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Insolvency, Partnership & Company Law - Annulment of bankruptcy

By : Sara Benbow

Annulment of bankruptcy - the status of a solicitor's undertaking and a likely change to Court practice

 

 

A divergence of practice between the registrars of the Chancery Division and the district judges of the County Court was noted and addressed in Halabi v London Borough of Camden and another[1]

  Ms Halabi was adjudged bankrupt in March 2007 on Camden’s petition based upon unpaid rates of approximately £12,500, only a small element of which was unproven. She obtained funds from a commercial lender sufficient to discharge the proven debt and applied to annul the bankruptcy under section 282(1)(b) of the Insolvency Act 1986, which provides “The court may annul a bankruptcy order if it at any time appears to the court - … (b) that, to the extent required for by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.”.  

At the hearing, Ms Halabi sought to rely upon her solicitor’s undertaking to hold those funds in his client account until the bankruptcy order was discharged. This has been a common practice on annulment applications before the County Court, which generally treats a solicitor’s undertaking as tantamount to payment in the context of bankruptcy proceedings. However, the bankruptcy registrar was not prepared to accept that undertaking as sufficient for the purposes of section 282. The matter was therefore referred to the Judge for a ruling as to the status of a solicitor’s undertaking in such circumstances.  

The principal question for John Jarvis Q.C., sitting as a deputy judge, was whether the word “paid” in section 282 was an absolute concept, or whether it was qualified by the words “to the satisfaction of the court”. Ms Halabi’s counsel argued for the qualification, which would have rendered valid the County Court’s approach to solicitors’ undertakings in this context. However, the Judge held that on a proper construction of the statute the “satisfaction of the court” applied only to the provision of security, not to the concept of payment. Accordingly it was not possible for the court to exercise its discretion under s.282(1)(b) in a payment case unless there had been actual payment made, and the practice adopted by the County Court with regard to solicitor’s undertakings was therefore outside its jurisdiction.

  Had matters ended there, it would have been a disastrous ruling not just for Ms Halabi, but also for many other bankrupts in the future seeking to address financial problems and escape from bankruptcy by payment of their debts. However, the Judge was not unsympathetic to the situation and found himself able to provide an alternative route to annulment for such individuals. Notwithstanding the frequently expressed view that an order for annulment cannot be made in a conditional form because such an order would be contrary to the statutory scheme (see, for example, Halsbury’s Laws of England volume 3(2) paragraph 147), the Judge held that a conditional order was appropriate in this case, following the dicta of Ferris J in Engel v Peri[2]. He therefore ordered that there be an annulment of the bankruptcy to take effect only once the trustee in bankruptcy had notified the court that the bankruptcy debts had been paid and the unproven element of the petition debt had been secured.  

Subject to any appeal against this ruling, it seems that County Courts will have to desist from accepting a solicitor’s undertaking as sufficient to satisfy the “paid” element of the section 282 test, and that in future the better course for a bankrupt in Ms Halabi’s situation will be to apply for a conditional annulment order.  

However, the judgment is open to criticism and should therefore be viewed with caution, for the time being at least. In particular, it is arguable that the Judge should not on the one hand rule out the qualification of the court’s satisfaction in respect of the word “paid”, drawing a distinction between payment and security, and then on the other hand rely upon Ferris J’s dicta as to conditional orders which are based upon that very element of court satisfaction and the provision of sufficient security.[3]

  Furthermore, the ruling in Halabi as reported in the All England Reports Digest appears to involve the wholesale delegation to the trustee in bankruptcy of the court’s power to ascertain whether or not payment of the debts shall have been made at an unspecified date in the future, and provides that upon notification of the trustee’s decision (regardless of when that takes place and in what circumstances) there shall be an automatic annulment without any exercise of judicial discretion at that stage. The Court is not supposed to annul without a proper investigation of the facts[4]. It is a somewhat tortuous exercise to seat such an order comfortably with the wording of section 282(1)(b), particularly in the light of the Judge’s interpretation of that provision. If the court’s discretion to annul under section 282 does not come into existence until the debts have been “paid”, and if a solicitor’s undertaking cannot constitute payment for these purposes, how can the court purport to exercise that discretion at a time when no payment has been made? If there is no discretion at the date of the hearing because the section has clearly not been satisfied, it must be arguable that the court is unable to make even a conditional order for annulment.

  Accordingly, it is suggested that those representing bankrupts on applications to annul in such circumstances should proceed with caution and consider seeking various alternative forms of immediate and conditional order from the relevant court. Perhaps the safest route is to provide security for the debt by payment into Court or third party guarantee, worded so as to satisfy the court under the latter part of section 282(1)(b) and to avoid the pitfalls of the now absolute requirement of payment.  

By Sara Benbow    

[1][2008] All ER (D) 213 

[2][2002] EWHC 799 (Ch) 

[3]See also Hirani v Rendle [2003] EWCH 2538 and Thornhill v Atherton [2004] EWCA Civ 1858 for the availability of conditional orders 

[4]See, for example, Housiaux v Customs and Excise Commisioners [2003] EWCA Civ 257