Mowbray v Sanders & Anor

This is an appeal against the order made by Deputy District Judge Smith (“the Deputy District Judge”), sitting at Chelmsford County Court, on 19 November 2013, dismissing the Appellant’s application for the annulment of her bankruptcy pursuant to section 282(1)(a) of the Insolvency Act 1986 (“section 282(1)(a)”) on the grounds that the debt on which it was founded was disputed, and the bankruptcy order should never have been made.

The appeal is brought with the permission of Mann J given after an oral hearing on 24 January 2014. Mann J had initially refused the application for permission to appeal. In giving permission he described his decision as a marginal one.

The Appellant was represented by solicitors before the Deputy District Judge, but she has appeared in person before me. The First Respondent, Mr Michael Colin John Sanders, is acting as the Trustee in Bankruptcy of the estate of the Appellant. The Second Respondent is or was the petitioning creditor, relying on an alleged debt in the sum of £3,919.39. The Second Respondent is an assignee from Lloyds Bank Plc of the alleged debt. The Respondents were each represented by Counsel, both before the learned Deputy District Judge and before me.

The debt upon which the bankruptcy order was made arose in 2004. It has been, and continues to be, disputed by the Appellant on two principal grounds.

The first ground is that the debt should never have come into existence because the original creditor, Lloyds Bank Plc, was advancing monies by way of overdraft which the Appellant, as the account holder, did not wish to have advanced to her. It is her case that, having closed her bank account with Lloyds Bank Plc, she instructed Lloyds Bank Plc not to honour various cheques which she had prior to closing the account already written, but which so far as she was aware had not been presented for payment; yet the bank honoured the cheques and increased the overdraft which represents the debt in question, in effect without authority.

The second ground is that the recovery of any such debt was already statute-barred by the time that the Second Respondent, as assignee from Lloyds Bank Plc, first brought proceedings for its recovery (in April 2011).

The central curiosity of this unusual case is that although this second ground of defence was put forward by the Appellant (on the advice of the Citizens Advice Bureau) in response to the proceedings and was plainly a good one unless something had happened to extend the limitation period, the Second Respondent nevertheless obtained not only a default judgment but (after service of a statutory demand) a bankruptcy order against the Appellant without ever putting forward any (or any cogent) answer to that limitation defence. It was not until the Appellant applied to annul the bankruptcy order that the Second Respondent advanced its contention that the Appellant had, on 21 September 2007, repaid a small part (just £20) of the debt, which acted as an acknowledgment of the debt so as to re-set the Limitation Act clock.

The Deputy District Judge, in dismissing the Appellant’s application for an annulment, rejected both of the grounds she relied on. As to the first ground, the Deputy District Judge found it “hard to believe that the [Appellant] genuinely believed at the time that the bank had received and acted on her letter of instruction to close the account”. As to the second ground, the Deputy District Judge considered to be authentic and dispositive a copy ledger entry which recorded receipt from the Appellant of a payment of £20, and rejected the contrary evidence of the Appellant that she would hardly have made such a random and small payment of £20 after three years inactivity, and indeed had certainly not done so.

In Mann J’s judgment briefly explaining his reasons for giving permission (after an oral hearing), he stated at the outset that he had found this a troubling matter. In the end, he was persuaded chiefly because of his concern that it was sufficiently inherently unlikely that the Appellant should have chosen to repay £20 to warrant further investigation. He considered further investigation was justified, and that if it revealed that the Limitation Act defence was a good one, that might radically alter the perspective of the court.

Mann J warned the Appellant, however, to think very carefully before proceeding. The costs of the bankruptcy process have been considerable, and exacerbated by delays of the Appellant’s own making. Those costs must be met somehow, even if the appeal is successful. Whoever they are visited upon will feel ill served. If they are visited upon the Appellant, her victory would be pyrrhic, and if she loses, that would be disastrous. But she has persevered.

Like Mann J, I have found this a troubling case. After considerable hesitation, I have eventually concluded that, subject to certain conditions, I should allow this appeal. Put shortly, that is because it does not seem to me that there has ever been any such unequivocal and plain and obvious answer to the Appellant’s limitation defence to warrant a bankruptcy petition and the bankruptcy order which followed. I appreciate that this involves, exceptionally, permitting an annulment by reference to a defence that was raised, and prima facie at least considered, before the bankruptcy order was made. But it seems to me that the debt on which the petition was at all times disputed on sufficiently substantial grounds to preclude summary adjudication, and that the error in proceeding otherwise should, in all justice, be corrected, so far as is at this late stage now possible fairly to do so.

The factual background to the matter can briefly be summarised as follows.

As is common ground, the Appellant instructed Lloyds Bank Plc to close her account number 02355046, sort code 30-97-13, on 25 August 2004. At that date her account was overdrawn by £387.06; but the Appellant contends that that amount was cleared by the combined effect of a payment by the Appellant’s father in the sum of £200 into that account and a credit covering the rest agreed by the then manager of the relevant branch of the bank.

The Appellant’s case is that the payment of £200 was credited to her account on 6 October 2004 and that so far as she was concerned that concluded her dealings with Lloyds Bank Plc. Her evidence was that she did not hear again from either the bank or the Second Respondent between August 2004 and some time in May or August 2011.

However, and as indicated above, various cheques that she had previously written in favour of creditors, but which she had instructed Lloyds Bank Plc not to honour, were honoured by the bank, resulting in an alleged overdraft on the account in the sum of £387.08.

In the summer of 2006, Lloyds Bank Plc sold the benefit of the debt (which the overdraft in law represented) to the Second Respondent. Notice of that assignment was sent to the Appellant at the address held by the bank for her at 120 Rivermeads, Stansted Abbotts, Ware, Hertfordshire, SG12 8EL.

In November 2006 the Second Respondent instructed a debt recovery agent, Connaught Collections UK Limited (“CCUK”), to recover the debt. There is what is described as a “user note” dated 12 December 2006 on the electronic file relating to the Appellant’s debt maintained on the Second Respondent’s in-house computer case management called Creditsolve (“Creditsolve”). That reads (so far as legible from the print out of the electronic record) as follows:

As the Deputy District Judge pointed out in paragraph 17 of her judgment, there is no reason to question the authenticity of that note, and it belies the Appellant’s contention that she had heard nothing from Lloyds Bank Plc or anyone else in relation to the debt until 2011. As the Deputy District Judge observed, the Appellant “would not have contacted the debt collecting agents in December 2006 if she had not heard from them”.

CCUK was unsuccessful in its efforts to recover the debt, and the account was returned to the Second Respondent in May 2007. Then, in July 2007, the Second Respondent engaged another debt recovery agent, Scotcall Limited (“Scotcall”), to recover the debt.

It was not until 26 April 2011, nearly seven years after the debt was established, that the Second Respondent issued a claim against the Appellant. It seems that the Claim Form was purportedly served on the Appellant at the address held by the Second Respondent for her which she had by then left. On 27 May 2011 the Second Respondent entered judgment in default against the Appellant in the sum of £3,953.34 (inclusive of costs).

On 28 July 2011 the Second Respondent served a statutory demand dated 22 July 2011 by way of personal service on the Appellant. There is a further entry on Creditsolve dated 28 July 2011 , which reads as follows:

The Appellant did not apply to set aside the statutory demand. However, on 16 August 2011, the Appellant filed an application to set aside the default judgment. Unfortunately, this application was formally defective.

The judgment was left to stand, and the statutory demand remained unchallenged.

On 20 September 2011, and on the basis of the default judgment it had obtained and the unanswered statutory demand, the Second Respondent presented a bankruptcy petition which was then personally served on the Appellant at her address at Sevens, Spellbrook Lane West, Spellbrook, Bishop’s Stortford, Hertfordshire, CM23 4AY. (It will be recalled that it is said that the Appellant paid £20 in part payment of the debt on or about the same day.)

The hearing of that bankruptcy petition was subsequently adjourned to 31 March 2012. It was then further adjourned to be heard on 10 April 2012. The adjournment appears in part at least to have been granted in order to enable the Appellant to file and serve a “fully detailed witness statement setting out grounds of opposition to the bankruptcy order being made”, with the Second Respondent being given permission to file and serve evidence in reply by 28 February 2012.

In accordance with that order the Appellant did file a witness statement (date-stamped 14 February 2012 by Chelmsford County Court) setting out her grounds of opposition. These included (in paragraph 1) that she had been advised that the debt was over six years old and therefore statute-barred.

On 21 February 2012 she also resubmitted her application to set aside judgment in default, but this was once more refused, as the fee remission application she had lodged was deemed incorrect. She did not persevere and try to correct this. She thereafter made no further attempt to set aside the default judgment.

The Second Respondent served evidence in reply in respect of its bankruptcy petition on 6 March 2012. Apart from a reference to the Appellant having apparently contacted CCUK in 2006 acknowledging receipt of correspondence and claiming she was dealing with Lloyds Bank Plc directly, that evidence in reply did not address the Appellant’s main contention that the debt was statute-barred.

Nevertheless, at the hearing on 10 April 2012 Deputy District Judge North (sitting in the Chelmsford County Court) made a bankruptcy order against the Appellant. There is no record of the hearing; nor is there a note or other record of any judgment. The order records that the evidence was read. It is not clear to me on what basis, but the Deputy District Judge appears to have found (see paragraph 40 of her judgment) that Deputy District Judge North

It may be that the Deputy District Judge had more detail on her files to warrant that finding (which the Appellant has not specifically appealed). However, there is no indication as to the basis on which Deputy District Judge North felt able so to conclude. Perhaps she felt that the notes on Creditsolve evidenced acknowledgments of the debt sufficient to constitute clear admissions of continuing indebtedness: but that seems somewhat tenuous, and (as I have indicated) I have not been provided with any record of any such process of reasoning. It seems more likely that the judge considered the matter concluded by the unchallenged default judgment and statutory demand.

Be that as it may, the order was made; it is apparent from the evidence filed that the Appellant immediately (that same day) sought advice from the Citizens Advice Bureau, but it is not clear with what result; what is clear is that the Appellant took no active steps to appeal it. On 17 July 2012 the First Respondent was appointed as Trustee in Bankruptcy.

Although the Appellant did not co-operate with the First Respondent after his appointment as Trustee in Bankruptcy, she took no further steps to challenge the bankruptcy until possession proceedings were under way and a warrant for possession of her house had been obtained. Only thereafter did she file an application to annul the bankruptcy order: that was on 2 July 2013, almost a year after the bankruptcy order.

In circumstances that are not clear, it was at about this stage (in July 2013) that the Second Respondent put forward, for the first time, its case that on 21 September 2009 the Appellant had paid a sum of £20 in part payment of the debt on which the bankruptcy had been based.

The evidence before the Deputy District Judge for the annulment application included a witness statement by Mr David Silcock (“Mr Silcock”, an Insolvency Manager who worked for and had conduct of the matter on behalf of the Second Respondent) exhibiting a letter to the Appellant dated 15 July 2013 from Scotcall. That letter stated as follows:

Mr Silcock also stated that he had checked on Creditsolve, and found that there was recorded a payment of £20 on 21 September 2007 “made to Scotcall in relation to the [Appellant’s] account, which was then transferred to us”. He exhibited a print-out for Creditsolve purporting to show the record of the payment.

In a further witness statement dated 3 September 2013 the Appellant rejected this “recent revelation” and emphasised:

The annulment application was heard by the Deputy District Judge on 19 November 2013. The application to annul was made under section 282(1)(a) of the Insolvency Act 1986. That provides as follows:

At the hearing, the Deputy District Judge read the evidence of the parties, including witness statements from the Appellant, one of which (out of three) was prepared with professional assistance. It does not appear that there was any oral evidence: since definitive findings of fact are not ordinarily appropriate in the context of such an application, none would be usual. The court heard submissions from Counsel for the Respondents, as well as submissions from the Appellant’s solicitor.

The Deputy District Judge dismissed the application to annul the bankruptcy on several grounds:

She did not accept the Appellant’s first line of defence. As previously noted, she found it hard to accept that the Appellant genuinely believed at the time that the bank had received and acted on an instruction to close her account, dishonour the cheques she had written and extend her no further facilities. She noted that the Appellant had not asked the bank to return to her the dishonoured cheques; nor had the Appellant been contacted by any of the payees (who, on the Appellant’s version of events, had been left with bounced cheques and unpaid) for further payment.

She did not accept that the Appellant first came to know of the judgment against her and the statutory demand thereafter served on her until August 2011. She noted various inconsistencies in the Appellant’s evidence in this context, including the Appellant’s own earlier evidence that she was first notified of the judgment in default in May 2011, and the call from the Appellant recorded on the Creditsolve print-out as having been made in December 2006. She concluded that even though correspondence may have been sent to her previous address, the Appellant must have been receiving correspondence, since it must have been that which triggered her call to CCUK.

More generally, the Deputy District Judge found the Appellant’s “recollection inaccurate”, and she did not accept the Appellant’s evidence that she (the Appellant) had not made the random payment of £20 relied on by the Second Respondent. The Deputy District Judge considered that she had no reason to question the authenticity of a print-out from a ledger maintained by the Second Respondent recording such a payment, together with the Appellant’s name and address and the aggregate amount of the debt. She found as a fact that the Appellant did make the payment of £20 towards the debt on 21 September 2007 and that this did extend the limitation period.

As to the delays and substantial costs of the bankruptcy, and the Appellant’s previous conduct, the Deputy District Judge found that the Appellant (a) had never sought to set aside the statutory demand, although she had tried (unsuccessfully because of procedural errors) to set aside the default judgment; (b) had not initially co-operated with the Trustee in Bankruptcy, had then delayed matters and increased their costs by asking them to challenge her father’s will (in which he made no provision for her, citing “difficulties” in their relationship); (c) had already previously raised the two grounds on which she sought annulment at the hearing of the bankruptcy petition (at which she had been present); and (d) was not, at the time the bankruptcy order was made, in a position to pay her debts.

In such circumstances, the Deputy District Judge held that (a) the debt on which the bankruptcy petition was founded was valid and still enforceable; (b) the judgment obtained was regular and valid; (c) the bankruptcy order was correctly made; (d) there were no exceptional circumstances such as might merit the matter being re-litigated; and (e) the First Respondent as Trustee in Bankruptcy was in no way at fault and should be entitled to his reasonable costs and expenses.

If, however, she was “wrong about the validity of the [petition] debt”, it was still in the discretion of the court whether or not to annul the bankruptcy order; and in this case, it would not be right to annul, since (a) no exceptional circumstances to justify re-litigating points made at the hearing of the bankruptcy petition had been demonstrated, and in any event (b) the Appellant could not clear her debts nor pay her share of the First Respondent’s costs acting as her Trustee in Bankruptcy (then some £64,952), so that it would be a “nonsense” to annul the order, since a petition could then be presented for either (or both) the outstanding debts and the costs.

The application before the Deputy District Judge, being one made pursuant to section 282(1)(a), required the Appellant to show that there were grounds existing at the time when the bankruptcy order was made such that that order ought not to have been made.

Further, and since otherwise the proper channel would have been an appeal from the bankruptcy order, the Appellant has to show material sufficiently new and different in nature such that it would have been likely, if it had been considered at the time, to result in the bankruptcy order never having been made: and see Ahmed v Mogul Eastern Foods & Another [2005] EWHC 3532 (Ch) at paragraph [23].

By its nature, therefore, an annulment application should not be used to re-litigate grounds which were the subject of adjudication when the bankruptcy order was made: see Yehuda Gershon Crammer v West Bromwich Building Society & Ors [2012] EWCA Civ 517, where the Court of Appeal confirmed (citing Turner v Royal Bank of Scotland [2000] BPIR 683) and re-emphasised that the court would allow such points to be re-litigated on an application under section 282(1) “only in exceptional circumstances” (see especially paragraph [5] in the judgment of Patten LJ).

As to what might constitute “exceptional circumstances”, helpful guidance is provided in the judgment of Patten J (as he then was) in Ahmed v Mogul Eastern Foods & Another [supra] and in the judgment of Millett J (as he then was) in Re A Debtor [1993] 2 All ER 991 which (though in fact a decision on section 375 of the Insolvency Act 1986) Patten J cited and adopted.

In Re a Debtor, Millett J, in distinguishing an application under section 375 from an appeal, said this:

In Ahmed Patten J put it this way:

Patten J added this observation:

As to that final observation, not only is it in the discretion of the court to determine whether an application under section 282(1)(a) is a permissible process (rather than an appeal), but it is also in the discretion of the court whether, pursuant to that process, to grant or refuse an annulment, even in a case where it is satisfied that the bankruptcy order ought not to have been made: see Askew v Peter Dominic Ltd [1997] BPIR 163 (in the Court of Appeal).

An appeal from a refusal of an annulment is in the nature of a true appeal: it is not a rehearing or review: see Cozens v HM Commissioners of Customs & Excise [2000] BPIR 252 at 254D-G.

So the court should only intervene if persuaded that the Deputy District Judge has erred in law or otherwise in principle: see AIB Finance Ltd v Alsop [1998] BCC 780 at 783. Only if so persuaded should this court exercise a fresh discretion.

The questions for this court are whether the Deputy District Judge erred, and if so, whether the circumstances are such that this court should permit the annulment which she refused.

The Deputy District Judge had a number of cases cited to her, including Royal Bank of Scotland v Farley [1996] BPIR 638 (in the Court of Appeal) and also the Turner case and the Crammer case (see paragraph [42] above), and she carefully listed these in paragraphs 25 to 32 of her judgment.

She cited Royal Bank of Scotland v Farley as

She took Turner to be

She stated that Crammer was

Except that, as regards the last point, I think it would suffice for the debtor to show a substantial dispute as to the validity of the debt, these quotations seem to me to demonstrate that the Deputy District Judge was aware of the correct approach in general.

More particularly, it is clear that she appreciated that only in exceptional circumstances would it be right to reopen objections to a bankruptcy order that had already been considered at the time of that order. It is also clear that she took the view that both grounds relied on by the Appellant had already been considered, and that there were no exceptional circumstances which would merit the matter being re-litigated.

Nevertheless, the approach she in fact adopted was to deal first and foremost with the issue as to the validity of the debt, and only thereafter to consider what would be the position if she was wrong as to that issue. Her ultimate conclusion that there were “no exceptional circumstances which would merit the matter being re-litigated” prompts the question as to why she had first embarked on a course (re-determination of the issue of validity) which the cases she cited advised her against. If all the material had already been considered by the court, then the proper means of challenge was an appeal.

I therefore propose to consider her conclusions in reverse order, and to address, first, whether there was any error in her conclusion that there were no “exceptional circumstances” such as to justify the court revisiting the issue as to the validity of the petition debt, and then, secondly, whether there was any error in her conclusion that it was so.

The Deputy District Judge focused, in determining whether there were “exceptional circumstances” sufficient to warrant the invocation and application of section 282(1)(a), on the various personal difficulties prayed in aid by the Appellant. These included her marital difficulties and eventual separation, her injuries in a motor car accident, her deep depression on the death of her father exacerbated by a previous family rift and being cut out of his will, and their combined result that (as the Appellant herself put it) she was “there but not there” and consistently “put her head in the sand”. The Deputy District Judge also took into account the fact that the Appellant only received specific legal advice after the order was made.

In my judgment, her decision that none of the factors constituted, individually or in combination, “exceptional circumstances”, as envisaged in Crammer, was plainly a matter of judgment well within “the generous ambit within which a reasonable disagreement is possible” (see G v G [1985] 1 WLR 647 (HL) and not such as could be upset on appeal. Indeed, if those were the only factors, I would consider the conclusion not only unassailable but also correct.

However, in confining her consideration of “exceptional circumstances” to the Appellant’s personal difficulties, it seems to me that the Deputy District Judge overlooked (or at least, paid insufficient regard to) the change in legal landscape brought about by the Second Respondent’s belated revelation of its answer to the Appellant’s limitation defence.

In saying that, I can well understand why the Deputy District Judge proceeded as she did. After all, the revelation was of evidence relied on, not by the Appellant, but by the Second Respondent and was such (if accepted as true) as supported the legal conclusion already reached against the Appellant. Furthermore, she had already determined that this new answer was to be believed, and established the validity of the debt.

All that said, however, it seems to me that although the new circumstances that need to be found to justify recourse to section 282(1)(a) are more usually (perhaps almost always) introduced by the applicant, the proper test is not the source of the relevant evidence but whether it is such as could not have been introduced earlier by the applicant and does materially change the legal landscape.

In my judgment, the belated revelation of the Second Respondent’s only real answer to the Appellant’s limitation defence after the bankruptcy order had been made, without any explanation why it had not previously been put forward, did materially alter the legal landscape and was an exceptional circumstance justifying review of the validity and enforceability of the petition debt. As it seems to me, the Second Respondent can hardly be heard to complain about the Appellant seeking to test evidence which the Second Respondent paraded as its answer, but which it had previously held back and which had never been available to the Appellant.

Indeed, I suspect that her instinct that this was so may explain why the Deputy District Judge was led into dealing with the issue of validity first, instead of following the path prescribed by the authorities she herself had quoted. I further suspect that her subsequent focus only on the Appellant’s personal circumstances is explained by her unequivocal conclusion on the issue of validity: her prior conclusion that the new material demonstrated that the debt was valid left only such personal circumstances to be considered.

In summary, therefore, I have concluded that in the curious circumstances of this case, the Second Respondent’s belated revelation of its evidence relating to the alleged part payment of £20 by the Appellant, and its implicit invitation to the court to sustain the order it had obtained by reference to it, was sufficient to warrant review of the validity of the petition debt under section 282(1)(a).

My conclusion in that regard is fortified by evidence sought to be introduced in the course of this appeal by the Appellant.

The evidence in question comprises bank statements from August to November 2007 obtained by the Appellant in 2014. Its purpose and avowed effect is to show that there was no transfer of £20 out of her bank account at Lloyds/Halifax in that period and further undermining the contention that she paid £20 in part payment of the debt assigned to the Second Respondent. The Appellant also had obtained and sought to adduce letters from other banks stating that, more than six years having elapsed, they no longer held records for accounts she had held with them.

Although the Second Respondent objected to the introduction of this evidence on appeal, it is a striking fact that it was its own solicitors who had requested the Appellant to obtain it, on the basis (they said) that they understood that Mann J had himself requested a copy at the oral hearing of the Appellant’s application for permission to appeal. No transcript of the hearing was made available to me; but it was not suggested to me that Mann J had not made the request.

I accept that the usual approach, where there has been a trial on the merits, is for the appellate court not to permit a party to adduce further evidence unless “special grounds” are demonstrated: Ladd v Marshall [1954] 1 WLR 1489 still generally informs the approach of the court, although CPR 52.11(2) on the face of it gives the court a wide discretion. However, Ladd v Marshall is not now, if ever it was, a “straitjacket” (see the judgment of Sir Anthony May PQB, in the Court of Appeal in Singh & Ors v Habib & Anr [2011] EWCA Civ 699). Also, I do not think the position is really analogous to that of an appeal from a trial. Further, I do not think I should ignore the fact that the Second Respondents themselves called for its production. Lastly, it seems to me that it would almost certainly have emerged and been relied on had a trial process been adopted, as in my view was always necessary once the Second Respondents revealed their answer to the Appellant’s limitation point.

All in all, I consider that the new evidence, called for by the Second Respondent and only objected to when they saw it, should be included as part of the record in this appeal; and that provides a further basis for my conclusion that there are “exceptional circumstances” warranting the invocation of section 282(1)(a).

I turn therefore to the question which the Deputy District Judge focused on at most length: the validity of the petition debt.

Notwithstanding all the above, I acknowledge that if I felt able to share the Deputy District Judge’s conclusion that the material in question demonstrated that the petition debt was valid, what I regard as the inconsistencies and potential difficulties in her approach would not affect the result. For if the petition debt was valid, there could be no basis for annulment.

As it is, however, I have not felt able to share that conclusion. In summary, that is because I do not consider that, on the untested evidence before her, the Deputy District Judge was in a position safely to make what in effect was a summary determination of disputed factual matters without cross-examination. That is especially so in the context of the limitation point.

As to that, the Deputy District Judge felt able to treat the print-outs from the Creditsolve records as “authentic”, definitive and thus determinative of the fact of the payment of £20 and thereby the non-applicability of the Limitation Act and thus the validity of the debt. However, for my part, I consider that the combination of the Appellant’s unequivocal evidence (which was untested), the gaps in the record, the fact that it was provided so long afterwards, and the inherent unlikelihood that the Appellant would have paid such a small part of the debt years after it arose, made a summary determination unwise and unsafe.

I share Mann J’s considerable reservations as to the cogency of the evidence generally, and his concern as to “troubling features” relating to the payment of £20. In my judgment, the evidence as to the alleged payment by the Appellant of £20 is inherently so remarkable as to raise more questions than it answers, and, in consequence, a dispute which could only fairly and properly be resolved after disclosure and a trial, including cross-examination. The new evidence introduced on appeal supports that conclusion.

It is long established that a debt disputed on genuine and substantial grounds cannot ordinarily provide the basis for a bankruptcy order. The process is not intended, nor is it suitable, for the resolution of such disputed debts. A bankruptcy petition should not be brought where it is plain that the facts may be disputed; and no bankruptcy order should be made where the dispute is sustainable. That is so even where the court is by no means convinced that the debtor will ultimately prevail: see, for example, Neuberger J’s remarks in Guinan III v Caldwell Associates Ltd [2004] BPIR 531, [2004] EWHC 3348 (Ch), at paragraph [48].

That brings me to the final question, which is whether an annulment should be granted, remembering that the relief is ultimately discretionary.

The final alternative basis on which the Deputy District Judge refused annulment was that it was the Appellant’s own evidence that at the time that the bankruptcy order was made she was not able to pay her then other debts, and there was no evidence that she could pay those debts and “her share of the Trustee’s costs”.

As it seems to me, three questions arise, namely as to:

the ramifications of my conclusion (contrary to that of the Deputy District Judge) that there was and is a genuine dispute about the validity (or, perhaps more accurately, enforceability) of the petition debt;

the position in relation to the Appellant’s unsecured creditors; and

what properly are, and who should pay, the costs and expenses of the First Respondent?

In my view, and although the discretion to do so is broadly stated, it is only in exceptional circumstances that it is right to decline to grant an annulment if it is demonstrated that a dispute as to the petition debt was genuine and on substantial grounds, and thus could not properly be the basis of an order of bankruptcy on that petition, so that the bankruptcy order ought not to have been made: and see per Neuberger J in Guinan III v Caldwell Associates Ltd [supra] at paragraph [49].

However, there is no doubt that even in such circumstances, the court is not only not bound to exercise its discretion by annulling the bankruptcy order, but is always concerned to be satisfied that by making an annulment order it would not be acting to the detriment of other creditors with undoubted debts, or for no good purpose (for example, because there is clear other evidence of insolvency). Askew v Peter Dominic Ltd [supra] provides confirmation of this, and an example; so does Re Coney [1998] BPIR 333.

Thus, the fact that I have reached a different conclusion than did the Deputy District Judge on the principal issues as to whether the conditions of section 282(1)(a) are satisfied, the question which she addressed in her final alternative way of determining the matter and in case she was wrong as to the validity of the petition debt (see paragraphs 48 and 49 of her judgment), is substantially the same: whether the interests of creditors or the entitlement of the First Respondent to payment of his proper costs and expenses outweigh the obvious logic in setting aside an order which should not have been made.

In determining this, the position of unsecured creditors is of particular importance. As mentioned previously, bankruptcy is a class remedy.

In this case, it is not entirely clear to me what the number and amount of unsecured creditors and their undisputed debts actually are. The Deputy District Judge’s judgment does not set out the position. The First Respondent stated that these amounted in aggregate to over £18,000 (being a figure which had already had to be revised down following confirmation of the Appellant’s case that two debts that had been proved amounted to the same debt and were secured).

However, there would appear to be some doubt in this regard: for example, one creditor (namely, Lowell Group), listed by the First Respondent as having an unsecured claim of £3,029.41, has by letter to the Appellant (dated 25 July 2013) confirmed that it accepts that its claim is statute-barred and that it will not be pursued. There also appears to be some doubt as to the status of an unsecured debt listed as owed in the sum of £9,463.78 to Equidebt Limited. Indeed, it is the Appellant’s case that the only debt is one of £1,994.49 owed to the Royal Veterinary College, which I understand her ex-husband has agreed to pay.

It may be that it is for this reason that the Deputy District Judge appears to have based her decision primarily on the evidence before the court of the inability of the Appellant to pay any significant proportion of the First Respondent’s costs and expenses (then some £65,000 and put at over £82,000 by the time of the appeal, a figure which does not include the Secretary of State’s fees of some £16,000 if the bankruptcy order is not annulled).

That was on the basis, of course, that the First Respondent would be entitled to recovery of “a significant proportion” of his costs (estimated at over £82,000) from the Appellant: and see paragraph 49 of the judgment. The question is whether the Deputy District Judge was in error in proceeding on that basis. Her judgment does not explain why she did so.

In my judgment, subject to two caveats or restrictions as to their quantification to which I return below, the Deputy District Judge was not in error in concluding that the First Respondent should be entitled to recover his proper costs and expenses even if the bankruptcy order should not have been made.

The sad series of real difficulties which the Appellant has compellingly related, and which she says petrified her, may well explain her conduct, which she described as “putting her head in the sand” and which resulted in the bankruptcy continuing at exacerbated expense. The First Respondent had to carry out his statutory functions accordingly. Subject to the caveats later detailed, I see no reason to depart from the Deputy District Judge’s conclusion that there is no good reason to deprive him of his costs and expenses.

The next question is who should pay those costs and expenses. The choice is between the Appellant and the Second Respondent. The First Respondent was careful to appear neutral in this regard, not least having regard to suggestions made by the Appellant’s former solicitors (Gallant Maxwell) that he and the Second Respondent, who both used the same solicitors, were (to quote Gallant Maxwell’s letter to Moorhead James LLP of 14 November 2013)

The Deputy District Judge, who of course had proceeded primarily on the basis that the petition debt was “valid”, appears to have determined that the Appellant should pay the First Respondent’s costs and expenses by reference to the following factors (see paragraph 44 of her judgment):

the Appellant’s failure to set the default judgment aside, and her failure also to liaise with the Second Respondent (it being the Deputy District Judge’s tentative view that such liaison might have prevented the matter “snowballing”);

the Appellant’s failure to apply to set aside the statutory demand (so possibly missing another chance of compromise);

the Appellant’s failure to co-operate with the First Respondent as her Trustee in Bankruptcy; and

the Appellant’s conduct in “making this application to annul the bankruptcy order” (though it seems from paragraph 51 of her judgment that the Deputy District Judge invited further submissions on the costs of the annulment application itself).

This is a sorry catalogue of failure, however understandable. Plainly I should take all (save point (4)) into account; but because my starting point is different (since I have concluded that the petition debt was not “valid”), I consider that I am required to exercise my discretion afresh in this regard.

In principle, at least where the petition was based on a judgment debt and statutory demand, there is no presumption or starting point that where a bankruptcy order is annulled pursuant to section 282(1)(a) the petitioner (here, the Second Respondent) should pay the costs and expenses of the Trustee in Bankruptcy (as well as the costs of the petition and the annulment): see per Sir Andrew Morritt C. in London Borough of Redbridge v Mustafa [2010] EWHC 1105, especially at paragraphs 30 to 33.

I take the essential rationale to be that, provided the petition was “properly presented”, and not an abuse of process or plainly without any basis, a subsequent determination that there were grounds why the order ought not to have been made does not mean that the bankruptcy order was not “properly made when it was made”.

This case is, to my mind, something of a hybrid in this regard. On the one hand, the fact that the default judgment was not challenged successfully, and the statutory demand was not challenged at all, was capable of itself justifying the petition and even the order. Further, there is no real doubt that the Appellant’s catalogue of failures has caused costs, and (it may be) the Second Respondent’s resort to the expedient of a petition. On the other hand, it is well known that bankruptcy courts may go behind both a default judgment and a statutory demand, and are likely to do so if a bankruptcy order is challenged. I have expressed reservations as to the conduct of the Second Respondent and its solicitors in failing to put forward the evidence on which it only subsequently relied as its only answer to the limitation point raised by the Appellant as early as June 2011, and before the petition was presented. Further, the Second Respondent was well aware of the Appellant’s (albeit unsuccessful) efforts to set aside the default judgment.

Also to be weighed in the balance, in my view, is whether the Appellant can and does now pay (or procure to be paid) any unsecured creditors whose debts remain unsatisfied. That is because, as Mann J expressly warned the Appellant, any order for annulment will normally be, and in this case will be, conditional on known creditors being satisfied in full so as to ensure that they are not prejudiced: and see Thornhill v Atherton [2005] BPIR 437 (in the Court of Appeal).

The balance is an unusually fine one. I have provisionally concluded that the costs and expenses should be allocated for payment between them, and that, as a matter of broad fairness, the Appellant should pay the costs and expenses up to the date of the annulment application, but the Second Respondent should pay the costs and expenses from then on.

That is only a provisional conclusion for a number of reasons. First, certain matters are unclear (including the true amount of unsecured debts and the ability of the Appellant to see to their payment) or uncertain (including the ability of the Appellant to pay any fair share of the First Respondent’s costs) or yet to be quantified (especially any assessment of the First Respondent’s proper costs). Secondly, it seems to me fair to allow further short submissions on the point, given my departure from the judgment below, and given also that it will be necessary to have further short submissions on the issue as to the costs of the annulment application and this appeal (though prima facie these are likely to follow the event). If all parties agree, submissions may be in writing; otherwise short oral submissions can be made after this judgment is handed down (and see also paragraph [102] below).

One final matter: as previously foreshadowed, I remain troubled at the disproportion between, on the one hand, the amount of the debt on which the petition was founded and the amount of the debts of the Appellant’s other creditors and, on the other hand, the claimed costs and expenses (exceeding £82,000). I shall require a detailed breakdown and explanation of those costs in writing before handing down this judgment; and if necessary I shall hear submissions on the issue as a consequential matter when the judgment is handed down.

In summary and in conclusion, I propose to allow this appeal, and annul the bankruptcy order, conditionally upon payment of (a) the sums due to the Appellant’s unsecured creditors, and (b) the Appellant’s share of the First Respondent’s costs and expenses.

I shall hear further argument, if required, on the issues I have mentioned, on the costs of the appeal, and any other consequential issues. If all parties are agreed, it may be possible to deal with these matters on paper.

In any event, I would ask Counsel for the Respondents to identify for the Appellant and the court any further consequential issues in good time before any oral hearing.