Insolvency & Bankruptcy

Insolvency & Bankruptcy

Annulment of Bankruptcy

I have set out below what I hope is useful and helpful detailed information if a Bankruptcy Order has been made against you.  

Once a Bankruptcy Order has been made it is possible for it to be annulled.  This effectively returns the bankrupt to his original position.  In other words the bankruptcy is treated as if it had not happened.  An annulment can only be obtained by obtaining an Order from the Court and there are two main grounds upon which to apply for an annulment.  The first is that the Order should not have been made, the second is that the bankruptcy debts and expenses have either been paid in full, or secured for, to the satisfaction of the Court.  It is also possible to obtain an annulment of a Bankruptcy Order where a bankrupt subsequently enters into a Voluntary Arrangement which is approved and accepted by the creditors.

An annulment on the ground that the Bankruptcy Order ought not to have been made is not quite as simple as it sounds.  It is not open to a bankrupt simply to argue that it is unfair, or unreasonable, to make a bankruptcy Order.  Usually for applications on this ground to have some success they should be based upon either a technical defect with the legal process, such as that the debt had already been paid, or was less than £750.  The other circumstance in which this application may be successful is if the Order was made on the basis of evidence which turned  out to be untrue.  This may be because the creditor has agreed to give the debtor some time to pay and therefore agreed an adjournment but that that instruction has not been passed on to the creditor's representative attending the Court and as a result a Bankruptcy Order has been made.  The application may also succeed if the Petition or notice of adjournment was not served and the debtor was unaware of the hearing.  This ground is a discretionary remedy on the part of the Court and the circumstances in which it can be used are relatively limited.

The more usual basis upon which an application for annulment is made is under Section 282 (1) (b) of the Insolvency Act 1986 under which the bankrupt must prove that he has paid his debts in full, or secured them to the satisfaction of the Court.  Bankruptcy debts include not only the original debt but also the costs and expenses of the bankruptcy and,  in some cases, interest.

It is sometimes difficult for a bankrupt to know exactly how much is owed, particularly if he wants to make the application shortly after the Order was made.  There is a common misconception that an annulment can be obtained if the Petition debt is paid in full but this is incorrect.  Once a Bankruptcy Order has been made the bankrupt needs to be able to discharge all of his debts irrespective of whether or not the creditors are chasing for those debts.  The Court will not simply take the bankrupt's word that he has paid the debt.  Evidence must be produced and the Court will require a report from either the Official Receiver or the Trustee in Bankruptcy to confirm that the debts have been paid.   Sometimes a bankrupt is eager to make an application for annulment because of the consequences of a Bankruptcy Order and may make an application before the debts have actually been paid.  This can cause problems and usually leads to an adjournment which may only delay the process further and is likely to result in increased costs.  It is important to note that the Court  will not generally make an annulment Order before the debts have been paid but sometimes a Court may be persuaded to make a conditional Order and this may be necessary where a bankrupt is relying on obtaining funds to pay off the bankruptcy debt but these will only be available once the Bankruptcy Order has been annulled.  However, even where the debts are paid in full, the decision about whether to make an Order for annulment is at the discretion of the Court and may be refused if the Court receives an adverse report from the Official Receiver, or the Trustee in Bankruptcy, about the bankrupt's conduct.

Generally speaking it is in the bankrupt's interest to make an application for annulment as soon as possible following the making of the Bankruptcy Order.  This is because the consequences of bankruptcy, such as the bankrupt's inability to act as a director of a limited company and to operate a normal bank account, will cause the bankrupt considerable problems and may ultimately be damaging to the bankrupt's business.  However, an application based on the ground that the debts have been paid in full will take some time to deal with, particularly because the Court requires a report from the Official Receiver, or the Trustee in Bankruptcy and the bankrupt must give them at least 28 days' notice of the hearing.  The bankrupt must also pay the costs of the hearing and those of the Official Receiver, or Trustee.  When the Order is drawn it will normally provide for the vacation of any bankruptcy entries which have been registered against the bankrupt and it is important that these are cleared off, as they could otherwise cause problems in the future.

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