Too late to annul a bankruptcy order? (Taylor v The MacDonald Partnership)

In Taylor v The MacDonald Partnership and others, Lord Justice Kitchen had to decide whether to grant permission for a second appeal to be brought in respect of a discharged bankrupt’s failed application to have her bankruptcy annulled.

Original news

Taylor v The MacDonald Partnership and others [2015] EWCA Civ 921

Briefly, what were the facts of the case?

Mr and Mrs Taylor were said to have been in partnership together. The partnership got into financial difficulties. Individual voluntary arrangements (IVAs) were proposed by both Mr and Mrs Taylor, and these were approved by creditors in January 1996.

About four years after Mrs Taylor’s IVA had been approved, the supervisor of her IVA petitioned for her bankruptcy due to Mrs Taylor being in breach of her IVA obligations. However, the terms of the IVA provided that the supervisor should not present any bankruptcy petition unless that had first been agreed upon by a meeting of creditors—no such meeting had taken place in this case.

Mrs Taylor was subsequently adjudged bankrupt, and discharged from her bankruptcy three years later.

Nine years after discharge, Mrs Taylor applied to annul her bankruptcy under section 282(1)(a) of the Insolvency Act 1986 (IA 1986) on the basis that the bankruptcy order ought not to have been made, relying upon a number of grounds. That application was dismissed—the district judge did not consider that any of the grounds had any substance, including that the supervisor did not have standing to present the bankruptcy petition as no meeting of creditors had been held. Mrs Taylor appealed.

The appeal was heard by His Honour Judge Hodge QC sitting as a Judge of the High Court. Judge Hodge found that the district judge had fallen in error in failing to have regard to the fact that no meeting of creditors had taken place. However, the district judge had said that, even if he had agreed that the bankruptcy order ought not to have been made, he would still have exercised his discretion against making the annulment order because of the fact that the application had been issued some 11 years after the bankruptcy order had been made, and no explanation had been given for that delay or why no application had been made before then. Judge Hodge considered that there was no reason to interfere with the district judge’s exercise of his discretion.

Judge Hodge considered—but ultimately rejected—the other grounds of appeal raised by Mrs Taylor. The district judge had not fallen into error in refusing to accept that, at the time the bankruptcy order was made, any grounds existed by virtue of which it ought not to have been made, and in any event the district judge was entitled and bound to take the view that the application had been made far too late to be made with any realistic prospect of success.

What were the legal issues that Kitchen LJ had to decide?

This was an application for permission to bring a second appeal. Accordingly, Mrs Taylor had to demonstrate that her appeal would raise an important point of principle or practice, or that there was some other compelling reason for the court to hear it.

What legal arguments were put forward?

By the time of the hearing before Kitchen LJ, Mrs Taylor’s grounds of appeal were:

  • Judge Hodge had fallen into error in failing to find that there were grounds existing at the time which meant that the bankruptcy order ought not to have been made—principally as a result of Judge Hodge’s finding that the supervisor failed to hold a meeting of creditors in breach of the terms of Mrs Taylor’s IVA
  • the exercise of the discretion to refuse the annulment was plainly wrong—among other reasons, IA 1986, s 282(1) provides that an application may be made at any time (including after discharge). Therefore any reference to the length of time that had passed prior to the making of the annulment application should have no bearing on the exercise of discretion. Further, IA 1986, s 282(4) allows the court to validate all proper steps taken prior to annulment so as to ensure a just outcome

What did Kitchen LJ decide, and why?

Kitchen LJ dismissed Mrs Taylor’s application for permission to appeal, as it did not raise an important point of principle or practice and there was no other compelling reason for the court to hear it.

The decision appears to be very much based on the exercise of discretion to annul a bankruptcy order, rather than whether the bankruptcy order ought to have been made in the first place. As Mr Justice Morgan confirmed in JSC Bank of Moscow v Kekhman [2015] EWHC 396 (Ch), [2015] All ER (D) 288 (Feb), even if the court decides that a bankruptcy order ought not to have been made, it still has a discretion not to make an annulment order.

In Kitchen LJ's judgment (at para [20]):

…both the district judge and Judge Hodge were entitled to conclude as they did that it is now far too late to make an order annulling Mrs Taylor’s bankruptcy order, irrespective of whether that order ought not to have been made.

Kitchen LJ accepted the submission made on Mrs Taylor’s behalf that IA 1986 allows annulment applications to be made at any time, but that in this case there had been a change of circumstances since the bankruptcy order had been made. A considerable amount of litigation—and work undertaken by Mrs Taylor’s trustee in bankruptcy—had taken place in the intervening period, which had resulted in significant costs being incurred, some of which were recoverable from Mrs Taylor through costs orders made against her that were unpaid. An annulment order would still result in further costs and expenses—probably more so than if the bankruptcy was not annulled—which would not be a just result.

What practical lessons can those advising take away from this case?

It is true that IA 1986 does not state a time limit by which an annulment application must be made. However, the prospects of success for an application made under IA 1986, s 282(1)(a) will usually, without a proper reason for any delay, decrease the longer the period between the date of the bankruptcy order and the issue of an annulment application is. Even if the bankruptcy order ought not to have been made, it does not automatically follow that it will be annulled—the court still retains a discretion and must exercise that discretion so as to achieve a just and proportionate result.

It was accepted by Judge Hodge that the supervisor had no authority under the terms of the IVA to petition for Mrs Taylor’s bankruptcy. It was argued on behalf of the supervisor that he had authority anyway under IA 1986, s 264, and that IA 1986, s 276 conferred upon the court the power to make a bankruptcy order for failure to comply with the terms of an IVA. However, as the judgment in this case focussed on Mrs Taylor’s delay in making her application, no decision was made as to whether, by itself, those statutory provisions would effectively override any failure by a supervisor to obtain creditors’ consent to present a bankruptcy petition.

However, it must be recognised that Mrs Taylor’s IVA, and the subsequent bankruptcy order made against her, occurred a long time ago. Practice and procedure has moved on, and it would perhaps be unusual nowadays for a supervisor to petition for a debtor’s bankruptcy unless the creditors had so resolved.

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

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?

A summary checklist and timeline for annulment applications where bankruptcy order ought not to have been made

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First published on LexisPSL Restructuring and Insolvency

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