The court has a broad and unfettered discretion to consider all relevant circumstances when deciding whether to annul a bankruptcy, and time continues to run for limitation purposes for the period between bankruptcy and annulment orders.
Summary
The High Court dismissed an appeal against a first instance decision, refusing to annul a bankruptcy despite the appellant proving that the bankruptcy order should never have been made. The court held that even where a bankruptcy ought not to have been made under s282(1) of the Insolvency Act 1986 (IA 1986) the court has a broad and unfettered discretion to consider all the relevant circumstances when deciding whether to annul a bankruptcy.
The court also considered a point of law upon which there was no previous authority. The court decided that the effect of annulment in relation to limitation is to deem time to have run in the interim (the period between the making of the bankruptcy order and its annulment). This might have the effect of statute-barring creditor claims which proved in the bankruptcy before the annulment, and so should be a consideration of the court when exercising its discretion.
Background
The appellant, Khan, was a former director and shareholder of a company and had provided a personal guarantee to Habib Bank (Habib) for £223,539 (‘the Guarantee Debt’). Khan also took a personal loan from Habib for £558,888 (‘the Personal Debt’). A statutory demand was served in respect of the Guarantee Debt in February 2016 which founded a petition presented in May 2016. Khan was adjudged bankrupt on 16 January 2018.
Khan applied to annul his bankruptcy under s282(1) IA 1986 on the grounds that the order ought not to have been made because the Guarantee Debt was disputed and was otherwise secured.
At trial in August 2021, the court accepted that the Guarantee Debt was disputed, but exercised its discretion not to annul based upon findings that Khan:
had diverted bankruptcy assets (rental receipts) from the trustee
had failed to cooperate with the bankruptcy trustee
was insolvent so that a bankruptcy order was inevitable
Additionally, the length of time between the annulment and demand of the debts would potentially be statute-barred.
Khan appealed on six grounds, chiefly arguing that the court had wrongly exercised its discretion under s282(1) IA1986 in refusing to annul. Khan submitted:
the court should annul where the grounds of s.282(1) IA 1986 are made out except in ‘exceptional circumstances’
the court erred in its findings of fact that there had been a significant lack of cooperation
the time for limitation purposes was not deemed to run in the interim period following annulment
The court's decision
The High Court upheld the decision of the judge at first instance, dismissing all grounds of appeal and finding:
the judge at first instance made findings of fact well within the generous scope within which reasonable disagreement is possible
the discretion to annul was a broad one and could encompass all the circumstances of the case including those arising post-bankruptcy, considering all the relevant caselaw and following the binding decision of the Court of Appeal in Owo-Samson v Barclays Bank plc (No2) [2004] BPIR 303
the relevant caselaw did not provide an ‘exceptional circumstances’ test before annulment could be refused in cases where a bankrupt has proven that the bankruptcy order ought not to have been made under s282(1)(a) IA1986
The High Court held the effect of annulment is to ‘wipe away’ the bankruptcy order as if it were never made. The effect of this is that time continues to run during the period between the bankruptcy and annulment orders for limitation purposes. This might time-bar creditor claims whose debts were otherwise provable in bankruptcy and this prejudicial effect must be considered when exercising discretion on whether to annul.
Comments
When advising clients on the annulment of bankruptcy orders under s281(1)(a) IA1986 on the ground that the order ought not to have been made there are two important factors to consider which arise from this case.
The court's discretion
The court has a broad and unfettered discretion when deciding to annul even where it is proven that a petition debt is disputed. The court should consider the full circumstances of the bankruptcy including, but not limited to:
the bankrupt’s conduct post-bankruptcy (namely, cooperation with the trustee in bankruptcy in providing information and recovering assets)
whether there was any delay in making the application
whether the bankrupt remained hopelessly insolvent so as to likely face a second petition and bankruptcy shortly after any annulment
the effect of annulment on unsecured creditors through the operation of the Limitation Act 1980
Time continues to run during interim period
The High Court’s finding that time continues to run for limitation purposes for the period between bankruptcy and annulment orders is a key consideration for both those disputing the right to an annulment and those seeking one. For the latter it means that s282(1)(a) applications should be made as soon as possible.