Bankruptcy – annulment – section 282 – exceptional circumstances – whether judge erring determining validity
The bankrupt, Ms Mowbray, applied to annul her bankruptcy order under section 282(1)(a) of the Insolvency Act 1986. She contended the debt was limitation barred at the time the petitioner, 1st Credit (Finance), obtained a default judgment upon which its petition was based, and, accordingly, the court should never have made the bankruptcy order. Deputy District Judge Smith refused the application accepting 1st Credit (Finance)’s new contention that Ms Mowbray acknowledged the debt in any event, and that consequently there were no exceptional circumstances that might merit re-litigating the matter.
In allowing Mrs Mowbray’s appeal, Hildyard J held the Deputy District Judge had embarked on the wrong exercise. An applicant for an annulment needed to show material sufficiently new and different in nature such that it would have been likely, if it had been considered at the time, to result in the bankruptcy order never having been made: Ahmed v Mogul Eastern Foods [2005] EWHC 3532 (Ch). The Deputy District Judge erred in first analysing the validity of the debt (and thus, the order), rather than considering whether there were new and exceptional circumstances that merited reconsideration of the bankruptcy order.
In this case, Hildyard J held 1st Credit (Finance)’s lately proffered argument that Ms Mowbray acknowledged the debt raised “more questions than it answers”. This late and unconvincing answer to what would be a critical issue going to the debt’s validity was a sufficiently new and exceptional circumstance to justify revisiting the bankruptcy order. It did not matter that the new and exceptional circumstances originated with the petitioning creditor. Further, the Deputy District Judge was not in a position to determine (and so should not have determined) whether there had been an acknowledgment. This was a disputed question of fact requiring cross-examination to resolve.
Hildyard J also held the Deputy District Judge erred in holding that the order ought not to be annulled as a matter of discretion, because Ms Mowbray was unable to pay the costs of the trustee in bankruptcy, Mr Sanders. Although Ms Mowbray had been responsible for much of the delay in challenging the underlying debt, 1st Credit (Finance) had also only lately answered her limitation argument; therefore, Mr Sanders’ cost should be borne between them. Hildyard J conditionally annulled Ms Mowbray’s bankruptcy pending further argument on the ability of Ms Mowbray to pay these costs and her remaining unsecured creditors.
This case reinforces that on an annulment application a bankrupt only has to show exceptional circumstances that would cause the court to revisit the order, courts should not embark on determining the validity of the order on that application.
