MOHAMMAD RAZI KHAN v ARVINDER SINGH-SALL & Anor

An annulment application under section 282(1)(a) of the Insolvency Act 1986 remains discretionary even where the bankruptcy order ought not to have been made. There is no general rule that annulment must follow unless exceptional circumstances are shown. The court must consider all relevant factors and give them appropriate weight, including the bankrupt’s conduct, solvency, the interests of creditors, delay and the utility of annulment. Where the debt is fully disputed, the court retains that discretion. An appeal against its exercise is ordinarily a review, and intervention is justified only for legal error, procedural irregularity, failure to consider relevant matters, reliance on irrelevant matters or a plainly wrong decision. For limitation purposes, annulment generally treats time as having run throughout the bankruptcy, subject to the court’s power to impose appropriate terms.

Habib Bank obtained a bankruptcy order against Mr Khan on a petition founded on a guarantee debt. Mr Khan later applied under section 282(1)(a) of the Insolvency Act 1986 to annul the order, arguing that the statutory demand and petition failed to disclose security and that the petition debt was disputed on substantial grounds.

The District Judge accepted that the order ought not to have been made on those two grounds, but refused annulment after considering Mr Khan’s conduct, the Trustee’s continuing investigations, his insolvency and the potential effect on creditors. Mr Khan appealed, challenging the legal test and the factual and discretionary conclusions.

1. Appeal dismissed. The District Judge had found two grounds on which the bankruptcy order ought not to have been made, but section 282(1)(a) of the Insolvency Act 1986 conferred a discretion rather than requiring annulment.
2. There was no “exceptional circumstances” test requiring annulment unless circumstances against it were exceptional. The court must consider all relevant factors and give them appropriate weight. Authorities including Owo-Samson v Barclays Bank plc (No. 1) and JSC Bank of Moscow v Kekhman supported that construction. The COMI decisions in Raiffeisenlandesbank Oberösterreich AG v Meyden and Deutsche Apotheker-Und Artzebank EG v Leitzbach were distinguishable in principle because they concerned orders made without jurisdiction, which had to be set aside as of right. Even where the petition debt was fully disputed, however, Owo-Samson prevented the court from treating annulment as automatic.
3. The District Judge was entitled to treat Mr Khan’s sustained and deliberate lack of co-operation, diversion of rental income and obstruction of the Trustee’s investigations as relevant factors. Her factual findings fell within the generous ambit within which reasonable disagreement was possible.
4. Solvency was to be assessed on a cashflow basis under section 271 of the Insolvency Act 1986, not merely by balancing assets and liabilities. The evidence did not show that Mr Khan had sufficient liquidity to meet the Personal Debt if a fresh petition were presented.
5. The passage of time was also relevant. Debts outside the bankruptcy, including the secured Personal Debt, continued to run for limitation purposes. Upon annulment, time should generally be deemed to have run throughout the bankruptcy because annulment wiped away its effect. The District Judge was therefore entitled to consider possible prejudice to creditors.

1. High Court, Chancery Appeals: The appeal from District Judge Hart’s refusal to annul the bankruptcy order was dismissed. The costs and consequential orders below remained undisturbed.