A solicitor has failed in his effort to set aside a £717,000 statutory demand arising from a guarantee he gave over money his firm owed HM Revenue & Customs (HMRC).
It is the latest stage in a five-year battle waged by Martin Pearse, who was one of two partners at Cornwall firm Follett Stock, over the guarantee. He is now a consultant at listed law firm Keystone Law.
By February 2013, Follett Stock owed HMRC about £1.2m in taxes and entered into a time to pay agreement (TTPA) under which it would pay £600,000 by way of 24 monthly payments of £25,000 each.
It was a condition of the TTPA that Mr Pearse and his fellow partner gave a personal guarantee for that sum.
However, Follett Stock only made one payment before defaulting and it was wound up by the court in an insolvent liquidation on 4 November 2013 and then intervened in by the Solicitors Regulation Authority (SRA). Some 30 people lost their jobs.
The next month, HMRC issued proceedings against Mr Pearse to recover the £575,000 due under the guarantee, plus interest. In February 2014, judgment in default was entered for the sum of £589,000, including interest; Mr Pearse unsuccessfully applied to set it aside.
Shortly after the debt proceedings were served on Mr Pearse but prior to judgment being entered, he put forward a proposal for an individual voluntary arrangement. However, HMRC voted against it and the proposal was defeated.
Mr Pearse then challenged the admission of the HMRC vote but that too was dismissed.
In October 2016, HMRC served the statutory demand on Mr Pearse, by which time the sum due was £717,000 due to interest from the date of judgment.
The solicitor applied to set aside a statutory demand on the grounds that the judgment debt was covered by terms in the guarantee which precluded HMRC from petitioning for his bankruptcy.
Insolvency and Companies Court Judge Briggs dismissed this in June 2017, noting that it would have been easy for the parties, as they were legally qualified on both sides, to have added a clause that HMRC would be precluded from invoking any insolvency process based on any judgment debt arising from a breach of the guarantee.
That decision was upheld on appeal by Mrs Justice Rose this week. She found that the relevant clause of the guarantee “does what it says” in preventing HMRC from seeking to launch bankruptcy proceedings to enforce the debt under the guarantee.
“It does not prevent them from enforcing a judgment obtained for the payment of the Part Debt.”
There was also no basis for implying such a term, she added: “The contract works perfectly well as it is. It places before HMRC the hurdle in terms of time and cost of obtaining a default judgment.
“As this case illustrates, this can be a significant hurdle given that Follett Stock defaulted on the TTPA in July 2013, judgment was obtained by HMRC under the guarantee on 14 February 2014 and the application to set aside the default judgment was obtained in May 2015.
“There was no commercial advantage to HMRC in agreeing to any broader protection for Mr Pearse than that provided for in the contract as the price for him and his co-partner agreeing to provide the guarantee for Follett Stock’s performance of the primary obligations under the TTPA.
“There is no overriding reason why HMRC should regard it as in the interest of the general body as taxpayers for Mr Pearse to be immune from bankruptcy proceedings in respect of taxes owed by his former firm if he fails to meet his obligations under the guarantee and judgment is obtained against him.
“For as long as HMRC considers that it is in their interests to allow Mr Pearse to continue to practice in the hope that he will use his earnings to pay off the debt, they can forbear from serving a statutory demand without needing to be contractually prevented from doing so.”
Mr Pearse was one of three people at Follett Stock rebuked by the SRA in 2014 for failing to comply with regulatory obligations and dealing with the regulator in an “open, timely and co-operative manner”. They also delayed informing the SRA of the serious financial difficulty the firm was in.