MOHAMMAD RAZI KHAN v ARVINDER SINGH-SALL & Anor

The appeal concerned an application to annul a bankruptcy order under section 282(1)(a) of the Insolvency Act 1986 where the District Judge had concluded that the bankruptcy order "ought not to have been made" on two separate grounds (defects in disclosure of security and that the petition debt was disputed on substantial grounds) but nonetheless refused annulment in the exercise of the court's discretion. The High Court reviewed the authorities and affirmed that s.282 confers a discretion to annul even when the statutory ground is made out, subject to the special position where a court lacked jurisdiction to make the original order (for example certain COMI cases).

Key legal principles: (i) s.282(1)(a) gives a discretionary power to annul; (ii) even where a bankruptcy order ought not to have been made, the court must weigh all relevant factors (including the bankrupt's conduct, likely solvency or liquidity, prejudice to creditors, abuse of process and any delay); (iii) where a court had no jurisdiction to make the original bankruptcy order (for example certain COMI situations) the order must be set aside as of right; and (iv) the appellate court will only interfere with the exercise of discretion if the lower court was wrong in law or plainly wrong in fact, or there was a serious procedural irregularity.

The judge rejected the appellant's criticisms of the District Judge's approach and concluded that the District Judge had lawfully and reasonably exercised her discretion in light of the bankrupt's sustained failures of co-operation, the risk of prejudice to creditors (including limitation issues) and the absence of evidence of liquidity sufficient to meet likely fresh demands. The appeal was dismissed.

This appeal arises from an application by Mr Mohammed Razi Khan to annul a bankruptcy order made against him following a bankruptcy petition by Habib Bank AG Zurich. Mr Khan had given a personal guarantee for corporate indebtedness and separately owed personal sums to the bank. After a petition hearing in January 2018 he was adjudged bankrupt; he subsequently applied to annul on the basis under section 282(1)(a) that, on grounds existing when the order was made, the order ought not to have been made.

Background and procedural posture

• Habib presented a petition founded on a statutory demand; service and petition proceedings led to a bankruptcy order in January 2018.
• Mr Khan applied to annul his bankruptcy on several bases: alleged failure to grant an adjournment, defective service of the statutory demand, failure to disclose security over properties (alleged breaches of rules and ss.267/269) and that the petition debt was disputed on substantial grounds.
• District Judge Hart (County Court at Central London) heard the annulment application over three days and concluded that two of the grounds established that the bankruptcy order ought not to have been made (non-disclosure of security and that the petition debt was disputed on substantial grounds), but she exercised her discretion under s.282(1)(a) and refused annulment for reasons including the bankrupt's conduct, continuing investigations by the trustee, likely insolvency/liquidity issues and potential prejudice to creditors, including limitation concerns. The District Judge ordered costs against Mr Khan and dismissed his application.
• Fancourt J stayed parts of the costs/lifting orders and granted permission to appeal to the High Court, with limited leave to adduce further evidence on payments by Mr Khan's wife and updated valuations of two properties.

Issues before the High Court

1. Whether the District Judge applied the wrong legal test, in particular whether an annulment should be refused only in "exceptional circumstances" where the underlying order ought not to have been made.
2. Whether the District Judge was plainly wrong in fact in her findings about Mr Khan's conduct and the need for further trustee investigations.
3. Whether the District Judge erred in treating the passage of time and limitation risk as a relevant factor.
4. Whether she erred about Mr Khan's solvency and ability to meet likely fresh demands.
5. Whether her approach to potential prejudice to creditors by reason of time bar was correct.

Court's reasoning

• The court held that s.282(1)(a) vests a discretion to annul and that established authority (including Owo-Samson and Guinan and other authorities) requires the court to take all relevant factors into account; there is no absolute rule that annullment must be granted unless "exceptional circumstances" are shown, although some authorities indicate that where a petition debt is genuinely disputed it will commonly be exceptional to refuse annulment.
• The High Court accepted the distinction established in COMI cases (Meyden, Leitzbach) that where the original bankruptcy order was made without jurisdiction the order must be set aside as of right, but that did not apply on the facts of this case.
• The judge was not persuaded that the District Judge misdirected herself. The factual findings about Mr Khan's sustained lack of co-operation, diversion of rental income, obstructive conduct, ongoing gaps in disclosure and the realistic possibility that the trustee still needed to investigate assets and liabilities (including foreign matters and a first-charge loan) were within the generous ambit of fact-finding and justification for refusing to exercise the discretion to annul.
• The High Court also endorsed the District Judge's consideration of limitation and the passage of time: on annulment time is generally treated as having run through the period of the annulled bankruptcy and potential prejudice to creditors is a legitimate consideration.
• Finally, the High Court accepted that there was insufficient evidence of liquidity to satisfy likely fresh demands, so that solvency concerns weighed against annulment.

Result: The appeal was dismissed. The District Judge’s exercise of discretion under s.282(1)(a) was upheld.

The appeal is dismissed. The court held that section 282(1)(a) of the Insolvency Act 1986 confers a discretion to annul even where a bankruptcy order ought not to have been made, and the District Judge lawfully and reasonably exercised that discretion after weighing relevant considerations (the bankrupt’s conduct, outstanding trustee investigations, likelihood of insolvency/liquidity on annulment, and potential prejudice to creditors including limitation risks). The High Court found no error of law or plainly wrong factual finding requiring interference.

Bankruptcy petition presented to the County Court at Slough (petition hearing 16 January 2018) resulted in a bankruptcy order. Permission to appeal against the bankruptcy order was refused on paper by Rose J (20 March 2018 and renewed orally 3 May 2018). Annulment application heard by District Judge Hart who dismissed the application by written judgment dated 26 August 2021. Fancourt J made interim orders (5 October 2021) and granted permission to appeal and limited leave to adduce further evidence (2 November 2021). Appeal heard in the High Court (Chancery Appeals) before David Mohyuddin QC on 29–30 March 2022; judgment ([2022] EWHC 1913 (Ch)) delivered 21 July 2022.