The Future for Remortgage-based Bankruptcy Annulments

(the case of Halabi –v- London borough of Camden & Anor (2008))

The decision in Halabi –v- London Borough of Camden & Anor 2008 EWHC 322 (Ch) confirms that the courts do not have the power to annul bankruptcy orders on the basis of an undertaking to pay the bankruptcy debts, costs and expenses.  Courts can, however, grant conditional annulment orders which take effect only after the bankrupt has satisfied certain conditions such as the Official Receiver notifying the court that the relevant sums have been paid.

Background

Hala Halabi applied to annul the bankruptcy order made against her on 26.03.07 on a petition presented by the London borough of Camden for unpaid rates.  Mrs Halabi has a limited understanding of English and was not properly aware of the consequences of a bankruptcy order being made and acknowledged her mistake in allowing this to happen.  Mrs Halabi owned two properties in central London with equity in them, the remortgaging of which would have provided more than sufficient funds to cover the bankruptcy debts, costs and expenses totalling £12,544.70.  She sought to annul her bankruptcy on the basis that her solicitor would hold funds advanced to her under a remortgage, while giving undertakings (1) (to the mortgagee) not to release the funds until the annulment order had been made and (2) (to the court) to release those funds to pay the debts, costs and expenses of the bankruptcy in full once the annulment order had been made.

The applicant sought to argue that the word “paid” as it appears in s. 282(1)(b) Insolvency Act 1986 was qualified by the phrase “to the satisfaction of the court” which appears in the same section.  Initially, Registrar Simmonds was unimpressed with the application and declined to list it until evidence was presented to the effect that the claims, costs and expenses had indeed been paid.  The application was later referred to the High Court for a substantive hearing. 

Mr John Jarvis Q.C. sitting as a judge in the High Court (the judge) declined to accept the applicant’s submission, that the qualification (“to the satisfaction of the court” in s.282(1)(b)) governs the giving of security rather than whether or not the debts and expenses of the bankruptcy had been paid.  The judge drew from the fact that there is no qualification to Insolvency Rule 6.211(2) which states that ‘all bankruptcy debts which have been proved must have been paid in full’.

As far as the judge was concerned, the word “paid” in s. 282(1)(b) could not embrace the giving of security for a debt and the offering of a security by way of an undertaking would not qualify as a payment.

Nevertheless, the judge wished to find a solution within the rules whereby an annulment order could be granted in cases where it was not in the public interest for the bankruptcy to continue and enable remortgage-based annulments to proceed.  The judge also reinforced the principle that the granting of an annulment order was an indulgence which the court grants to a bankrupt and in order to exercise its discretion to do so the court had to be satisfied that there was nothing wrong in the bankrupt’s conduct.

In accordance with Civil Procedure Rule r.40.7(1), the judge made an annulment order which would take effect once the necessary conditions, specified in the order, had been satisfied.  This type of order is nevertheless (in law) an order in the meantime from the moment it is given or made, sufficient therefore in this case to satisfy the solicitor’s undertaking to the mortgagee and permit the release of the funds such that the conditions could be satisfied.  It was only the effect of the order which was suspended until the conditions had been satisfied.

An example of the conditions which might be required by the court is that the Official Receiver has notified the court that bankruptcy debts, costs and expenses have been paid and that there is sufficient security in place to cover any known but unproven debts.

In practice, when such orders are made, the court office may deal with them by deferring the drawing up or stamping of the annulment order until such time as satisfactory evidence of the completion of the conditions has been supplied.  The precise practice of the courts across the country may well vary.

Implications for Insolvency Practitioners

This case comes after Chief Registrar Baister’s practice note concerning the disparity between the procedure adopted in many County Courts whereby debtors would seek to have their bankruptcy orders annulled on the basis that their solicitors would provide an undertaking that the funds be transferred to cover the bankruptcy debts, costs and expenses following the making of the annulment order and the growing reluctance of the High Court Registrars to grant annulment orders on this basis.

This decision appears to signal the beginning of a more standardised approach to granting annulment orders on the basis of s. 282(1)(b), since it offers High Court authority for the Chief Registrar’s interpretation of the Act and the Rules.

It remains to be seen of course to what extent the courts and lenders will embrace the conditional order route.  Some lenders may still insist upon effective orders before drawdown and others may require third party guarantees or payments into court.  Much will clearly depend upon the circumstances of the individual borrower and the creditor position in the bankruptcy.

April 2009