Khan v Singh-Sall case: application of the court’s discretion not to annul a bankruptcy order

This article looks into the Khan v Singh-Sall case in detail, highlighting the court’s discretion in determining whether to annul a bankruptcy order in circumstances where it has determined the order ought not to have been made.

Background to the case

Mohammad Khan was made bankrupt following a petition brought by Habib Bank AG Zurich. Mr Khan applied to annul the bankruptcy. That application was heard by DJ Hart, sitting at the County Court at Central London.

Whilst DJ Hart concluded the bankruptcy order should not have been made - on the basis that the petition debt was disputed and secondly the petition erroneously stated that the debt was unsecured when the petitioning creditor held security, albeit of limited value – DJ Hart declined to annul the bankruptcy, concluding, among other matters, that Mr Khan was undoubtedly insolvent.

Mr Khan appealed to the High Court, where his appeal was dismissed on all grounds. One of those grounds addressed, specifically the effect of annulment on the running of time for the purposes of limitation. David Mohyuddin KC, sitting as a Deputy High Court Judge, dismissed Mr Khan’s ground of appeal in this regard, and held that time should be deemed to have run throughout the period of the bankruptcy order for the purpose of limitation of the bankruptcy debts.

Mr Khan then appealed again, on the grounds that the case raised two points of potential significance more widely. Firstly, the extent of the discretion conferred on the court by section 282(1)(a) of the Insolvency Act 1986, which states that the court may annul a bankruptcy order, rather than must annul when determining that a bankruptcy order ought not to have been made. Secondly, the effect of annulment on the running of time for the purposes of limitation.

What did the court decide?

The Court of Appeal declined to decide the point on limitation, noting that the decision of Mr Mohyuddin KC was open to doubt. The court noted that this was irrelevant to DJ Hart’s decision, and therefore stated that they would leave determining limitation to a case where the point needs to be decided, which was not the case here.

In considering exercising the court’s discretion, the Court of Appeal held:

Where the court concludes a bankruptcy order ought not to have been made, there must be ‘something’ sufficient to refuse annulment, but that ‘something’ does not need to be exceptional.
The decision to make an order annulling a bankruptcy order is very much at the discretion of the court, where the court can have regard to all of the circumstances relevant to that decision, including the bankrupt’s conduct and solvency.

What factors were considered?

The following were factors considered by the court in reaching its conclusion that the court was not prepared to exercise its discretion and annul Mr Khan’s bankruptcy order:

Whilst the petition contained a defect, in that it did not contain the required election pursuant to s.269 of the Insolvency Act 1986 – a statement to the effect the petitioning creditor had given up its security, or the petition debt was expressed not to be in respect of the secured debt and the unsecured debt was estimated - this omission was not fatal, but rather a defect capable of being cured.
Mr Khan’s conduct – Mr Khan had concealed and diverted assets and generally failed to submit to the bankruptcy estate.
Mr Khan’s solvency, or rather lack off – Mr Khan remained insolvent, he was unable to meet his debts.

What can we take away from this?

Annulment of a bankruptcy order remains very much at the discretion of the court, having regard for all of the circumstances of the case. We await future case law to decide the point on annulment as to whether time continues to run during the period of the bankruptcy order in respect of limitation.

For further information, please contact the restructuring and insolvency team.