Malathi Latha Sriram v Commissioners for HMRC & Anor

A bankruptcy order made while the debtor lacked capacity is not automatically annulled. The court must first determine whether the order ought not to have been made, and must then exercise the discretion under section 282 of the Insolvency Act 1986 having regard to all relevant circumstances.

Where service was effected by substituted methods, the creditor must take all steps reasonably required to bring the statutory demand and petition to the debtor’s attention. It need not adopt a scattergun approach by serving every address connected with the debtor, particularly where an address has proved ineffective.

Capacity is decision-specific and time-specific. Retrospective capacity may be assessed from the medical evidence as a whole, including evidence arising after the material date.

The applicant sought annulment of a bankruptcy order made on an HMRC petition. She relied principally on alleged defective service of the statutory demand and petition, and on her lack of capacity during the relevant period. She also relied on the possibility that the petition debt could be substantially reduced, but that alternative ground was no longer pursued.

The court found that HMRC had served the statutory demand and petition properly, using addresses associated with the applicant and obtaining an order for substituted service. It nevertheless found that the applicant lacked capacity to understand or conduct the bankruptcy proceedings. The central issue was whether, in those circumstances, the court should exercise its discretion to annul the bankruptcy.

1. Service. The obligation under rule 6.3(2) of the Insolvency Rules 1986 was to take all steps reasonably required to bring the statutory demand to the debtor’s attention. The practice direction provided useful guidance but did not require HMRC to pursue every address with which the debtor had some connection. The address at 106 Woking Close had proved ineffective and was not a known residence when the statutory demand was served. HMRC acted reasonably in serving at 11 Westfields Avenue and later seeking substituted service at 480 Upper Richmond Road.
2. Capacity. Applying the Mental Capacity Act 2005, capacity was issue-specific and time-specific. The court accepted the evidence of Dr Gibbons that the applicant’s prolonged schizoaffective illness impaired her ability to understand, retain and weigh the nature and effect of the statutory demand, petition and bankruptcy proceedings. Her apparent periods of improved functioning did not establish restored capacity to manage these affairs.
3. Discretion. Lack of capacity did not automatically require annulment. Under section 282 of the Insolvency Act 1986, the court had to consider all relevant circumstances, including post-bankruptcy events. The applicant’s delay, lack of co-operation, opaque affairs, uncertainty about her assets and liabilities, and the risk of prejudice to unidentified creditors weighed heavily against annulment. The likely recurrence of HMRC’s petition debt was also relevant.
4. The application to annul the bankruptcy was dismissed.