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Test for Annulling Bankruptcy Settled

In Re Russell Ian Payne; Woolsey v Payne & anor [2015] EWHC 968 (Ch), Mr John Male QC, sitting as a deputy High Court judge, considered the test to be applied when a bankrupt applies to set aside a bankruptcy order on the basis that the petition debt was not due. There were conflicting authorities on the point. The deputy judge held that the bankrupt need only show that there was a genuine triable issue.

The Statutory Scheme

Under section 282(1)(a) of the Insolvency Act 1986 (IA 1986), the court may annul a bankruptcy order “if it at any time appears to the court... that, on any grounds existing at the time the order was made, the order ought not to have been made”.

The court's task on such an application is three-fold. First, the court should identify the relevant grounds existing at the order was made. Second, the court should consider whether on those grounds the order ought not have been made. Third, the court should consider whether, in its discretion, it should annul the bankruptcy order.

A bankrupt might argue that the bankruptcy order should not have been made for a number of different reasons. He might allege that the petition debt was not due, that the petition was an abuse of process or that the petition ought to have been dismissed in the court's discretion.

Where the bankrupt's case is that the petition debt was not due, what does he have to show? Until recently, there were two conflicting authorities on this point. In Guinan III v Caldwell Associates Ltd [2004] EWHC 3348 (Ch); [2004] BPIR 531, Neuberger J said that it was common ground that the correct question was whether there was a genuine triable issue. In Flett v HMRC and Daley [2010] EWHC 2662 (Ch); [2010] BPIR 1075, Mr Anthony Elleray QC, sitting as a deputy High Court judge, held that the bankrupt had to establish on the balance of probability that the debt was not due.

The Facts

Mr Woolsey lent money to Mr and Mrs Payne, who did not comply with the terms of the loan and made repayments only sporadically. Mr Woolsey served statutory demands on both Mr and Mrs Payne. They did not respond. Two months later Mr Woolsey petitioned for Mrs Payne's bankruptcy. She did not respond to the petition and was made bankrupt. Some months later, Mr Payne applied to set aside the statutory demand served upon him and Mrs Payne applied for the annulment of her bankruptcy. Their case was that the loan agreement failed to comply with various provisions of the Consumer Credit Act 1974 and was therefore unenforceable. In response, Mr Woolsey argued that the loan was exempt from the Consumer Credit Act either under section 16B or section 74.

At first instance, Chief Registrar Baister found in favour of Mr and Mrs Payne. He held that each of them needed to show there was a genuine triable issue as to the existence of the debt and that they had succeeded in showing this. The deputy judge upheld this decision. In doing so, he considered the conflicting decisions in Guinan and Flett and held that Guinan was to be preferred. He rejected Mr Woolsey's submissions that an applicant for an annulment should have to pass a more stringent test because (1) he could have made his argument at the statutory demand or petition stage and (2) an application for an annulment can be made at any time and is effective against the whole world. He held that it was desirable that the height of the hurdle the debtor has to negotiate should be the same at whatever stage he mounts his challenge.

Implications

Payne should now be followed at first instance: Colchester Estates (Cardiff) v Carlton Industries Plc [1986] Ch 80. It remains to be seen whether the decision leads to an increase in the number of applications to annul.

Prospective applicants should bear in mind that showing that there is a genuine dispute as to the petition debt does not guarantee success. The court has a discretion whether to grant an application to annul. Debtors who deliberately or inexcusably do not challenge statutory demands and bankruptcy petitions run a serious risk that relief will be refused.

18/05/2016
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