McKay v The Official Receiver

INSOLVENCY GROUP

McKAY V THE OFFICIAL RECEIVER
16th June 2009, Court of Appeal

Annulment – payment in full – whether creditor who withdraws proof of debt has to be paid

The facts

Following a minor car accident, judgment was given against the debtor, who was then made bankrupt on a petition presented by the other party backed by that party’s insurance company, who had paid its insured. The debtor refused to accept the judgment of the bankruptcy. The petition debt was the only debt in the bankruptcy.

After a number of years the insurance company realised it was unlikely to make any recovery and was simply incurring additional expense as the debtor persisited in challenging all aspects of the debt and bankruptcy. As a result, the insurance company withdrew the proof of debt and paid the costs of the bankruptcy, whereupon the official receiver applied to the court for directions as to whether the bankruptcy should be annulled on the grounds of payment in full.

The debtor objected in writing but was unable to attend the hearing. She wanted to apply instead for the bankruptcy order to be annulled on the grounds that it ought never to have been made, which she had sought unsuccessfully in the past. The judge annulled the bankruptcy order on the grounds of payment in full. The debtor appealed with permission from the Court of Appeal limited to the question of whether a debt which has been released can be said to have been paid in full.

The judgement

Re Keet [1905] 2 K.B. 666 (under the Bankruptcy Act 1883) held (i) that the debts that had to be paid included all debts which had been proved, unless the proof was subsequently expunged on the grounds that it ought not to have been admitted to proof and (ii) that a release was not payment. Therefore, where debts properly proved were subsequently released, because the creditors had decided to try to help the debtor start in business again, the bankruptcy could not be annulled on the grounds of payment in full. The provisions relating to annulment have remained virtually unaltered through to the Insolvency Act 1986.

However, applying the principle set out in Re Smith ex p. Braintree D.C. [1990] 2 A.C. 215 that the 1986 Act can be construed as piece of new legislation without regard to 19th century authority or similar provisions of repealed Bankruptcy Acts (and bearing in mind Hoffman J. observations in Re a Debtor (No 784 of 1991) [1992] Ch 554), the Court of Appeal held that it had been open to the judge to annul the bankruptcy on the grounds of payment in full because the debts which are required by s.282(1)(b) of the 1986 Act and the rules to be paid are those, for which a proof has been put in, in the amount at which the proof stands at the relevant time. As there was no longer any subsisting proof in respect of the petitioning creditor’s debt, it did not have to be paid. Had the proof been reduced, it would have been the reduced amount that would have had to be paid.

One minor feature was that as the debt had not been released, it was still technically extant following the annulment, though this was of no practical consequence as the insurance company was clearly not going to seek to pursue it.

Another possible course open to the court, had it held that no jurisdiction arouse under s.282(1)(b), would have been to rescind the bankruptcy order and dismiss the petition under s.375 of the 1986 Act (see Fitch v O.R. [1996] 1 W.L.R.242). In the circumstances the court did not have to consider this point.

Richard Ritchie
XXIV Old Buildings, July 2009