When faced with bankruptcy proceedings, it is paramount that you act quickly in order to avoid unnecessary costs and stress.

The bankruptcy proceedings

The first step a creditor will take to initiate bankruptcy proceedings is to serve a statutory demand. If there is a genuine dispute in relation to the debt; or your creditor owes you money which, if set-off against the debt reduces the debt to less than £5,000, then you can apply to the court to set aside the statutory demand. Alternatively, your creditor may be willing to accept payment by installments or accept security for the debt. A successful response to the statutory demand will prevent the issue of bankruptcy proceedings and the costs which accompany these.

It is equally important to seek legal advice after you have been served with a bankruptcy petition and you dispute the debt; have a counter or set-off claim; or are in a position to offer security or payment, so as to try and avoid the making of a bankruptcy order.

Annulment

Whilst it is possible to have a bankruptcy order annulled, if you can demonstrate that it ought not to have been made; or because you are able to make payment, there is no guarantee that the court grant an annulment order. In particular, delay in making an annulment application may result in the court refusing to grant an annulment.

Furthermore, applying for an annulment of a bankruptcy order will come at a hefty cost. Not only will you incur costs when instructing a solicitor to assist with the annulment application, when making an application on the basis of payment, you will have to pay not only the debt owed to petitioning creditor, but all of your debts. In addition, you need to consider the bankruptcy costs, that is to say, the costs of the original petition; the costs of the annulment application; and the fees and expenses of the trustee in bankruptcy, which can quickly spiral.

Payment of the bankruptcy costs

There is a statutory requirement on the bankrupt to pay the bankruptcy costs, when applying to annul a bankruptcy order on the basis of payment to creditors. However, the legislation is silent on the issue of payment of the bankruptcy costs, when dealing with an annulment application on the basis that the bankruptcy order ought not to have been made.

Whilst one can ordinarily expect the court to order that the petitioning creditor has to pay the bankruptcy costs, the decision of the Court of Appeal in Oraki v Dean & Dean [2013] EWCA Civ 1629, demonstrates that this is not always the case.

In the Oraki case the two bankrupt had been made bankrupt on petitions by their former solicitor for non-payment of fees. However, it subsequently transpired that the solicitor had not been properly qualified. As such, he had not been entitled to charge the fees, which meant the bankruptcy order ought not to have been made.

At the annulment hearing payment of the bankruptcy costs was discussed. The Judge made an annulment order which was conditional upon payment of those costs by the bankrupts, albeit that the bankrupts were permitted to challenge the level of fees and expenses; and could seek to recover the costs from the solicitor. In stipulating the condition, the Judge had taken into consideration the fact that the solicitor would be unable to pay.

The Court of Appeal upheld the decision, confirming that there is a guiding principle that a trustee who has acted properly can expect to have his reasonable remuneration provided for and that when it comes to deciding who should pay the trustee, the court has total discretion.

Conclusion

The case of Oraki stresses the importance of effectively dealing with a disputed debt at the petition stage, rather than after a bankruptcy order has been made. In circumstances where the petitioning creditor is unable to pay the trustee, the court can stipulate that the bankrupt makes payment instead.