Mowbray v Sanders & Anor

Factual and Procedural Background

This appeal arises from an order made by Deputy District Judge Smith at Chelmsford County Court on 19 November 2013, which dismissed the Appellant's application to annul her bankruptcy under section 282(1)(a) of the Insolvency Act 1986. The bankruptcy order was made on the basis of a debt that the Appellant disputed on substantial grounds. The debt originated in 2004 from an overdraft with Lloyds Bank Plc, which the Appellant contended should never have arisen as she had instructed the bank to close her account and not to honour certain cheques. Further, the Appellant argued that the debt was statute-barred by the time the Second Respondent, an assignee of Lloyds Bank Plc, sought recovery in 2011.

The Second Respondent obtained a default judgment and subsequently a bankruptcy order against the Appellant without addressing the limitation defence. The Second Respondent later claimed that a small payment of £20 made by the Appellant in 2007 constituted an acknowledgment that reset the limitation period. The Deputy District Judge rejected the Appellant's grounds for annulment, accepting the payment as genuine and the debt as valid.

The appeal was granted permission by Mann J after an oral hearing, who expressed concerns about the payment's credibility and the need for further investigation. The Appellant appeared in person before the appellate court, while the Respondents were represented by Counsel. The court considered new evidence, including bank statements challenging the alleged payment, and ultimately allowed the appeal subject to conditions.

Legal Issues Presented

1. Whether the bankruptcy order should be annulled under section 282(1)(a) of the Insolvency Act 1986 on the basis that the debt on which it was founded was disputed and ought not to have been the subject of a bankruptcy petition.
2. Whether the alleged payment of £20 by the Appellant constituted an acknowledgment sufficient to reset the limitation period under the Limitation Act.
3. Whether there were exceptional circumstances justifying the court's review of the validity of the petition debt despite prior adjudication.
4. The proper exercise of discretion in granting or refusing annulment, including consideration of the interests of unsecured creditors and the allocation of costs and expenses of the bankruptcy process.

Arguments of the Parties

Appellant's Arguments

• The original debt should never have arisen because the bank honoured cheques after the account was closed contrary to her instructions.
• The debt was statute-barred by the time proceedings were initiated in 2011.
• The alleged payment of £20 in 2007, relied upon by the Second Respondent to reset the limitation period, was not made by her.
• The bankruptcy order should be annulled as it was founded on a disputed debt and the Second Respondent failed to properly address the limitation defence at the time of the petition.

Respondents' Arguments

• The alleged payment of £20 on 21 September 2007 was genuine and constituted an acknowledgment of the debt, thereby resetting the limitation period.
• The debt was valid, enforceable, and the bankruptcy order was properly made.
• The Appellant had prior opportunities to challenge the debt and the default judgment but failed to do so effectively.
• The Trustee in Bankruptcy was entitled to recover his reasonable costs and expenses.
• There were no exceptional circumstances warranting re-litigation of the issues raised by the Appellant.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by considering the statutory framework of section 282(1)(a) of the Insolvency Act 1986, which permits annulment if, on grounds existing at the time the bankruptcy order was made, the order ought not to have been made. The court emphasized that annulment applications should not be used to re-litigate matters already adjudicated unless exceptional circumstances exist, citing key authorities to that effect.

The Deputy District Judge had rejected the Appellant's grounds, accepting the alleged payment of £20 as resetting the limitation period and finding the debt valid. However, the appellate court found that the Deputy District Judge erred in making a summary determination on disputed factual matters without cross-examination, especially concerning the alleged payment. The Appellant's unchallenged sworn denial, the gaps and delays in the evidence, and the inherent improbability of the payment raised serious doubts requiring further investigation and trial.

The court identified the Second Respondent’s belated disclosure of the alleged payment as an exceptional circumstance justifying reconsideration of the debt's validity. It also admitted new evidence, including bank statements, which supported the Appellant's denial and undermined the Respondent’s case.

The court recognized that bankruptcy orders should not be made where the debt is genuinely and substantially disputed. It acknowledged the discretionary nature of annulment and considered the interests of unsecured creditors and the allocation of costs. Given the Appellant’s inability to pay the Trustee’s substantial costs, the court provisionally concluded that the costs should be apportioned, with the Appellant responsible for costs up to the annulment application and the Second Respondent responsible thereafter.

Finally, the court noted the disproportion between the amount of the debt and the costs incurred, requiring a detailed breakdown and further submissions before finalizing the costs order.

Holding and Implications

The court ALLOWED THE APPEAL and ordered the annulment of the bankruptcy order, subject to conditions that the Appellant pays the sums due to unsecured creditors and her share of the Trustee’s costs and expenses.

The decision corrects the error in permitting a bankruptcy order based on a debt that was genuinely disputed on substantial grounds and not suitable for summary adjudication. It establishes that late disclosure of critical evidence by a creditor can constitute exceptional circumstances justifying annulment under section 282(1)(a). The ruling emphasizes the court's discretion in balancing the interests of all parties, including unsecured creditors and the Trustee, especially regarding costs.

No new binding precedent was established beyond the application of existing principles on annulment, exceptional circumstances, and disputed debts in bankruptcy proceedings. The judgment highlights the importance of proper procedural conduct by petitioning creditors and the necessity of rigorous examination of disputed debts before bankruptcy orders are made.