Paragraphs 7.9.1 and 7.9.2 of the the UK Border Agency's guidance to its officers on the good character requirement wrote:Payment of the Council Tax is a legal requirement, and non-compliance is a punishable offence. Failure to pay Council Tax means that an applicant fails to meet the good character requirement. Applicants who also provide a false statement or fail to declare their full circumstances in order to avoid paying a higher rate of Council Tax should also normally be refused citizenship.
However, where an applicant has been unable to pay the Council Tax because of his or her financial position, and some sort of arrangement is being, or has been, negotiated with the relevant authority then caseworkers may grant an application.
You definitely need to declare the liability order. In the event that you had financial difficulty and made arrangements with your local authority, then you should explain this.