Bankruptcy Threat from Foreign Revenue Authorities
Author:
Suzanne Carter
In a recent High Court case a European Union (“EU”) insolvency regulation has been interpreted widely. The case opens the door to revenue authorities of EU member states to use the insolvency procedures of the Irish courts to pursue revenue claims, and enforce the winding up of Irish registered companies with tax debts in those foreign territories.
Common law
It is a long standing principle of common law and bankruptcy in Ireland that the Irish courts would not directly or indirectly enforce foreign revenue laws. To do so would have involved an assertion of sovereignty by a foreign state within the territory of Ireland. This would have violated a principle of the conflict of laws which was respected throughout the common law world.
In the matter of Cedarlease Limited
On 14 March 2005, Miss Justice Laffoy delivered judgment in High Court proceedings concerning a petition by the United Kingdom Commissioners for Customs and Excise (“C&E”) for the winding up of an Irish registered company, Cedarlease Limited. The petition was taken under European Council Regulation (EC) No. 1346/2000 on insolvency proceedings (“the Insolvency Regulations”).
Cedarlease was incorporated in November 1998. The company was involved in the sale and hire of vehicles. As a result of rules regarding importation into the UK, in February 2000 the company was compulsorily registered for UK VAT, and the registration was effective from 1 November 1998. C&E raised an assessment for undeclared output VAT totaling just under STG840,000 for the period from 1 November 1998 to 30 November 1999. Cedarlease appealed the assessment through the usual VAT appeal channels in the UK. However the company withdrew its appeal following an unfavourable decision in another case before the VAT Tribunal. Cedarlease failed to pay the VAT assessed. On 21 January 2005, following unsuccessful negotiations with the company, C&E presented a petition to the Irish High Court to have Cedarlease wound up pursuant to the Insolvency Regulations.
The petition was successful. The High Court ordered the winding up of Cedarlease. This is a ground-breaking decision. It allows Irish companies to be wound up at the suit of tax authorities in other EU member states.
The EU regulations – priority over common law
The Insolvency Regulations are in operation since 31 May 2002. It had been widely speculated that these regulations overturned the older common law rule in relation to revenue debts. It was only a matter of time before the limits of the new legislation were tested by an ambitious tax authority. The success of the petition by C&E, and relative speed and ease of bringing such petitions, is likely to have emboldened the newly merged HM Revenue and Customs to bring claims for the enforcement of UK tax liabilities in Ireland as well as other EU member states.
In this case, Cedarlease contended that the petitioner should have relied upon the EC (Mutual Assistance for the Recovery of Claims relating to Certain Levies, Duties, Taxes and other Measures) Regulations, 2002 (S.I. No. 462 of 2002) (“the Mutual Assistance Regulations”). This S.I. gives effect to a European Council directive on the mutual assistance to be provided between the tax authorities of EU member states in the case of pursuing foreign tax debts. Under the Mutual Assistance Regulations, the Irish Collector General would enforce foreign tax claims, when the appropriate request is made by the competent tax authorities in the other member state. The operation of the Mutual Assistance Regulations is cumbersome, which may explain the infrequency of its use to date. In the Cedarlease case, it was held that the Insolvency and Mutual Assistance Regulations are mutually exclusive. Therefore, there was nothing to preclude the use of the Insolvency Regulations by the petitioner in this case.
Also Miss Justice Laffoy confirmed that the common law principle, that an Irish court will not enforce a revenue claim of a foreign state, was overridden in the case of a revenue debt of an EU member state where the Insolvency Regulations were concerned.
Conclusion
The way is now open for foreign revenue authorities in EU member states to pursue Irish companies using the threat of a winding up order in Ireland. The real effectiveness of this sanction (and the threat of its exercise) is that a foreign revenue authority could proceed from an initial demand for unpaid tax to the liquidation of an Irish company within a period of just six to eight weeks. For these reasons, the Cedarlease ruling should give Irish companies with significant foreign revenue debts grounds for worry.
Other EU jurisdictions will be guided by the Irish decision in interpreting the Insolvency Regulations. Therefore, the Irish Revenue Commissioners should be able to initiate the winding up of tax delinquent companies in other EU member states. For example, the Revenue could pursue a company in another EU territory where it sets up an Irish branch which subsequently fails, leaving significant Irish tax debts behind, but no Irish assets to pursue in a domestic insolvency action.
It is expected that the result in Cedarlease will be appealed. However, the case has already opened a new prospect which may hold much terror for Irish companies but considerable allure for the Irish Revenue Commissioners.