Overturning a bankruptcy order – the options

It is not uncommon for a person who has been adjudicated bankrupt to later seek to have their bankruptcy overturned. There are many possible reasons for pursuing such a course of action and equally there are several different legal routes to effectively achieve the same goal, depending on the circumstances of the particular case.

Some examples that we commonly see are:

  • Some alleged procedural impropriety in how a debtor was adjudicated bankrupt such as a lack of service or notice of the petitioning creditor’s proceedings
  • A debtor underestimating or misunderstanding the impact of bankruptcy on his estate, particularly in circumstances where the estate comprises assets of value that a trustee in bankruptcy is taking steps to realise
  • A trustee in bankruptcy seeking to challenge transactions completed within the relevant time prior to the bankruptcy (referred to as preferences or transactions at an undervalue)
  • A change in financial circumstances that now allow the debtor to address their liabilities with the assistance of a third party

Difference between discharge and rescission/annulment

Terms such as discharge, rescission and annulment are sometimes used interchangeably and loosely by debtors and creditors alike, however each term is quite distinct from the other and have quite technical and important differences.

Provided that a debtor cooperates in their bankruptcy they will usually be automatically discharged from same on the first anniversary of being adjudicated bankrupt. This however does not signal the end of the administration of the bankrupt’s estate which will continue to be administered for as long as a trustee in bankruptcy requires it in order to realise all of the bankruptcy assets for the benefit of the bankruptcy creditors. This is a constant area of confusion for debtors.

From a technical point of view, being discharged simply releases the debtor from the responsibility for their bankruptcy debts and also frees them from the various prohibitions and restrictions that they were subject to whilst they were an “undischarged” bankrupt such as company directorships, leaving the jurisdiction and acquiring property post-bankruptcy.

However, discharge does not result in the bankrupt acquiring back any of the unrealised assets that were previously lost in the bankruptcy, the latter can only be achieved by taking steps to formally overturn the bankruptcy through an application to annul or rescind as set out below.

  1. Annulling the bankruptcy – All bankruptcy debts and expenses paid

Annulling a bankruptcy effectively puts a bankrupt back into the position that they were in immediately prior to being adjudicated bankrupt. Whilst it does not undo any realisation of assets that have already properly taken place, it does importantly mean that the title to any as yet unrealised assets immediately re-vest back to the bankrupt and this is normally the primary motivation behind such an application.

The most common form of annulment is made under Article 256(1)(b) of our insolvency legislation which essentially involves a bankrupt bringing an application back to Court on the basis that all of their bankruptcy debts and expenses have now been discharged in full. If the Court is satisfied with the documentary proof that has been produced (normally signed receipts from the various payees) and subject to their being no objections from the trustee in bankruptcy or the Official Receiver, then a court order can be made annulling the bankruptcy and this would bring the bankruptcy to a complete end.

  1. Annulling the bankruptcy – bankruptcy order ought not to have been made

A different and less common route to seeking an annulment of a bankruptcy is offered by Article 256(1)(a) but this requires the bankrupt to satisfy the Court that the bankruptcy order should not have been made in the first place and therefore an application on these grounds is likely to involve allegations that there have been some sort of procedural irregularity or abuse of process in the lead up to the bankruptcy such as issues with the debtor being put on proper notice of the proceedings and perhaps not having the opportunity to involve himself in same.

  1. An individual voluntary arrangement followed by an annulment

Any debtor that is in financial difficulty can propose an individual voluntary arrangement (IVA) to their creditors and this is normally presented as an alternative to bankruptcy. Whilst a debtor does not have to be faced with a bankruptcy petition in order to enter into an IVA, in practice it is normally considered when a debtor is faced with mounting pressure from their creditors and a bankruptcy petition is perhaps pending.

When a debtor is adjudicated bankrupt they still have a window of opportunity to avail of an IVA but importantly this option only exists for the period during which they are an “undischarged” bankrupt. As mentioned above, once a debtor obtains their automatic discharge they are effectively released from their bankruptcy debts meaning that those debts are no longer their responsibility and therefore technically they have no creditors to whom they can propose an IVA.

If however an undischarged bankrupt puts a proposal for an IVA to his creditors and obtains the requisite support for same then they can seek an annulment of their bankruptcy under Article 235 of the insolvency legislation. An application of this type requires the bankrupt to prove to the satisfaction of the Court that they have entered into a formal IVA with their creditors and that the necessary period during which a creditor could challenge the outcome of the creditors’ meeting has passed, this normally being 28 days from the meeting of creditors at which the proposal was accepted.

If an annulment application under Article 235 is successful then that would conclude the bankruptcy and in its place leave the IVA to run its course under the supervision of an insolvency practitioner.

  1. Rescinding the bankruptcy order

Article 371 gives the Court a general overriding power to “review, rescind or vary” any previous court order which it may have made and this could be adopted to seek the Court to rescind a bankruptcy order. The application to rescind will have to set out in great detail the reasons why the Court should “review, rescind or vary” the bankruptcy order and, similar to an annulment application under Article 256(1)(a), it is commonly used to address any perceived or alleged procedural impropriety in the lead up to the debtor’s adjudication.

One important distinction between annulling a bankruptcy and rescinding it is that the latter simply reverses the actual order itself and effectively takes the bankruptcy process back one stage so that the debtor is still subject to a pending bankruptcy petition that will have to be determined in due course. The debtor will still therefore have to deal with the petitioning creditor’s debt somehow if they are to avoid being adjudicated bankrupt on foot of same at a future hearing.

At Millar McCall Wylie we have a wealth of experience in advising clients on a wide range of complex bankruptcy matters such as:

  • Overturning bankruptcies
  • Acting for family members wishing to purchase assets out of a bankruptcy
  • Acting for family members wishing to exert an interest over a bankruptcy asset
  • Defending challenges brought by a Trustee in relation to preferences or transactions at an undervalue
  • Advising creditors owed money by a debtor
  • Advising debtors being pursued by creditors

We also work closely with a large network of local insolvency practitioners based throughout Northern Ireland who can assist with putting forward a proposal for an individual voluntary arrangement. It is imperative to take legal advice on such matters at the earliest opportunity to ensure that all available remedies and recourses are fully considered and explored and identify which suits your particular circumstances best.

If you wish to discuss a current or potential bankruptcy issue then please contact Jason Byrne in our Insolvency & Restructuring Team.