, Power to annul bankruptcy order part 3: leadingcounsel.co.uk
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Power to annul bankruptcy order part 3

Last week we were looking essentially at those situations where a third party may be applying to annul a bankruptcy order. However of course frequently instead of someone improperly trying to go bankrupt, and others trying to stop them, it will be a situation where it is actually the person who has gone bankrupt who wants to avoid the bankruptcy.

In such cases is important to apply promptly. If there is a delay, then that can have two impacts. The first is it can make it much more difficult to demonstrate what would or would not have been the position at the time the bankruptcy order was made. The onus of showing what the position at the time was is on the applicant for annulment. If it can be shown that grounds existed on the basis of which the order ought not to have been made, then the court has a discretion to annul. If it cannot be shown, the discretion does not exist. As a matter of practical reality, the passage of time can in some cases make it more difficult to establish the true position.

The second consequence is of course that if the position of creditors might be prejudiced because of the delay the court might decline to exercise its discretion to annul in any event, even if the jurisdiction to annul is established. The court however will be applying a two-stage process. Before going on to the decision as to whether to exercise the discretion it has the court will of course consider whether grounds existed on the basis of which the order ought not to have been made.

One thing the court will consider is whether it is right to allow the bankrupt to raise an issue which could have been raised before the court before. A key aspect of this will be deciding whether in any way this amounts to an abuse of the court process. Generally speaking courts apply this in a flexible way.

Sometimes the circumstances will depend upon error. There are been cases where due to a mixup a party's lawyers have not attended to dispute the debt and the bankruptcy order has been made. If there would or could have been a valid defence, then that is a situation where the court could interfere. Another illustration arose where a solicitor, somewhat bizarrely, relied on what some unidentified person told him at court. Apparently this person told him that the bankruptcy hearing would be ineffective and so he left. (Presumably he had mistaken the person for someone actually holding office. These mistakes can occur: as a very junior barrister I appeared in some far-flung bankruptcy court on behalf of the bankrupt who was middle-aged, immaculately turned out in a three-piece suit, and obviously was a frustrated barrister since it is best to look like one. At least to some extent he succeeded because when we arrived the court usher was under the erroneous impression that he was a barrister and I was the bankrupt).

In each of those cases where the lawyer failed to attend the client had been made bankrupt as a result. It is difficult to imagine what it must feel like to phone up your lawyer to find out what happened, confident that the bankruptcy petition would not succeed, to find out that due to their failure to attend you are now actually bankrupt.

If the issue which the bankrupt is disputing relates to the ability of the petitioner to petition as a creditor, then that issue relates to whether the debt is disputed on what are called bona fide and substantial grounds. The test is effectively the same as on summary judgement on the CPR part 24 namely whether there is a real issue to be tried. That is not the same as having a trial. (In other words it is purely whether there is an issue which would make it worth having a trial: the court will not determine issues of fact unless it feels as an assertion is so fanciful that it lacks all credibility, so that hence there would still be no real issue to be tried)

One factor which the court will always consider is whether or not the debtor can meet his or her liabilities. There is little point in annulling a bankruptcy just in order for a successor bankruptcy to be put in its place.

Michael J. Booth QC