Court of Appeal confirms applicable test when hearing an application to annul a bankruptcy under section 282(1)(a) (Khan v Singh-Sall and another)

Dispute Resolution analysis: In a second appeal, the Court of Appeal has upheld the decisions of two lower Courts in concluding that due to the conduct of a bankrupt and his insolvency, his bankruptcy should not (on an exercise of discretion) be annulled, despite concluding that the bankruptcy order should not have been made.

Khan v Singh-Sall and another [2023] EWHC 1119 (Ch)

What are the practical implications of this case?

This is an interesting case in relation to applications to annul a bankruptcy pursuant to section 282(1)(a) of the Insolvency Act 1986. It might credibly be thought that where, on an annulment application, the Court concludes that the bankruptcy order should not have been made, an order annulling the bankruptcy would necessarily follow. However, not only is such an annulment not inevitable, the Court of Appeal rejected a submission that the annulment should only be refused in ‘exceptional circumstances’. On the contrary, the Court of Appeal noted that an order annulling a bankruptcy is a discretionary order under section 282(1)(a) of the Insolvency Act 1986 and the Court considering an annulment application should consider all the circumstances of the case including the conduct of the bankrupt and should give significant weight in the exercise of the discretion to the bankrupt being insolvent. The decision highlights and offers a view on the question on the impact of an annulment on the running of time for the purposes of limitation, albeit without determining the point. The Court of Appeal was sympathetic to the argument that the limitation period on debts within the bankruptcy is suspended during the bankruptcy and only restarted on annulment. Having declined to determine the point, it is perhaps likely that permission to appeal to the Court of Appeal will likely be given should a case arise in which that is a live issue.

What was the background?

Mohammed Khan (the “Bankrupt”) was made bankrupt following a petition brought by Habib Bank AG Zurich (the “Bank”). He applied to annul the bankruptcy and the annulment application came before DJ Hart at the County Court at Central London. On two specific grounds, DJ Hart concluded that the bankruptcy order should not have been made: (1) the petition debt was disputed; and (2) the petition erroneously stated that the debt was unsecured when, in fact, the Bank held security (albeit of limited value). Nevertheless, she declined to annul the bankruptcy, concluding, among other matters, that the Bankrupt was undoubtedly insolvent. The Bankrupt appeal first to the High Court, where David Moyuddin KC (sitting as a Deputy High Court Judge) dismissed the appeal on all grounds. Arnold LJ gave permission to the Bankrupt to bring a second appeal, on the basis that the case raised two points of potential significance more widely. First, the extent of the discretion conferred on the Court by section 282(1)(a) of the Insolvency Act 1986. Second, the effect of annulment on the running of time for the purposes of limitation.

What did the court decide?

This was not a case in which the Court had no jurisdiction to make a bankruptcy order, similar to circumstances in which the Court finds that COMI had not been established within the jurisdiction. On the contrary, it was a case in which the proper conclusion reached was that the bankruptcy order ought not have been made. This meant that a discretion lay in relation to whether to annul the bankruptcy, a discretion apparent on the face of section 282(1)(a). In exercising that discretion, the Bankrupt was wrong to argue that the Court should decline to annul the bankruptcy order only in exceptional circumstances. The Court should have regard to all the circumstances of the case and the solvency of the bankrupt would be a highly relevant factor to consider. The Court of Appeal declined to determine the element of the appeal concerning limitation. DJ Hart declined to determine the question, concluding as she did that it made no difference to her analysis. The Court of Appeal noted that the analysis of David Moyuddin KC was open to doubt when he said that upon the making of an annulment order time should be deemed to have run throughout that period. The Court of Appeal said that “On the face of it therefore it would seem very unfair on a creditor with a provable claim to find that on annulment time had run during the bankruptcy despite the fact that during that period he could not have brought an action to stop time running.” It was nevertheless felt to be more appropriate to leave the question open for a case in which the point needed to be decided.

Case details

• Court: Court of Appeal (Civil Division)
• Judges: Lord Justice Lewis, Lord Justice Nugee, Lord Justice Snowden
• Date of judgment: 6 October 2023

Article by Phillip Patterson – first published by LexisNexis