Official Receiver v McKay

The Court of Appeal dismissed the appellant's challenge to an order of His Honour Judge Norris annulling a bankruptcy order under section 282(1)(b) of the Insolvency Act 1986. The court held that, under the 1986 legislative regime and the Insolvency Rules 1986, the debts which must be paid in full for the purpose of section 282(1)(b) are those for which a proof of debt is then subsisting and not debts which have previously been the subject of a proof but whose proofs have been validly withdrawn by agreement under rule 6.106 or expunged under rule 6.107. The court distinguished earlier authorities under the Bankruptcy Act 1883 (notably Re Keet and In re Burnett) and explained that the 1986 regime permits withdrawal or variation of proofs by agreement and that it is unnecessary to require payment of an amount that a creditor no longer seeks to recover in the bankruptcy. The court also emphasised that the judge retains a discretion to refuse annulment where appropriate.

Background and nature of the application.

Following a 1994 road traffic collision and subsequent county court proceedings, a judgment debt and substantial costs were recorded against Mrs McKay. A statutory demand and bankruptcy petition led to a bankruptcy order in August 2000. A trustee was appointed and later reported that the petitioning creditor had withdrawn their proof of debt and agreed to discharge trustee costs; the trustee was released and the Official Receiver became trustee. With no subsisting assets or creditors, the Official Receiver applied for directions and an annulment was ordered by His Honour Judge Norris on 24 February 2006 under section 282(1)(b) of the Insolvency Act 1986.

Procedural posture.

• The appellant, Mrs McKay, appealed to the Court of Appeal. Permission to appeal was granted on a single point: whether annulment under section 282(1)(b) is available where the only proved debt has been withdrawn by agreement and not paid in full (relying on Re Keet under the 1883 Act).
• The Official Receiver filed a respondent's notice proposing, alternatively, rescission under section 375 if section 282(1)(b) was not available.

Issues framed by the court.

• Whether, for the purposes of section 282(1)(b) and Insolvency Rule 6.211, a debt which was once the subject of a proof but whose proof has been withdrawn by agreement under rule 6.106 still counts as a "debt which has been proved" and therefore must be paid in full before annulment can be ordered.
• How earlier authorities under the Bankruptcy Act 1883 (in particular Re Keet and In re Burnett) bear upon the interpretation of section 282(1)(b) under the 1986 Act.

Court's reasoning and decision.

The court analysed section 282(1)(b) together with Insolvency Rules 6.211 and 6.106 (and related rules). It recognised the historical authorities under the 1883 Act but concluded that the 1986 Act and rules form a self-contained regime which expressly permits withdrawal or variation of proofs by agreement. The court held that the debts which must be paid in full are those for which a proof is then subsisting and stated in the amount shown by that subsisting proof; where a proof has been withdrawn or expunged, the former proved debt does not require payment for the purposes of annulment. The court further noted that the discretion to refuse an annulment remains available where it would be inappropriate to make an order. Applying those conclusions to the facts, the court held that Judge Norris was entitled to treat the bankruptcy as having no subsisting proved debt and to order annulment under section 282(1)(b).

Wider context. The court distinguished earlier decisions under the 1883 Act that were influenced by the then-different regime for discharge and the risk of evasion of stricter discharge rules; it accepted that the 1986 Act's different policy supports a different practical approach to withdrawn proofs.

The appeal was dismissed. The Court of Appeal held that under the Insolvency Act 1986 and the Insolvency Rules 1986 a debt whose proof has been validly withdrawn by agreement under rule 6.106 (or expunged under rule 6.107) does not remain a "debt which has been proved" for the purposes of section 282(1)(b), and therefore need not be paid in full before an annulment order may be made; the judge was entitled to annul the bankruptcy on the facts and had an appropriate exercise of discretion.

This is an appeal to the Court of Appeal from the order of His Honour Judge Norris Q.C. annulling the bankruptcy under section 282(1)(b) of the Insolvency Act 1986 ([2006] EWHC 430 (Ch)). The appellant had previously pursued other applications and appeals in the bankruptcy (including an appeal to Hart J, [2002] EWHC 2825 (Ch)) and an application for permission to appeal to the Court of Appeal was granted on a single ground in December 2006. Arden LJ had earlier refused permission to appeal against an order of His Honour Judge Norris ([2004] BIPR 1282 is cited in the judgment).