Annulling bankruptcy orders—limitation defences (Mowbray v Sanders)

Annulling bankruptcy orders—limitation defences (Mowbray v Sanders)

Why did the High Court decide to allow the annulment of a bankruptcy order in Mowbray v Sanders? Nick Brown, barrister at St Philip's Chambers, discusses the reasoning behind the ruling and the practical lessons the decision offers for insolvency office-holders.

Original news

Re Julie Ann Mowbray (A Bankrupt); Mowbray v Sanders (Trustee in Bankruptcy of the Estate of Julie Ann Mowbray) and another [2015] EWHC 296 (Ch), [2015] All ER (D) 161 (Feb)

The appellant debtor appealed against an order of a deputy district judge dismissing her application for the annulment of a bankruptcy order. In her grounds of appeal, the appellant had raised a limitation defence. Mr Justice Hildyard, in allowing the appeal, held that the belated revelation of the second respondent's only real answer to the appellant's limitation defence after the bankruptcy order had been made, without any explanation why it had not previously been put forward, materially altered the legal landscape and was an exceptional circumstance justifying review of the validity and enforceability of the petition debt.

What was the background to the case?

The case was an appeal to the High Court against an order of a deputy district judge who had dismissed the appellant's application, pursuant to section 282(1)(a) of the Insolvency Act 1986, for the annulment of her bankruptcy, such application having been made on the grounds that the debt upon which the petition was founded was in dispute and that the bankruptcy order should, therefore, never have been made.

What were the legal issues the judge had to decide?

Whether the deputy district judge had been in error to conclude, on the annulment application, that there had been no 'exceptional circumstances' permitting the court to reconsider the validity of the petition debt, such issue having been aired at the original bankruptcy hearing. In addition, whether the deputy district judge had been in error to conclude that the petition debt was valid.

Why did these issues arise?

One of the bases upon which the appellant had always disputed the petition debt was that the claim that led to the default judgment against her (and ultimately the petition) had, for the purposes of the Limitation Act 1980, been time-barred. Hildyard J remarked that such a defence 'was plainly a good one unless something had happened to extend the limitation period'. He then further noted that the 'central curiosity of this unusual case' was that it was not actually until the appellant applied to annul the bankruptcy order that it was advanced by the second respondent (the assignee of the debt) that the appellant had, in fact, repaid a small part of the debt at a point which 'acted as an acknowledgment of the debt so as to reset the Limitation Act clock' and so as to make the original claim within time (para [7]).

What were the main legal arguments put forward?

That the deputy district judge had, by limiting her consideration of 'exceptional circumstances' to the appellant's personal difficulties, paid insufficient regard to the significant change in the legal landscape which had arisen in consequence of the second respondent's factual assertions (only made belatedly within the annulment proceedings) as to the appellant's part-payment of the debt (para [61]). Further, that the deputy district judge ought not, as she did, to have concluded as a matter of fact that the appellant did make such payment, given that this was contested and the evidence had not been tested under cross-examination (paras [38] and [74]).

What did the Judge decide and why?

That the appeal should be allowed because there had never been a 'plain and obvious' answer to the appellant's limitation defence that could have warranted the making of a bankruptcy order (para [11]). Although, exceptionally, this involved permitting annulment with reference to matters raised before the bankruptcy order was made, it appeared to the Judge that the petition debt had, at all times, been disputed on substantial grounds and that the error in allowing proceedings to continue as far as bankruptcy had, 'in all justice', to be corrected (para [11]).

To what extent is this judgment helpful in clarifying the law in this area?

The case represents a useful summary of and reminder as to the (ultimately discretionary) nature of the annulment power and the nature of an appeal from a refusal to annul.

In respect of the former, the Judge noted, following Turner v Royal Bank of Scotland [2000] BPIR 683, that 'only in exceptional circumstances' can a court allow points which were considered when the bankruptcy order was made to be re-litigated on an annulment application (para [42]).

As to the latter, the Judge noted, following Cozens v HM Commissioners of Customs & Excise [2000] BPIR 252, that an appeal from a refusal of annulment is 'in the nature of a true appeal: it is not a rehearing or review' (para [48]).

What practical lessons can insolvency office-holders and those advising them take away from the case?

The judgment ends with a set of useful observations as to the determination of a trustee's costs in annulment cases (paras [88]-[99]). The Judge was content, as determined at first instance, that the first respondent trustee should be entitled to recover his proper costs and expenses, even though the bankruptcy order should never have been made—the question then being whether these should be met by the appellant or the second respondent. Having given consideration to the full history of the matter (which included factoring in a number of procedural failures on the appellant's part such as her failure to make an application to set aside the default judgment) the judge concluded:

'The balance is an unusually fine one. I have provisionally concluded that the costs and expenses should be allocated for payment between them, and that, as a matter of broad fairness, the Appellant should pay the costs and expenses up to the date of the annulment application, but the Second Respondent should pay the costs and expenses from then on' ([para [98]).

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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What steps are available if it transpires that the bankruptcy order should not have been made and what are the usual grounds for the court annulling the bankruptcy order?

How do you annul a bankruptcy order and who can make the application?

Disputed bankruptcy petitions

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.