Where a bankruptcy order is later annulled pursuant to s.282(1) of the Insolvency Act 1986 ('1986 Act'), is time deemed to have run during the period between the bankruptcy order and the annulment order (the 'BO2AO period') for limitation on creditor claims[1] against the debtor/former bankrupt?
This is the issue that arose for consideration in Khan v Singh-Sall [2023] EWCA Civ 1119, CA (Nugee LJ, with whom Snowden LJ and Lewis LJ agreed) - however, as shall be discussed below - the Court of Appeal (unfortunately) left the matter 'open'.
The appeal before the Court of Appeal was a second appeal:
(1) A district judge who heard the case at first instance decided she did not need to decide the point as it made no difference to her analysis[2].
(2) At the first appeal, in the High Court, Mr Mohyuddin sitting as a deputy High Court Judge decided ('HC Judgment') that time was deemed to have run throughout the BO2AO period
In the Court of Appeal, Nugee LJ (paragraph 73) posed the question, as:
(1) 'whether the effect of an annulment is to put the creditor and debtor in the same position as if the debtor had never been made bankrupt, with the result that time is deemed to have run throughout the period between the making of the bankruptcy order and the annulment' (the 'deemed to have run throughout the B02AO period' approach) or
(2) 'whether the effect is that time resumes running from the date of the annulment order' (the 'time resumes only after B02AO period' approach)
For ease of comprehension, an example was given:
'If ... a simple debt accrues in 2010, the debtor is made bankrupt 2 years later in 2012, and his bankruptcy annulled three years after that in 2015, does the creditor have 1 year left to sue, or 4?' (paragraph 73)
Court of Appeal - Point left 'Open' and Undecided
Well, the Court of Appeal decided that it also (alongside the district judge) did not need to decide the point (paragraphs 74 and 83) - leaving the matter 'open' (paragraph 83). It took the view that it would 'leave it to a case where it needs to be decided' (paragraph 83). However, the Court of Appeal did make it clear it had doubts about the deputy High Court Judge's decision in his HC Judgment that the 'deemed to have run throughout B02AO period' approach represented the law. Responding to this aspect of the case, Nugee LJ said:
(1) '... am not satisfied that the conclusion reached by [the deputy High Court Judge] on this point is correct, and would prefer to leave the matter open.' (paragraph 83)
(2) 'I think [the deputy High Court Judge's] decision is open to doubt.' (paragraph 76)
Even these rather ambigous statements were qualified. Qualifying the strength of these statements, Nugee LJ referred to how little argument and material they (i.e. the Court of Appeal) had had on this legal point. Nugee LJ said:
(1) 'we received quite limited submissions on the point' (paragraph 75)
(2) the Court had only seen 'limited material' (paragraph 76); and
The result was, that Nugee LJ did 'not propose to examine the question at any length' (paragraph 76).
Analysis of the Position
What examination did Nugee LJ provide? Well, Nugee LJ did set out some interesting discussion on the legal point. Nugee LJ said in Singh-Sall, from paragraph 76 to 82:
'76...It is true that it has, in other contexts, been said that the general effect of an annulment is to "remit the party whose bankruptcy is set aside to his original situation" (Bailey v Johnson (1872) LR 7 Ex 263 at 265 per Cockburn CJ); or that when a bankruptcy order is annulled it is "annulled ab initio save for the certain matters which are specifically dealt with in the rules" (Choudhury v Inland Revenue [2000] BPIR 246 at 250 per Aldous LJ). But these are statements of general principle, and I do not think can necessarily be applied to the question of the running of time.
77. It is not disputed that once a bankruptcy order is made the creditors in the bankruptcy no longer have a right to bring an action against the debtor. This is the effect of s.285(3)(b) IA 1986 which provides:
"(3) After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall—
…
(b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terms as the court may impose."
78. The corollary of this is that if a provable debt is not statute-barred at the commencement of the bankruptcy, it does not become barred by lapse of time thereafter, at any rate for the purposes of proof and distribution in the bankruptcy: see re Benzon [1914] 2 Ch 68 at 75 per Channel J giving the judgment of this Court. That is of course consistent with the nature of bankruptcy as a collective process for the benefit of unsecured creditors (or, to be more accurate, those with provable claims). It would be inconsistent with that collective process for individual creditors to be able to take action to enforce their claims; and it seems to me that it would be equally inconsistent with it for them to be required to do so to preserve their claims from becoming statute-barred. It can therefore be seen that this prima facie bar on bringing an action for claims within the bankruptcy is a necessary part of the legislative scheme. (That can be contrasted with claims outside the bankruptcy such as claims by secured creditors to enforce their security, where time continues to run normally: Cotterell v Price [1960] 1 WLR 1097 at 1105 per Buckley J.)
79. On the face of it therefore it would seem very unfair on a creditor with a provable claim to find that on annulment time had run during the bankruptcy despite the fact that during that period he could not have brought an action to stop time running. It is true that s. 265(3)(b) IA 1986 contemplates that an individual creditor can bring an action with the leave of the Court, but it can scarcely be said to be an attractive idea that unsecured creditors should in every bankruptcy routinely have to apply for such leave, and the Court routinely have to grant it, solely to guard against the possibility that otherwise the bankruptcy might be annulled at some future date when their claims had become statute-barred. That would mean that well-advised creditors would have to incur costs on applying for leave and then initiating proceedings, despite the fact that in the vast majority of cases such proceedings would be entirely futile.
80. [Counsel for the bank/creditor/petitioner] at one point suggested that the solution to this problem might lie in the Court that annuls a bankruptcy order making a direction under s. 282(4) IA 1986 that the limitation period should be deemed not to have run in the period between bankruptcy order and annulment. That section provides as follows:[3]
"(4) Where the court annuls a bankruptcy order (whether under this section or under section 261 in Part VIII )-
…
and the court may include in its order such supplemental provisions as may be authorised by the rules."
But it was not suggested that there was anything in the rules which could be said to authorise any such direction, which would seem to make it difficult to rely on this provision.
81. In those circumstances I think there is much to be said for the submission by [advocate for the annulment applicant/bankrupt/debtor], not ultimately dissented from by [Counsel for the bank/creditor/petitioner], that the effect of an annulment is that time resumes running on the date of annulment but is treated as not having run during the period between the making of the bankruptcy order and then. As [advocate for the annulment applicant/bankrupt/debtor], pointed out, this was the submission made by counsel in re Dennis [1895] 2 QB 630 at 631 ("Directly the receiving order is rescinded the creditor's right of action revives, and the statute begins to run."), although Vaughan Williams J did not have to decide the point.
82. However I am conscious that this is a matter of the law of limitation as much as it is a matter of the law of bankruptcy. We were not shown any of the jurisprudence on the general principles applicable to limitation, although it appears that there are authorities that might be thought to bear on the point: see for example the cases discussed by Mr John Jarvis QC in AngloManx Group Ltd v Aitken [2002] BPIR 215.' [bold added]
Where does this leave the law?
The legal point remains 'open' - that is, undecided/undetermined. There are two likely ways foward in the future:
(1) When a case comes along that requires a determination on the point, it will get determined then. The judge who decides that later case, will have to grapple with the various arguments available in support of each approach. The points made in the discussion/analysis provided by the Court of Appeal in Singh-Sall will inevitably assist that judge in making that determination. The weight of the comments of Nugee LJ are in favour of the 'time resumes only after B02AO period' approach, rather than, the 'deemed to have run throughout the B02AO period' approach, as representing the law, but the Court of Appeal was clear in expressing the limits of its analysis of this area. A later judge could, on greater analysis, find that the 'time resumes only after B02AO period' approach represents the law; or
(2) The Insolvency Rules Committee[4] consider the Singh-Sall judgment, and amend the Insolvency (England and Wales) Rules 2016 Rules, so as to include a rule, authorising supplemental provisions to be made to an annulment order - in particular, empowering the judge, when making the annulment order, to make such order as to limitation/the appropriate approach to apply, as is just in all the circumstances, in respect to any (proveable debt) creditor(s) of the annulment applicant/debtor/former bankrupt.
SIMON HILL © 2023*
BARRISTER
33 BEDFORD ROW
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[1] By 'claims', we are principally referring to non-judgment debts. All limitations on causes of action are contained in statute. There are no common law limitations (there is laches in Equity). The Limitation Act 1980 does not apply to judgment debts (save for the very rarely relevant s.24(1) of Limitation Act 1980, entitled ‘Time limit for actions to enforce judgments’). For further discussion on judgment debts and limitation, see a different article by the same author, entitled 'Limitation, Winding Up/Bankruptcy Petitions and Judgment Creditors', available here.
[2] In Khan v Singh-Sall [2023] EWCA Civ 1119, CA ('Singh-Sall') the district judge was deciding, at the discretionary stage of an annulment application, whether or not, in her discretion, to make the annulment order. Taking into account all the circumstances when reaching her decision about how to exercise her discretion, she sought to consider what affect her annulment order would have, if made, on the petitioning creditors (the 'Bank') claim against the debtor/applicant for the annulment order/bankrupt. Important to this was whether or not time is taken to have run through the period between the bankruptcy order and the annulment order, such that the petitioning creditors claim would be time-barred/statute barred by limitation. Or, if time for limitation pruposes stopped when the bankruptcy order was made, and just resumed ticking again, when the annulment order was made. As stated, the district judge decided she did not need to determine what the law was, as '...it made no difference to her analysis.' (Nugee LJ in Singh-Sall, at paragraph 74)
It made no difference, the district judge held (so she did not need to decide the point) as (as Nugee LJ in Singh-Sall summarised, at paragraph 74):
'This was that if the effect of an annulment was that the limitation period would be deemed to have run throughout, the Bank would be prejudiced by annulment as its claim on the personal indebtedness would now be statute-barred; whereas if the effect of an annulment was that time did not run between the bankruptcy order and annulment but resumed running on annulment, there would be nothing to be gained from an annulment as the Bank would present another petition and there was no evidence that [the bankrupt] was in a position to pay (see paragraph 11(4) above). That seems to me a cogent analysis that by itself justified her overall conclusion.
[3] While perhaps a little off topic, he might be helpful to set out in bullet point form, the propositions of law on limitation and bankruptcy that Nugee LJ in Khan v Singh-Sall [2023] EWCA Civ 1119, CA affirmed:
(1) While accepting that these general statements will not always apply, still (Singh-Sall, paragraph 76):
(a) 'the general effect of an annulment is to "remit the party whose bankruptcy is set aside to his original situation" (Bailey v Johnson (1872) LR 7 Ex 263 at 265 per Cockburn CJ); and
(b) that when a bankruptcy order is annulled it is "annulled ab initio save for the certain matters which are specifically dealt with in the rules" (Choudhury v Inland Revenue [2000] BPIR 246 at 250 per Aldous LJ).
(2) 'once a bankruptcy order is made the creditors in the bankruptcy no longer have a right to bring an action against the debtor' unless that (proveable debt) creditor obtained leave (permission) from the Court (Singh-Sall, paragraph 77)
(3) '...if a provable debt is not statute-barred at the commencement of the bankruptcy, it does not become barred by lapse of time thereafter, at any rate for the purposes of proof and distribution in the bankruptcy: see re Benzon [1914] 2 Ch 68 at 75 per Channel J...' (Singh-Sall, paragraph 78).
To expand this point a little. In re Benzon [1914] 2 Ch 68 ('re Benzon'), a Mr Benzon was adjudged bankrupt in 1890 and against in 1892. The appellants were creditors of Mr Benson when he was first adjudged bankrupt; were creditors in the first bankruptcy; and had proved their debts in the first bankruptcy. Importantly, Mr Benzon was never discharged from either of his two bankruptcies. Mr Benzon died in 1911 with a substantial asset.
The appellant's contended that, while it might look like their claims might be statuted barred, the effect of the bankruptcy was to prevent the statute running (and, in essence, it had never re-started). On this point, the Judgment of the Court was:
'...cases were quoted beginning with Ex parte Ross 2 Gl. & J. 330, which shew that in the bankruptcy a debt does not become barred by lapse of time if it was not so barred at the commencement of the bankruptcy, and of this there can be no doubt, but this is only in the bankruptcy' [words in bold in italics in original]
Pausing there, as to 'cases were quoted beginning with Ex parte Ross' - there is no such list of cases quoted earlier (or later) in the Judgment of the Court. The best that can be found for the 'cases quoted' is from the record in the law report of the argument that was put to the Court. That record of the argument includes:
'In Ex parte Ross 2 Gl. & J. 330 , 332, Lord Lyndhurst says that it is an admitted rule that unless debts are already barred by the Statute of Limitations when the trust for the benefit of creditors is created, they are not afterwards affected by lapse of time. In In re General Rolling Stock Co. (1872) L. R. 7 Ch. 646 the Court held that from the date of a winding-up order under the Companies Act, 1862, the Statute of Limitations did not run against a creditor, and in Ex parte Lancaster Banking Corporation (1879) 10 Ch. D. 776, where the bankrupt, after the close of the bankruptcy, became entitled to 20,000l. in an action for the administration of the will of a testatrix, Bacon C.J. allowed the claim of a creditor who had not proved before the close of the bankruptcy. In re Crosley 35 Ch. D. 266 shews that the Statute of Limitations does not run during the bankruptcy. I submit, therefore, that if a new right of action did not arise in 1911, at any rate the bankruptcy prevented the Statute of Limitations from continuing to run in respect of the original right of action, and that the appellants' claims are not barred.'
Seemingly, the approach applicable for where the bankruptcy of the debtor interposes, is not the general approach however. Returning to the Judgment of the Court in re Benzon, it continued, at little later:
'The real difficulty in the way of the appellants is the well-established rule that if the statute once begins to run it continues to run whatever happens. The only case we can find in the books where the running of the statute has been said to have been suspended is a decision of Lord Chelmsford L.C. in Seagram v. Knight (1867) L. R. 2 Ch. 628; but that was a peculiar case on very special facts, and, whatever view may be taken of it, it clearly is not an authority in the present case. The general rule is clear; Coply v. Dorkmincque (1676) 2 Lev. 166, where after the time had begun to run the Courts were closed owing to the rebellion and no action could be brought, is a very strong case. Rhodes v. Smethurst 4 M. & W. 42 is another strong case, where the whole matter was carefully considered. The principle of the rule—if on such a technical matter there can be said to be any principle—appears to be that if any man has a cause of action which is ripe so that he has an opportunity of bringing his action and does not do so, he thereby takes the risk of some unexpected event happening which takes away from him the possibility of bringing his action within the remainder of the period which he has under the statute. The rule may work hardship in particular cases, but it is so well established that no Court would now decline to follow it.' [Bold added]
(4) '...claims outside the bankruptcy such as claims by secured creditors to enforce their security, where time continues to run normally: Cotterell v Price [1960] 1 WLR 1097 at 1105 per Buckley J.' (Singh-Sall, paragraph 79)
To expand this point a little, in Cotterell v Price [1960] 1 WLR 1097, Buckley J referred to re Benzon, saying:
'The importance of that case and of the way in which the doctrine is stated in the judgment of the court is that it makes it clear that it is only “in the bankruptcy” that the statute ceases to operate. It does not have any effect on the operation of the statute on any rights or remedies which are unaffected by the bankruptcy. In my judgment, a mortgagee who relies upon his security retains and stands on rights which he had before the bankruptcy, and which remain unaffected by the bankruptcy....
Section 7 of the Bankruptcy Act, after providing in subsection (1) that once a receiving order has been made
“no creditor to whom the debtor is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the debtor in respect of the debt, or shall commence any action or other legal proceedings, unless with the leave of the court and on such terms as the court may impose,” goes on in subsection (2): “But this section shall not affect the power of any secured creditor to realise or otherwise deal with his security in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.”
Although the bankruptcy takes away the rights of ordinary creditors to sue for their dues and regulates their right of proof in the bankruptcy, the rights of secured creditors are unaffected under that section, and there is no reason, in my judgment, why time should not continue to run under the Limitation Act as regards those rights and remedies which the secured creditors have outside the bankruptcy.'
(Note the Bankruptcy Act is the Bankruptcy Act 1914 (now obsolete) - a predecessor to the Insolvency Act 1986 (now in force))
[4] For information on the Insolvency Rules Committee, click here.