Annulment of Bankruptcy Orders: When and How to Annul a Bankruptcy in England and Wales

When dealing with an annulment application made on the basis that the bankruptcy order ought not to have been made, the court will apply the following three-stage test:

1. What grounds existed at the time the bankruptcy order was made;
2. Whether, on those grounds, the bankruptcy order ought not to have been made; and
3. Whether to exercise its discretion to annul the bankruptcy order (if the bankruptcy order ought not to have been made). 

If the court determines that the bankruptcy order ought to have been made, the annulment application is likely to be dismissed. 

In deciding whether to annul a bankruptcy order, the court can also review the validity of the debt upon which the creditor based their petition. 

If a bankrupt seeks to annul their bankruptcy on the basis that they dispute the petition debt, they must show substantial grounds for asserting the dispute. 

It is important to note that the bankruptcy does not need to prove that the debt was not due at all in order to obtain an annulment of the bankruptcy order. 

In exceptional circumstances, an annulment application may also be used to re-litigate grounds which were submitted at the bankruptcy hearing. 

Evidence may be adduced in relation to the circumstances at the time of the bankruptcy hearing, which can now be shown to have been wrong. 

Fairness and the interests of justice generally require the court to consider new evidence, even if it has been submitted late or at the annulment hearing itself. 

Discounting or excluding new evidence without evaluating or considering it leaves the court’s decision exposed to an appeal on the grounds of a serious procedural irregularity in the proceedings.

However, the debtor cannot simply repeat arguments which have been previously presented and dismissed on their merits at earlier hearings. 

When deciding to annul a bankruptcy order, the court may also take into account changes which have occurred since the bankruptcy order was made.   

Examples where the courts have annulled a bankruptcy order on this ground include:

• Where the debt which led to the bankruptcy petition being presented could have been disputed by the bankrupt, even though it wasn’t at the time the bankruptcy order was made;
• Where set off was available in order to reduce the bankruptcy petition debt to a level below the ability to petition for bankruptcy;
• Where the bankrupt was able to pay their debts but had colluded with their petitioning creditor (or the bankruptcy order had been made following the debtor’s own application);
• Where the court did not have jurisdiction to make the bankruptcy order (e.g. where the debtor’s centre of main interests was not in England and Wales);
• Where there was a procedural irregularity (e.g. the debtor was not properly served with the bankruptcy petition); or
• Where there had been a breach of natural justice (e.g. the debtor did not attend the hearing of the bankruptcy petition because they had been misled into thinking it would be adjourned). 

This is the more common ground upon which applications are made to the court to annul bankruptcy orders. 

A bankruptcy order may be annulled if it appears to the court that, to the extent required by the Insolvency Rules, the bankruptcy debts and expenses have all been paid or secured to the satisfaction of the court.

A ‘bankruptcy debt’ in this context means a liability which arose from an obligation that the bankrupt incurred before the bankruptcy order was made. 

It also only relates to debts that the creditor has proven and that have not been withdrawn at the date of the hearing of the application for an annulment. 

If a debt is disputed or the creditor cannot be traced, the debtor may have to provide security (such as a payment into court or a bond entered into with an approved surety) in such terms as the court considers adequate to satisfy any debt which might subsequently be proved. 

Usually, it is the bankrupt who applies for an annulment order, but neither the Insolvency Act nor the Insolvency Rules define or restrict the identity of the applicant. 

Case law suggests that anyone affected by a bankruptcy order could apply.  However, the applicant must satisfy the court that they have some kind of direct or indirect legitimate interest in applying for an annulment of another person’s bankruptcy.  There are two common examples of this:

1. A bankrupt’s divorcing spouse could apply for an annulment of a bankruptcy order if they believe the bankrupt themselves had petitioned to be made bankrupt in order to avoid a claim for financial relief in divorce proceedings; or
2. An unsecured or partially secured creditor may also have a legitimate interest in seeking an order for annulment of bankruptcy.  This may arise where the debtor’s assets are sufficient to meet their debts or where bankruptcy proceedings ought to have been brought in another jurisdiction. 

Whether or not the court is prepared to annul a bankruptcy order will depend upon the particular facts and circumstances, including:

• The interest of the applicant;
• The bankruptcy creditors’ views;
• Any evidence of bad faith; and
• The bankrupt’s financial position. 

The question of who bears the costs of the bankruptcy and the annulment application following a successful annulment is complicated and is entirely at the court’s discretion.  Generally, the costs of a successful application to annul are divided into four categories:

1. The petitioning creditor’s costs (if the bankruptcy order was made on a creditor’s petition);
2. The costs of the Official Receiver;
3. The costs of the Trustee in Bankruptcy; and
4. The costs of the annulment application.

The conventional and pragmatic approach is for the applicant to ensure that all of the above costs are paid or provided for before the annulment order is made.