Where the underlying liability on which a bankruptcy order is made is subsequently set aside, the correct remedy is rescission under s.375(1) of the Insolvency Act 1986.
Annulment under s.282(1)(a) is the appropriate remedy when, on grounds existing at the time of making the bankruptcy order, the order ought not to have been made.
A bankruptcy order had been made on the basis of liability orders in respect of unpaid council tax that had been issued against the bankrupt by the local authority. It was subsequently discovered that the liability orders had been issued as a result of the erroneous categorisation of the bankrupt’s rental property. By that point, the bankrupt had already discharged the liability under the orders, and therefore, unable to set them aside, the local authority reimbursed the bankrupt, which was considered to have had the same effect as setting them aside.
The bankrupt appealed against the High Court’s decision to uphold the ruling of the District Judge that the appropriate remedy in the circumstances was rescission of the bankruptcy order, rather than annulment. The significance to the bankrupt is that rescission terminates the bankruptcy, whereas annulment treats the order as though it had never been made.
The Court of Appeal upheld the decision of the lower courts. The bankrupt had argued that annulment was appropriate as, on grounds in existence at the time of making the order, the order ought never to have been made. The Court of Appeal disagreed, stating that, regardless of the subsequent discovery that they originated from the mischaracterisation of her rental property for council tax purposes, the liability orders constituted a legally enforceable debt under the relevant tax legislation at the time of making the order.