Thornhill v Atherton & Ors

On an annulment under section 282(1)(a) of the Insolvency Act 1986, the court retains a broad discretion as to the trustee’s proper costs. It may require the bankrupt to bear those costs and direct that the annulment order is not perfected until they are paid.

The fact that the bankruptcy ought never to have been made, including where the petition was an abuse of process, does not displace the need to protect an innocent trustee. In exercising the discretion, the court may take account of delay which caused substantial costs to accrue, including delay attributable to the bankrupt’s legal advisers. Claims against the petitioning creditor, a spouse or former solicitors are separate matters.

Mrs Atherton assigned to the petitioning creditor an alleged debt said to arise from payments she had made towards a mortgage. A bankruptcy order was made against Mr Atherton in 2000. In 2004, an order made in ancillary-relief proceedings in 1995 came to light. It showed that Mrs Atherton had not paid a debt of Mr Atherton from her own funds and that there had been no valid petition debt.

Judge Raynor QC annulled the bankruptcy under section 282(1)(a) of the Insolvency Act 1986, but ordered Mr Atherton to pay the trustee’s proper costs and directed that the annulment should not be perfected until payment. Mr Atherton appealed, seeking an immediate and unconditional annulment. The issue was whether that costs condition was a permissible exercise of the annulment discretion.

1. Appeal dismissed. Lloyd J, with whom Jonathan Parker LJ and Waller LJ agreed, held that Judge Raynor’s order was within the proper range of his discretion.

2. An annulment under section 282(1)(a) of the Insolvency Act 1986 does not require the court to leave an innocent trustee without payment or security for proper costs. The trustee had acted in good faith under a court order. The court’s concern was not the fairness of the position between the bankrupt, his wife and the petitioning creditor, but the position between the bankrupt and the trustee.

3. Although the bankruptcy should never have been made and the petition was accepted as an abuse of process, the annulment application came effectively four years after the bankruptcy order. The substantial trustee’s costs arose because the 1995 order had not earlier been identified. As between the trustee and the bankrupt, it did not matter whether that omission was Mr Atherton’s personal fault or that of his solicitors. He was affected by their acts and omissions, while retaining any separate remedy against them or others.

4. The court applied the procedural guidance in Engel v Peri, [2002] EWHC 799 Ch. Directing that an otherwise unconditional annulment order should not be perfected until the costs were quantified and paid was a valid and practical means of protecting the trustee. Until then, the bankruptcy continued, the assets remained vested in the trustee, and the trustee could realise assets to meet proper costs and any proved debts. The condition was therefore neither self-contradictory nor impossible to perform.

5. Butterworth v Souter, [2000] BPIR 482, established no inflexible rule that a petitioning creditor must bear a trustee’s costs whenever annulment is under section 282(1)(a). Its circumstances were materially different: the application was early, costs were modest, and the petitioning creditor was a party. Here, an order against Mrs Atherton would have left the trustee without adequate security and might have made annulment depend on her compliance.

6. The application to adduce further evidence was also dismissed because it could not affect the discretionary conclusion. Permission to appeal to the House of Lords was refused, the stay was lifted, and the appellant was ordered to pay the respondent’s costs, subject to detailed assessment.

• Court of Appeal (Civil Division): Dismissed Mr Atherton’s appeal from the conditional annulment order: [2004] EWCA Civ 1858.
• Chancery Division, Manchester District Registry: Judge Raynor QC annulled the bankruptcy under section 282(1)(a) of the Insolvency Act 1986, but directed that the order should not be perfected until Mr Atherton had paid the trustee’s proper costs.
• Chancery Division: Neuberger J dismissed an earlier appeal from the Registrar’s refusal to annul the bankruptcy: [2003] BPIR 21.
• Bankruptcy Court: Registrar Baister dismissed Mr Atherton’s first application to annul the bankruptcy order on 5 December 2000.