There has been considerable publicity about the Local Government Ombudsman's ("LGO") decision on a complaint against Manchester City Council about the Council pursuing bankruptcy proceedings for non-payment of Council Tax (Complaint Number: 07/B/10432).

Briefly the Debtor (referred to in the LGO's Report as Mr Joseph) was declared Bankrupt on 6 February 2007 for non-payment of Council Tax of £1071 and a Licensed Insolvency Practitioner was appointed to act as Trustee in Bankruptcy.  In November 2007, utilising funds given by his son, Mr Joseph paid the sum of £18,405 in settlement of the sum owing to the Council and the costs of the bankruptcy.  Subsequently Mr Joseph's bankruptcy was annulled on the basis that his debts had been paid in full.

In June 2007 Mr Joseph made a complaint to the LGO contending that he did not owe the debt to the Council and that he was not made aware of the bankruptcy process.  The LGO decided that the first of these matters was outside his jurisdiction and the second could not be substantiated on the facts.  He did however find significant failings in the administrative actions taken by the Council in pursuing bankruptcy and as a consequence found maladministration and recommended the Council to pay Mr Joseph £1,000 compensation. 

It is important to point out that the LGO accepted that the Council were legally permitted like any other commercial organisation to use bankruptcy as a method of Debt Recovery provided the debt exceeds the "bankruptcy level" which is currently £750.  He also stated:

"I also recognise that any collection policy should reasonably include bankruptcy as a potential option for recovery and I acknowledge what the Council says about how its overall collection rates have improved, to the benefit of all tax payers, since introducing this method of collection".

The difficulty for the Council arose principally because they did not have a written policy on the use of bankruptcy proceedings for its officers to refer to.  He stated:

"I regard it as a fundamental flaw that the Council should have been using this method of collection without a written policy for officers to refer to in individual cases.  While the Council may not have been under a legal requirement to have such a policy, I consider it maladministration for an authority not to have such a policy for the guidance of its staff in such an important area of public administration". 

The LGO also found that the Council was unable to provide a satisfactory audit trail to show that it properly weighed up whether it had alternative collection methods available to it to secure repayment of the arrears and further that Mr Joseph had received no adequate warning of the potential consequences and costs of bankruptcy. 

Whilst recognising that he should not tie the Council's hands by saying that it must seek an attachment of earnings in all cases, the LGO considered that in the circumstances of Mr Joseph's case they ought to have sought an assessment of earnings order against Mrs Joseph who was jointly liable for the Council Tax.

The LGO noted that the Council had drafted a new collection policy for the recovery of Council Tax through the use of bankruptcy.  It recommended that further revisions were made to that policy to ensure the following:

1 That Officers are reminded that bankruptcy should be used as a last resort.
2 In considering whether bankruptcy is appropriate officers should weigh in the balance evidence concerning a debtor's income including receipt of benefits.
3 That clear timescales are set out in the policy as to when a warning of bankruptcy should be given.  When the warning is given Officers should state the consequences and costs of bankruptcy and how long it will be before the Council will pass the case to its solicitors. 
4 That a written record of the Council's decision-making process is kept.
5 That Officers are instructed to consider the availability of other collection methods and that checks also are made with the Council's Audit Services Department to ascertain if there is evidence of vulnerability on a case by case basis. 

We would be pleased to assist in the formulation and drafting of any such policy.
In summary therefore, each case must be considered individually but in a bad case where there has been deliberate avoidance and evasion and the debtor has been given every opportunity to pay, the decision-making process is properly documented, and assets are known to be available, the use of the bankruptcy process as a means of obtaining payment of the outstanding arrears is justified.

In the event that you are contacted for comment on your Authority's use of bankruptcy as a method of debt collection it is worth pointing out that it is used as a last resort and, on our calculations, the debtor will probably have had at least 11 opportunities to pay their arrears and to prevent the making of a bankruptcy order. Requests for payment, reminders and an opportunity to pay will have been given upon:

• Receipt of the Council Tax bill and
• Reminder notices to pay the bill.
• Contact from the Council to talk about the payment of the outstanding debt and an opportunity to make smaller payments.
• Receipt of the Summons for the Liability Order with an opportunity to attend court and make representations.
• Service of the Liability Order.
• Visits from Certificated Bailiff's to enforce arrears.
• Receipt of a letter from the Council telling the debtor that bankruptcy proceedings will be issued.

Once the Council has instructed lawyers, the debtor will have had the following additional opportunities:

• Upon receiving the letter before action from the Local Authority's solicitors
• Upon service of the Statutory Demand
• Upon service of the bankruptcy Petition
• At the hearing of the bankruptcy Petition itself

We have considered the use of bankruptcy as a method of debt recovery in more detail in an article which is to be published as a link in the electronic version of the December Edition of "INSIGHT". Should you require a copy in advance or if you have any questions relating to this publication, please contact Mark Taylor.