The Facts

Jenny Yang (JY) owned a rental property which was considered by Manchester City Council as being a house in multiple occupation. The Council subsequently obtained Liability Orders against JY for non-payment of council tax on the property. JY was made bankrupt on the basis of non-payment of the Liability Orders by the Council. After the bankruptcy order was made, a valuation tribunal found that the property was not in fact a house in multiple occupation and the Council refunded JY as she had already paid the Liability Orders by this point. The Judge commented that the effect was the same as if the Liability Orders had been set aside.

JY argued that the bankruptcy order should be annulled on the basis that the bankruptcy order ought not to have been made. The district judge refused the application, instead rescinding the bankruptcy under s.375(1) Insolvency Act 1986.

The High Court agreed with the district judge, finding that rescission of the bankruptcy was more appropriate than annulment. Permission to appeal was granted and JY appealed the decision.

Appeal Decision

The appeal was dismissed.

The Court of Appeal found that the Liability Orders were deemed to constitute a legally enforceable debt under the Council Tax (Administration and Enforcement) Regulations 1992, regardless of the position relating to the status of the rental property. At the time the bankruptcy order was made the Liability Orders were in place and therefore there was no ground to annul the bankruptcy on the basis that it ought not to have been made based on grounds "existing at the time the bankruptcy order was made".

Although the Liability Orders had subsequently been set aside (as such) the Court found that it would rarely make an alternative judgment on them in the absence of fraud or a miscarriage of justice. The Court concluded that the power to annul a bankruptcy order was not engaged and that rescission of the bankruptcy order was the appropriate power to have applied.

Our Comment

There was a previous suggestion in Royal Bank of Scotland Plc v Farley that the subsequent setting aside of a default judgment was a ground for annulment on the basis that it was a ground existing at the time the bankruptcy order was made. This was considered and dismissed by the Court of Appeal in this case. Any subsequent setting aside of a default judgment, liability order or other legally enforceable debt is not likely to be a ground for annulment on the basis that the order ought not to have been made. If the order or judgment is in place at the time the bankruptcy order is made, the requirement for circumstances existing at the time the order is made for annulment is not satisfied.

This is a useful authority that serves as a reminder to look back and consider the circumstances existing at the time the bankruptcy order is made, regardless of any subsequent change to those circumstances, before making an application for annulment on the basis that it ought not to have been made.