Application to annul a bankruptcy order under s. 282(1)(a) Insolvency Act 1986 dismissed by the Court

In the case of Magan v Wilton Management Ltd and another [2021] EWHC 3393 (Ch), Lord Magan's ("the Bankrupt") application to have the bankruptcy order made against him ("the Bankruptcy Order") annulled was dismissed. This was despite the Court expressing sympathy for his position and thanking him and his son for their clear, concise and well-argued submissions.

Legal basis for an annulment order to be made

Section 282(1)(a) of the Insolvency Act 1986 provides that the court "may annul a bankruptcy order if it at any time appears to the court… that, on any ground existing at the time that the order was made, the order ought not to have been made".

The case of JSC Bank of Moscow v Kekhman [2015] 1 WLR 3737 provides further guidance on the approach which the courts will take when considering whether an annulment order should be made. Generally, the court should answer three questions:

  1. What were the grounds existing at the time that the order was made;
  2. Whether, on those grounds, the order ought not to have been made; and
  3. Whether, if the order ought not to have been made, the court should now exercise its discretion to annul the order.  

In Magan, Kyriakides J made it clear that, when considering the first two questions set out in the Kekhman case, the court hearing the annulment application may take into account any further evidence regarding grounds that existed at the time of the bankruptcy order and also subsequent events which cast a "reliable light" on the grounds existing at the time the bankruptcy order was made.  

However, even if the court is satisfied that the bankruptcy order ought not to have been made, the court still has discretion as to the third question. In order to exercise its discretion to annul the bankruptcy order, the court must be satisfied that an annulment order would be the right thing to do by the creditors who benefit from the bankruptcy order and, in particular, that they would not be prejudiced by the court exercising its discretion.

Bankrupt's grounds for annulment application

The Bankrupt's annulment application relied on two grounds.

Firstly, that the petitioning creditor had acted fraudulently and in a way which prevented the Bankrupt from reducing his liability to the petitioning creditor. The Bankrupt argued that in the absence of this fraud he could have refinanced his liability and discharged the debt owed to the petitioning creditor.  

Secondly, the Bankrupt contended that, at the time of the Bankruptcy Order, the petitioning creditor knew that the Bankrupt had no assets and, therefore, knew that his bankruptcy would be pointless and futile.

Decision

In relation to the first ground, the Court recognised that there were doubts as to whether the quantum of debt which the petitioning creditor claimed was owed by the Bankrupt was accurate. However, as no evidence was produced to the Court that refinancing the lesser undisputed amount would have been likely (or even possible), the Court was not convinced that the Bankrupt had a real prospect of satisfying the petitioning creditor's debt and avoiding bankruptcy.

In relation to the second ground, the judge noted that it is a heavy burden for an applicant to show that there are no assets in the estate, and, on the basis of the evidence, which was provided by the trustees in bankruptcy, the Bankrupt failed to discharge this burden. This allowed the judge to conclude that the bankruptcy was not futile or pointless, as the Bankrupt had contended.

Therefore, the Court found that neither of the two grounds advanced by the Bankrupt in the annulment application were sufficient to conclude that the Bankruptcy Order ought not to have been made. As a result, the Court did not need to consider the third question of whether it should exercise its discretion to annul the Bankruptcy Order and the application was dismissed.

Conclusion

The case is a reminder that the Court will rely heavily on evidence when establishing the grounds which existed at the time that the bankruptcy order was made. Submissions by the trustees in bankruptcy presented a strong prima facie case that the Bankrupt's estate was not free of assets, and these were matters which required further investigation.

The case also highlights that advancing mutually irreconcilable grounds can undermine a party's position when seeking to establish grounds which existed at an earlier time. Here, the court noted that the Bankrupt's first ground (i.e. that refinancing was a real prospect) could not seriously be argued in light of the Bankrupt's second ground (i.e. that his estate had no assets). Whilst it may be tempting for parties in litigation to include all potential arguments, it will typically be better to rely on a clear and consistent version of events throughout.