Case Facts
In this case, a company owed the Inland Revenue substantial amounts of PAYE income tax deducted from employees' emoluments and national insurance contributions, with arrears stretching back to the previous fiscal year. On 15 July 1991, the company's managing director, Mr ffooks, met with Mr Polland, the collector of taxes, to discuss the outstanding liabilities. At that meeting, Mr ffooks proposed that the company would pay its ongoing tax and national insurance contributions as they fell due commencing August 1991, and that it would repay the existing arrears at a rate of £1,000 per month beginning 1 February 1992.
Mr Polland indicated that the proposal went further than he would have liked and stated that he would need to seek approval from his superiors. He told Mr ffooks that he would revert to the company only if the arrangement proved unacceptable. The company heard nothing further from the Revenue. However, by 9 October 1991 it had paid only one month's tax and national insurance contributions. On that date, the Revenue demanded payment of the full arrears. Thereafter, such payments as were made by the company were paid late.
The Revenue subsequently served a statutory demand and, on 7 September 1992, presented a winding-up petition against the company. The petition came before Judge Moseley QC sitting as a judge of the Companies Court, who made an order for the compulsory winding up of the company on 19 January 1993. The company appealed to the Court of Appeal.
The central question before the Court of Appeal was whether the company's debt to the Revenue was disputed in good faith on substantial grounds. The company advanced three arguments: first, that the Revenue's silence following the 15 July 1991 meeting constituted acceptance of its proposal; secondly, that its promise to pay the arrears by instalments provided good consideration by conferring a practical benefit on the Revenue; and thirdly, that the doctrine of promissory estoppel prevented the Revenue from demanding immediate payment of the full sum.
Held
The Court of Appeal dismissed the appeal, upholding the winding-up order. Three independent grounds supported this conclusion.
First, the collector of taxes had no actual authority to agree to the company's proposal — a fact Mr Polland himself had made clear at the meeting by stating that he needed to seek his superiors' approval. Nor did he possess ostensible authority to bind the Revenue, as the Revenue had made no representation to the company that the collector held such authority. Accordingly, the Revenue's silence following the meeting could not constitute acceptance of the proposed instalment arrangement.
Second, the company's promise to pay the arrears by instalments did not constitute good consideration. A promise to pay a sum which a debtor is already legally obliged to pay cannot in law amount to valid consideration. The Court acknowledged the practical benefit principle established in Williams v Roffey Bros [1991], but held that principle to be confined to cases involving the supply of goods or services. To extend it to obligations to pay money would be irreconcilable with Foakes v Beer [1884], a binding House of Lords authority, and would require the Court of Appeal to overrule that decision — something it had no power to do.
Third, the doctrine of promissory estoppel did not assist the company. Since Mr Polland lacked actual or ostensible authority to make the agreement or any promise capable of founding an estoppel, no relevant promise had been made by the Revenue at all. Furthermore, as the company had itself failed to honour its own proposal to pay tax as it fell due, it would not be inequitable or unfair for the Revenue to demand immediate payment of the arrears, serve a statutory demand, and present a winding-up petition.
Ratio Decidendi
The ratio of this case rests on two closely related propositions of contract law.
First, a promise to perform an existing legal duty to pay money does not constitute good consideration for a promise by the creditor to accept a lesser sum or to defer enforcement. This principle, long established by Pinnel's Case (1602) and confirmed by the House of Lords in Foakes v Beer [1884], remains binding on the Court of Appeal. Stilk v Myrick (1809) and D & C Builders v Rees [1965] were also referred to in the judgments as consistent authorities.
Second, the practical benefit principle developed in Williams v Roffey Bros [1991] — under which a promise to perform an existing contractual duty may constitute good consideration where the promisor's performance confers a practical benefit on the promisee — is confined to cases involving the supply of goods or services. It cannot be extended to cases where the obligation in question is simply an obligation to pay money. To do so would necessarily override Foakes v Beer [1884], and the Court of Appeal is bound by House of Lords authority.
Taken together, these principles mean that a debtor company cannot avoid a winding-up petition by arguing that an instalment arrangement previously proposed to a creditor was accepted by silence, or that the creditor derived a practical benefit from the prospect of receiving staged payments, where that debtor had no more than a pre-existing legal obligation to pay the sum owed.
Obiter Dicta
The court made an observation of broader constitutional significance in the context of the promissory estoppel argument. It noted that if the Crown, acting as a public authority, were to conduct itself so unfairly that it could not properly be permitted to enforce its strict legal rights, a remedy might in principle be available in public law by way of judicial review. However, no such unfairness arose on the facts of this case: the company had itself failed to comply with the very instalment proposal it now relied upon, having paid only one month's tax and national insurance contributions before the Revenue demanded full payment. It was therefore not inequitable to allow enforcement of the debt.