High Court Provide Clarification on Bankruptcy Annulment Test

Woolsey v Payne [2015] EWHC 968 (Ch)

The High Court have provided some much needed clarity on the test needed to annual a bankruptcy order.

The court may annul a bankruptcy order if, taking into account any grounds existing at the time of the hearing of the bankruptcy petition, the order ought not to have been made.

There are conflicting High Court decisions about what a bankrupt must prove in order to achieve the annulment of a bankruptcy order.

In a previous decision the High Court held that the bankrupt had to prove that, on the balance of probabilities, at the time of the hearing of the bankruptcy petition, he did not owe the petition debt.

However, this was slightly more onerous than an earlier decision where the High Court held that the bankrupt had the lesser burden of proving that the petition debt was disputed on substantial grounds.

In this case, Mr W lent money to both Mr and Mrs P.

Mr and Mrs P did not repay the loans, so Mr W served statutory demands on each of them. Mr P applied, successfully, to set aside the statutory demand against him. Mrs P did not challenge the statutory demand, nor pay the sum demanded.  Mr W issued a bankruptcy petition and Mrs P became bankrupt.

Mrs P applied, successfully, to annul the bankruptcy order against her. She relied on the same arguments that Mr P had used when applying to set aside the statutory demand against him which were that the loans were unenforceable under the terms of the Consumer Credit Act 1974. Mr W appealed against the decision to annul the bankruptcy order.

The High Court dismissed the appeal and held that the same single single test, of whether a debtor or bankrupt had raised a substantial dispute about the petition debt, applied to (1) an application to set aside a statutory demand (2) the opposition to a bankruptcy petition at its hearing, or (3) an application to annul a bankruptcy order.

The court considered that its approach was correctly founded in principle and sensible in practice. For example, the court noted that to impose a different standard on a debtor or bankrupt at different stages of the process might lead to odd results.

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The decision clarifies what a bankrupt has to prove when seeking to annul a bankruptcy order. The court's reasoning is persuasive and is a strong authority that a bankrupt need only show a substantial dispute of a petition debt to obtain an annulment.

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