The court has jurisdiction to make a bankruptcy order even if a debt is in dispute.
Summary
The Court of Appeal dismissed an appeal of a High Court decision which refused to annul a bankruptcy order.
The court has jurisdiction to make a bankruptcy order if a debt is in dispute and even if there has been a defect in proceedings. A disputed debt is still a liquidated debt.
Under s.282(1) Insolvency Act 1986 (IA 1986) the court has discretion when deciding whether to annul a bankruptcy order. There is no requirement for exceptional circumstances.
Background
The appellant, Khan, was made bankrupt following a petition made by Habib Bank. Khan applied to annul the bankruptcy.
County Court hearing
The County Court held that the bankruptcy order should not have been made because the debt was disputed, and the petition incorrectly stated that the debt was unsecured.
The court declined to annul the bankruptcy finding that:
Khan was insolvent and if the bankruptcy order was annulled the bank could petition again based on his personal debt
if the bankruptcy were annulled, a new petition would potentially be statute barred, which would be unfair
Khan’s failure to co-operate with the trustee was a relevant factor
High Court appeal
Khan appealed to the High Court. His main argument was that the County Court had wrongly exercised its discretion under s.282(1) IA 1986 in refusing to annul.
The High Court dismissed Khan’s appeal on all grounds.
It held that when there is no debt capable of founding a bankruptcy petition, the court still has discretion whether or not to annul.
Read our case summary of the High Court decision.
Court of Appeal
Khan appealed to the Court of Appeal.
Khan argued that the court had no jurisdiction in this case because the debt was not a qualifying debt for the purposes of s.267 IA 1986 and because the bank failed to disclose its security. The bankruptcy order must be set aside where the court has no jurisdiction to make a bankruptcy order.
Khan also argued that the debt was not a liquidated sum because it was disputed. He also believed that the limitation period is suspended during bankruptcy.
The court’s decision
The Court of Appeal dismissed Khan’s appeal on all grounds.
The court’s jurisdiction
The court rejected the argument that the failure of the bank to disclose its security meant the court had no jurisdiction to make a bankruptcy order. Although the bank had not complied with s.269 IA 1986 and this was a defect in proceedings, this did not deprive the court of jurisdiction. The court ought not to have exercised their power to make Khan bankrupt, but the court still had the power to do so.
The court rejected the argument that the debt was not for a liquidated sum because it was in dispute. This was a definite amount owed as a debt. The court confirmed that a claim for a debt of a definite amount is liquidated and a claim for damages is not liquidated.
Exceptional circumstances to annul
The court held that under s.282(1) IA 1986, the court has discretion when deciding whether to annul. Exceptional circumstances are not a requirement for an annulment request to be refused.
Insolvency of the applicant is a significant consideration when a court is exercising this discretion. There is little benefit in granting an annulment if an applicant is insolvent.
The limitation period
The court did not decide the limitation point, however it was in favour of the submission that the limitation period is suspended between a bankruptcy order and an annulment order.
Comments
The Court of Appeal has reiterated that the court has wide discretion when deciding whether to annul a bankruptcy order. It made it clear that the court still has jurisdiction to make a bankruptcy order when a debt is in dispute.
Debtors who are threatened with being made bankrupt for a disputed debt should not presume that any bankruptcy order made will be annulled.
Debtors should also be aware that the court will be less likely to exercise its discretion and annul a bankruptcy order where the debtor is insolvent.
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