Court's discretion to annul bankruptcy - Khan v Singh-Sall and Habib Bank

This case was heard in the High Court in March, with the judgment arriving in late July. It dealt with two points, firstly reiterating the understanding that the Court has ultimate discretion when deciding whether to allow an annulment, and secondly considering limitation.

Court discretion

The decision at first instance was upheld, refusing to annul the bankruptcy. This was despite the bankrupt proving that the bankruptcy order should never have been made, in accordance with section 282(1)(a) of the Insolvency Act 1986 ("the Act"). It was held that, even in these circumstances, the court still retains unfettered discretion to consider all the circumstances when deciding whether or not to annul a bankruptcy.

The Court came to the conclusion not to annul on the basis that this was in accordance with a long line of authority confirming that the Court should consider all the circumstances, not just the bankrupt's ability to demonstrate that the order ought not to have been made. The circumstances to be considered to be relevant included the bankrupt's conduct and likelihood to return to bankruptcy after the annulment; the length of time taken to make the application; and the effect of the annulment on unsecured creditors, particularly due to limitation.

Limitation

This case considered in particular the effect of limitation in the context of an annulment. This was a novel point of law that had not been considered in any reported cases from the 19th century onwards.

The effect of an annulment is to wipe away the bankruptcy as if it never existed. Therefore, the limitation clock must continue to run throughout the period between the bankruptcy order and the annulment order. This means that following an annulment creditors' claims are subject to limitation as if the bankruptcy never happened.

If the limitation clock was paused between bankruptcy and annulment, those creditors affected by an annulled bankruptcy would have more time than those which weren’t, which would be unfair. The Court sought to limit this unfairness.

Conclusion

The Court in this case refused the annulment application when considering everything in the round. This case highlights that even in circumstances where the bankrupt may be able to establish in accordance with the Act that the bankruptcy order should never have been, the ultimate decision as to whether an annulment order is appropriate remains with the Court. It is not a foregone conclusion and a multitude of factors, including fairness to creditors, can be considered by the Court in reaching a decision. Annulment is not guaranteed by simply bringing evidence to prove that the bankruptcy order ought not to have been made at the time.

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