Individual directors declared bankrupt following failed business venture

Last year a party house company owned by a couple in Brighton went into administration and the company directors have since individually been successfully subject to a bankruptcy order by a private school.

Although in this case, the individual directors have been personally pursued by the third party creditor school and have been successfully declared bankrupt, there are circumstances where an individual can seek to annul a bankruptcy order, which is set out below.

Why was the bankruptcy petition successful?

Neil Stonehill and Michelle Stonehill (the couple) were the directors of Brighton Holiday Home which instantly closed in May due to Neil Stonehill having borrowed an estimated one million pounds in August. Administrators have said that they will be pursuing these funds and petition for his personal bankruptcy.

But an update report published last week administrators have said that the couple had been declared bankrupt after petitions by a “third party”.

The “third party” petitioner in both cases has turned out to be Newells School Trust which runs (Handcross Park School) and a part of Brighton College family schools.

A report written by Quantuma said:

“Creditors will recall from the joint administrators proposals that an overdrawn director’s loan account was identified in the sum of £ 1,024,281.”

Paul Zalkin & Maxine Reid

What happened before the bankruptcy petition?

The director was served with a statutory demand on July 2019. The director did not seek to set aside the statutory demand. He was later declared bankrupt on 17 September 2019 following a third-party creditor issuing a bankruptcy petition.

Who were the creditors and how much are they owed?

The largest creditors are funders Worldpay and Nucleus Cash Flow Finance who were jointly owed over £600,000. Funding Circle were owed around £460,000, and almost £400,000 is owed to landlords. HMRC is owed £30,000 in corporation tax and £30,000 in PAYE. Employees are owed  £5,000 in holiday pay and salary.

How do I challenge a bankruptcy petition?

A bankruptcy petition may be challenged if:

  1. the debt alleged is genuinely disputed on substantial grounds; or
  2. the debtor has a genuine right of set-off against the creditor.

What is the procedure to challenge a bankruptcy petition?

The procedure to oppose a bankruptcy petition is to file a witness statement in opposition in court not less than five business days before the date of the hearing of the petition (rule 4.18(1), Insolvency Rules). A copy of the evidence must also be sent to the petitioning creditor as soon as reasonably practicable (rule 4.18(2), Insolvency Rules).

The individual is entitled to appear at the hearing of the petition and to oppose the making of a bankruptcy order. It is usual for a individual to instruct solicitors and/or counsel to appear on his or her behalf at the hearing.

If the debtor chooses not to instruct legal representatives, they can attend personally to represent themselves.

What is the procedure to annul a bankruptcy order?

It is important to seek the guidance of a solicitor familiar with the Insolvency Rules and the minutiae of the bankruptcy procedure to avoid failure risk. Generally, many solicitors do not understand the insolvency process and how to apply the bankruptcy rules to maximise the benefit to their clients. It will be detrimental to your case if you attempt to annul a bankruptcy yourself or instruct a solicitor with little to no experience of the bankruptcy procedure.

The process to follow to cancel a bankruptcy order depends on the grounds on which the bankrupt relies on to annul the bankruptcy.

The procedure to follow to annul your bankruptcy

  1. Fill in Form IAA (and pay the application fee): you can download a word version template Form IAA here. Guidance notes can be found here. It is important to seek legal advice when completing Form IAA because all relevant information must be included. You must also notify the Court if you want details of the bankruptcy removed from the Land Charges Register.
  2. Draft a Witness Statement: Depending on the facts of your case, a witness statement can be submitted to the Court in support of the application stating that all debts have been paid along with supporting documentary evidence. Legal advice should be sought when drafting the witness statement, guidance notes on the Civil Procedure Rules states that a witness statement must:
  • start with the name of the case and the claim number;
  • state the full name and address of the witness;
  • set out the witness’s evidence clearly in numbered paragraphs on numbered pages;
  • end with this paragraph: “I believe that the facts stated in this witness statement are true.” and
  • be signed by the witness and dated.

3. File the application and witness statement at Court: the Court will then send a notice of hearing setting out the date, time and location of the hearing to cancel the bankruptcy order.

4. Notify the Official Receiver: the bankrupt (or their legal representative) must liaise with the bankrupt’s Official Receiver and send them a copy of the application and witness statement. The Official Receiver must also be notified at least 28 days before the hearing. You will still be required to attend your interview with the Official Receiver if this has been scheduled.

5. Receive a report from the Official Receiver: the Official Receiver (OR) is required to produce a report 21 days before the annulment hearing which sets out a summary of the bankrupt’s assets and liabilities; any creditors of the debtor known to the OR; and whether the OR and/or trustee supports the bankrupt’s application to annul / cancel the bankruptcy.

6. Attend the Annulment Hearing: we provide representation at any bankruptcy hearing on your behalf. The Court will look at the grounds submitted by you requesting that the bankruptcy be annulled, it will also take into account whether the Official Receiver has any objections to the annulment application. The Court will also decide at this hearing who would bear the costs of the bankruptcy order and the annulment hearing.

Examples of cases where a bankruptcy order has been cancelled or annulled

The two main grounds for cancelling a bankruptcy are:

  1. annulling a bankruptcy which ought not have been made; and
  2. annulling a bankruptcy on grounds that all debts and expenses have been secured or paid.

The Court apply the same tests for setting aside a statutory demand and for deciding whether to annul a bankruptcy order. The judiciary are granted a wide discretion when it comes to deciding whether to cancel a bankruptcy petition.

Recent case law suggests that the Court follows the 3 stage test set out in JSC Bank of Moscow v Kekhman and others[2015] EWHC 396 (Ch), namely (i) it considers the grounds that existed at the time the order was given by the court at the bankruptcy petition hearing; (ii) whether or not on the grounds in (i) the bankruptcy order should have been made or not; and (iii) if (ii) is satisfied, the Court then has the wide discretion to determine whether it will exercise its’ judicial discretion to cancel / annul the bankruptcy order that had been made.

Cancelling / annulling a bankruptcy order that ought not have been made

  • Any procedural irregularity;
  • breach of justice e.g. where the debtor did not attend the bankruptcy petition hearing as they were misled to believe that the hearing would be adjourned (see Hope v Premierpace Ltd [1990] BPIR 695);
  • when the bankruptcy petition debt could have been disputed by the debtor; or
  • where the court that heard the bankruptcy petition and provided the sealed bankruptcy order did not have jurisdiction to make the bankruptcy order (see Raiffeisenlandesbank Oberösterreich AG v Meyden [2016] EWHC 414 (Ch)).

Meet our Expert Bankruptcy Lawyers

We specialise in personal insolvency dispute litigation. We’re a specialist City of London law firm made up of Solicitors & Barristers. We are based in the legal heart of London in Middle Temple next to the Royal Courts of Justice (where the Central London County Court (Bankruptcy) is based). We’re experts in dealing with matters surrounding personal insolvency including issuing and setting aside statutory demands, issuing and opposing bankruptcy petitions; and managing bankruptcy applications (including annulments).

Whilst we are based in London we provide national coverage across all Courts in England & Wales. We provide a quick no cost initial telephone case review to establish whether or not we can help you; just call one of our team on 02071830529.

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