Fraudulently Procured Bankruptcy: Annulment May Be Refused Without Provision for Trustees’ Costs

1. Introduction

This decision addresses a difficult question arising from a bankruptcy application made without the knowledge or authority of the person named as the debtor: who should bear the expenses of trustees who have properly administered the resulting bankruptcy?

The appellant had been made bankrupt through an electronic application which she had not submitted. The court subsequently established that the bankruptcy order ought not to have been made. Nevertheless, her application to annul it was refused because satisfactory provision had not been made for the trustees’ costs.

Lord Justice Lewison refused permission for a second appeal. He held that the existing principles governing trustees’ expenses applied even where the bankruptcy had allegedly been procured by fraud. The appellant’s innocence did not distinguish her position from the established authorities, which already addressed the competing interests of an innocent bankrupt and innocent trustees.

The decision therefore reinforces, rather than replaces, existing law: establishing that a bankruptcy order should never have been made does not necessarily entitle the affected person to unconditional annulment. Provision for properly incurred trustees’ expenses may remain a legitimate condition of relief.

2. Background and Procedural History

A bankruptcy order dated 10 February 2017 was made on what purported to be the appellant’s own electronic application. In fact, she had neither made the application nor known about it. Trustees were appointed and incurred expenses administering what they understood to be a valid bankruptcy estate. No impropriety by the trustees was alleged.

The appellant had subsequently sought to bring individuals associated with Victor Stone before the court. Those applications were refused in February 2025 on grounds of expense and proportionality. That refusal was not itself under appeal. Crucially, no attempt to trace or join the alleged fraudsters had been made before the district judge’s January 2021 decision.

3. Summary of the Judgment

The Court of Appeal’s principal conclusions were:

• Fraud did not displace the established costs principles. The relevant comparison was between an innocent appellant and trustees who had also acted innocently and properly.
• Annulment remained discretionary. The finding that the order ought not to have been made did not compel the court to annul it without protecting the trustees’ position.
• The appellant was required to demonstrate provision for costs, not necessarily personal payment. The district judge had not ruled that the appellant alone must fund the trustees.
• The bankruptcy order was not automatically ineffective. It remained valid unless and until set aside, notwithstanding the allegations of fraud and non-service.
• The trustees were not required to pursue the alleged fraudsters. In the circumstances, bringing those persons before the court was a matter for the appellant.
• The proposed second appeal failed. It lacked a real prospect of success and did not meet the additional requirements applicable to second appeals.

The separate challenge concerning the refusal to stay enforcement of a costs order also failed. Both permission applications were dismissed.

4. Statutory and Procedural Framework

Annulment under the Insolvency Act 1986

Section 282(1)(a) of the Insolvency Act 1986 permits the court to annul a bankruptcy order where, on grounds existing when it was made, the order ought not to have been made. The statutory power is discretionary: establishing the relevant ground does not automatically determine whether relief will be granted or what conditions should accompany it.

The court may impose terms concerning the trustees’ expenses. Its discretion extends both to whether those expenses should be paid and to identifying who should pay them.

The electronic application procedure

The judgment considered the procedure under Rules 10.34–10.48 of the Insolvency Rules. That procedure assumes that the person submitting the application is the named debtor. Rule 10.38 permits verification checks, including inspection of the electoral register, but the judgment did not establish whether such checks had occurred here.

There is no requirement within the procedure described by the court for advance notification to the named applicant before the order is made. However, Rule 10.45 requires the adjudicator to deliver the bankruptcy order to the debtor and the Official Receiver as soon as reasonably practicable afterwards.

Lewison LJ treated that requirement as an important opportunity for prompt challenge before substantial trustees’ expenses arise. He did not, however, find that the order had actually been delivered to the appellant in accordance with the rule.

5. Precedents Cited and Their Influence

Butterworth v Souter [2000] EPIR 582

The court cited Butterworth v Souter [2000] EPIR 582 for the breadth of the discretion concerning trustees’ expenses when a bankruptcy is annulled. The court can determine whether expenses should be paid and, if so, by whom.

This authority supplied the starting point: the allocation of expenses does not follow automatically from the conclusion that the bankruptcy order was wrongly made. It requires a separate discretionary assessment. The judgment did not examine the underlying facts of that case, and its relevance here was confined to that proposition.

Oraki v Dean & Dean [2013] EWCA Civ 1629

Oraki v Dean & Dean [2013] EWCA Civ 1629 was the central authority. The appellant accepted its governing principle but argued that the district judge had misapplied it because the present bankruptcy had been procured through a purported debtor application rather than ordinary creditor proceedings.

Lewison LJ identified three important aspects of that decision:

1. The court must consider both sides. Floyd LJ explained that the assessment must address the trustee’s position as well as that of the person seeking annulment. Innocence in relation to the petitioning creditor does not itself prevent an order requiring that person to bear trustees’ expenses.
2. Proper expenses ordinarily warrant protection. Arden LJ’s guiding principle was that the trustees’ proper expenses should normally be paid or provided for before annulment removes the assets from their control. That protection reflects the trustees’ existing property right under section 323 of the Insolvency Act 1986 to retain sums necessary to meet bankruptcy expenses.
3. A culpable party’s inability to pay matters. Although an order against the petitioning creditor will commonly transfer the burden away from an innocent estate, that solution fails if the creditor cannot pay. The burden may then remain with, or return to, the bankrupt.

The institutional explanation is significant. Trustees perform a court-related function and cannot reasonably be expected to accept appointments only on the risk that remuneration will disappear if the bankruptcy is later annulled. Those considerations may weigh heavily, although there is no automatic entitlement to payment in every case.

Lewison LJ rejected the proposed distinction based on fraud. The decisive similarity was that both the appellant and the trustees were innocent. The existing authority already required the court to resolve that conflict of interests.

No other judicial precedents were cited in the supplied judgment.

6. Analysis of the Court’s Reasoning

A. Wrongful bankruptcy and unconditional annulment are different questions

The appellant had already established that the bankruptcy order ought not to have been made. The remaining question was whether the court should exercise its discretion to annul it without satisfactory provision for expenses incurred under the order.

This distinction explains why the January 2020 finding did not end the proceedings. It established the statutory basis for seeking relief, but did not resolve the conditions on which relief should be granted.

After repeated adjournments and an unsuccessful proposal, the district judge was entitled to conclude that no workable arrangements had been demonstrated. The Court of Appeal considered that decision to fall within the permissible scope of her discretion.

B. Innocence does not itself allocate the financial loss

The appellant’s strongest fairness argument was that she had neither sought bankruptcy nor received the procedural opportunities normally associated with a creditor’s petition. She should not, she argued, have to finance the consequences of another person’s wrongdoing.

The difficulty was that the trustees had also done nothing wrong. Exempting the appellant from the financial consequences would not eliminate the loss; it would leave another innocent party exposed. The court therefore treated the identity of an available payer, rather than innocence alone, as central.

The judgment does not establish that a victim of identity fraud must invariably pay trustees’ expenses. It confirms that victimhood does not, by itself, override the court’s discretion to protect properly incurred expenses.

C. Provision for expenses is not the same as exclusive personal liability

Lewison LJ expressly distinguished between requiring the appellant to find a means of providing for the costs and deciding that only she could pay them. That distinction limits the decision’s reach.

An identified and solvent wrongdoer might provide an alternative source of payment. But the appellant had not presented an effective alternative when the district judge determined the application. Even an order against a fraudster would not necessarily solve the problem if it could not be enforced.

D. The electronic procedure did not justify a different costs rule

The appellant characterised the absence of a statutory demand, creditor’s petition, service and hearing as a structural weakness in the self-certified application process.

The court acknowledged that the procedure offered no opportunity to object before the order was made. Nevertheless, the requirement for prompt subsequent delivery provided an opportunity to seek annulment before excessive expenses accrued.

This reasoning should not be overstated. The judgment did not determine whether verification procedures were adequate in general, whether any public authority had breached a duty, or whether the appellant actually received timely notification. It decided that the procedural differences did not justify departing from the established principles governing trustees’ expenses.

E. Fraud did not make the order automatically void

A written ground, not pursued orally, contended that the bankruptcy order was void ab initio because it had been obtained fraudulently and never served.

Lewison LJ rejected that contention by applying the principle that an order remains valid unless and until set aside. The statutory power to annul an order because it ought not to have been made itself presupposes an operative order requiring judicial intervention.

For the present dispute, this meant that the trustees’ actions could not be treated as having occurred under a legally nonexistent bankruptcy merely because its foundation was defective.

F. Later attempts to join alleged wrongdoers could not repair the earlier omission

The court rejected the contention that the trustees should have pursued those responsible for initiating the application. If the appellant wanted the alleged fraudsters before the court, it was for her to take the necessary steps.

The timing was decisive. The appeal challenged the district judge’s exercise of discretion in January 2021, which had to be assessed by reference to the matters then before her. Later joinder applications could not retrospectively supply a missing feature of that decision.

Lewison LJ nevertheless recognised that an earlier attempt to join the alleged fraudsters might have supported a different order or a further adjournment. The decision therefore highlights the importance of timely procedural action, rather than establishing that the wrongdoers’ involvement was legally irrelevant.

G. The second-appeal threshold reinforced the outcome

This was an application for permission to pursue a second appeal, not a full appellate rehearing. The proposed appeal needed a real prospect of success and an important point of principle or practice, or some other compelling reason for a second appeal.

The relevant principles were already settled, were not themselves challenged, and had been applied within the district judge’s discretion. Lewison LJ therefore found neither a real prospect of success nor satisfaction of the additional second-appeal threshold.

H. The separate costs application disclosed no basis for intervention

The associated application concerned the refusal to stay enforcement of a costs order made by HHJ Cadwallader during the High Court appeal.

The argument that enforcement would prejudice the appellant’s ability to pursue the substantive appeal had apparently not been put before that judge. Moreover, the appellant had in fact pursued the appeal, undermining the argument’s factual premise. The decision also fell within the judge’s broad discretion over costs.

7. Potential Impact and Limits

The judgment provides practical guidance for bankruptcy annulment applications involving impersonation or an allegedly fraudulent debtor application:

• Proof that the application was unauthorised may not be sufficient. Applicants should also address the financial consequences of annulment.
• Trustees’ proper expenses remain important despite fraud. The absence of wrongdoing by the debtor does not remove the need to consider the trustees’ position.
• Alternative payment proposals must be workable. Identifying a potentially culpable person is different from demonstrating a realistic source of recovery.
• Early action can affect the available options. Timely investigation and joinder may support a costs order against a wrongdoer or justify further time to resolve funding.
• Appeals must address the decision actually made. Later procedural developments do not necessarily demonstrate error in an earlier discretionary ruling.

The decision does not create an automatic rule requiring fraud victims to pay, approve any particular amount of trustees’ remuneration, or resolve possible claims against those responsible for the unauthorised application. Its principal significance is the application of established annulment principles to this particular form of alleged fraud.

8. Complex Concepts Simplified

Annulment

A court order undoing a bankruptcy. Here, the relevant ground was that the bankruptcy order should not have been made in the first place.

Judicial discretion

A power to choose an appropriate outcome after considering the circumstances. A broad discretion must still be exercised according to legal principles.

Provision for trustees’ expenses

Arrangements protecting payment of proper bankruptcy expenses. Such arrangements need not necessarily mean payment solely from the applicant’s own resources.

Void ab initio

Legally ineffective from the outset. The court rejected that description of the bankruptcy order: it remained effective until set aside.

Joinder

Adding another person as a party to proceedings so that the court can determine relevant issues involving that person.

Stay of enforcement

A temporary suspension of steps to enforce an order. Refusing a stay leaves enforcement available while the order remains operative.

Second appeal

An appeal following an earlier appellate decision. Permission requires more than disagreement with the outcome; the additional second-appeal threshold must also be met.

9. Conclusion

The judgment confirms that an unauthorised bankruptcy application does not automatically entitle its victim to annulment free from conditions protecting innocent trustees. Courts must consider both parties’ positions and may refuse annulment where satisfactory provision for proper expenses has not been demonstrated.

Its practical lesson is to address the validity of the bankruptcy and the funding consequences together. Early, workable proposals—and timely steps involving any alleged wrongdoer—may materially affect the exercise of the court’s discretion.