ICC Judge Mullen’s judgment in Sriram v Revenue & Customs & Anor [2024] EWHC 853 (Ch) follows an application by the bankrupt, Ms Sriram, to annul a bankruptcy order made against her on a petition of HMRC in circumstances in which proper service of both the statutory demand and the petition was contested and in which her capacity to understand the proceedings against her was also in issue.
Ms Sriram was married to Mr Ravi Gupta, although the two were estranged. The judge referred to Mr Gupta’s application for annulment of his bankruptcy (see Re Ravikanth Gupta (also known as Ravikanth Borra)) by way of background. He had found Mr Gupta to have been dishonest, concluding that he had made separate applications to the court using two identities to try to create the impression that the subject of the bankruptcy petition issued in that case was not him. He made clear, however, that Ms Sriram’s application was not tainted by the evidence in her husband’s case: its relevance arose from the fact that husband and wife had a common trustee in bankruptcy who had applied to realise properties in which some of Ms Sriram’s family claimed an interest, some of which were transferred to Ms Sriram shortly before or after her husband’s bankruptcy in 2019. Opaqueness in Ms Sriram’s affairs coupled with her lack of cooperation in the bankruptcy were, however, matters relied on by HMRC in resisting the application. Furthermore, Mr Gupta and Ms Sriram were connected to a number of addresses relevant to the issues as to service.
The law regarding service of a statutory demand and petition where it has not been possible to effect personal service applicable at the relevant time was set out in r 6.3(2) Insolvency Rules 1986 (see now r 10.2 Insolvency (England & Wales) Rules 206)) and para 13.2 Practice Direction on Insolvency Proceedings 2014 (see para 11.2 of the current PD). The judge was also taken to Regional Collection Services Ltd v Heald, in which Nourse J held that failure to try to serve at the debtor’s business premises and not leaving or sending any communication there meant that the petitioner had in that case not taken “all such steps as were reasonable in the circumstances.” After a comprehensive consideration of the convoluted facts and an assessment of the evidence relied on by Ms Sriram and HMRC, ICC Judge Mullen concluded that HMRC had satisfied that test:
The practice direction in force at the time, he held, required a visit to the debtor’s residence if “known” and, where more than one residence was “known,” to each of those residences; that did not, however, require a creditor to trawl its internal records and list every addresses with which a debtor had had a connection and attempt service at each of them in what he described as a “scattergun approach.”
Of greater interest is what the judge had to say about Ms Sriram’s mental capacity. Her application also relied on her claim that she lacked capacity during the currency of the bankruptcy proceedings so that she was not able to appreciate the nature or implications of bankruptcy or to make decisions for herself.
The Mental Capacity Act 2005 provides in s 2(1) that “For the purposes of this Act, a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.” What constitutes inability to make a decision is set out in s 3.
The principles involved in assessing capacity were set out by Baker J in A Local Authority v P, cited with approval by the Court of Appeal in Cannon v Bar Standards Board. Those included:
(i) The burden of proof lies on the party asserting that a person does not have capacity.
(ii) The test involves two stages. The first (“the diagnostic test”) is to determine whether the person has an impairment of or disturbance in the functioning of the mind or brain. The second (“the functional test”) is to determine whether that renders the person incapable of making the relevant decision.
(iii) Capacity is both issue-specific and time-specific. A person can have capacity to do certain things but not others and may have capacity at some times but not at other times.
(iv) It is not necessary for a person to comprehend every detail of the issue – it is enough if they comprehend and weigh the salient details relevant to the decision.
(v) The court must avoid the “protection imperative” – the danger that the court will be drawn towards an outcome that will protect the individual rather than carrying out a detached and objective assessment of capacity.
The judge also considered the Supreme Court decision in A Local Authority v JB, the Court of Appeal decision in Masterman-Lister v Jewelland the pre-2005 Court of Protection authority Public Guardian v R1 as well as expert evidence which had been adduced to assist the court. He found that Ms Sriram lacked capacity:
“It is apparent that she has, sadly, suffered from a distressing and debilitating illness for a long period. While it was controlled by medication, the cessation of medication in April 2016 precipitated a relapse. No doubt periods of ‘florid psychosis’ would have been episodic, but Dr Gibbon’s opinion and the medical records which she, and indeed Dr Akenzua, so helpfully interpreted, satisfy me that her underlying psychotic state remained so that she would have been unable to understand the nature and effect of the documents served on her, or the proceedings, and weigh up the options available to her.”
One might have thought that that conclusion would have led the court to grant Ms Sriram’s application, but the judge went on to consider how in all the circumstances the court should exercise its discretion under s 282(1)(a) Insolvency Act 1986, drawing for that purpose on Morgan J’s judgment in JSC Bank of Moscow v Kekhman and the Court of Appeal’s judgment in Khan v Sing-Sallin which Nugee LJ said:
“If I can express it in my own words, the Court has a discretion to be exercised having regard to all the circumstances; but where the Court has concluded that the bankruptcy order ought not to have been made, there must usually be something of some weight to put in the scales on the other side before that fact is outweighed and an annulment refused. I do not think it is right to say that that has to be exceptional; but it does have to be something sufficient to lead to the conclusion that annulment should be refused. This was effectively the view taken by Mr Mohyuddin [in the judgment under appeal].
In practice the most significant consideration is likely to be the question of the applicant’s solvency. If there are debts which can be pursued against the debtor and which he cannot meet, then there is usually little benefit to anyone in granting an annulment. This is, as [counsel for the creditor] said, a consistent theme which runs through the cases.”
ICC Mullen held that the case before him was one where the discretion fell to be exercised against the presumption in favour of annulling. Ms Sriram’s affairs were opaque, she had not cooperated, there was evidence she had received properties from her husband, and she had concealed her marriage. He said:
“While I start from the proposition that a bankruptcy that proceeded during a debtor’s incapacity ought to be annulled, it seems to me that the above factors require me to exercise my discretion against annulment. It is also of significance that the application was not made for some 18 months after the point at which Ms Sriram says that she became aware of it. Given that Ms Sriram had returned to the UK and had recovered capacity in 2018, it is hard to believe that she would not have been aware of her bankruptcy as a result of the freezing of her accounts or as a result of having been told about the petition by Ms Gowda. However that may be, it is difficult to avoid the conclusion that it was launched belatedly in order to attempt to defeat the trustee’s realisation of property that she had discovered to be registered under Ms Sriram’s alias. Given that the extent of Ms Sriram’s liabilities is not known, not least because she has not cooperated with the trustee, it is possible that an annulment would mean that certain creditors find themselves with debts that have become statute-barred and lose their claim upon her estate, though the effect of an annulment on the running of time for the purposes of limitation is open to question given the observations of the Court of Appeal in Khan v Singh-Sall. However that may be, an annulment so long after the event may prejudice any creditors who might have given up any pursuit of Ms Sriram on the understanding that she was bankrupt and may not have notice of an annulment in sufficient time to bring their claims. Given Ms Sriram’s lack of candour with the trustee I have to be cautious about prejudicing any creditors who are not yet known. Not all of the delay in these proceedings is attributable to Ms Sriram of course, but the length of time between discovery of the bankruptcy, on Ms Sriram’s case, and the making of the annulment application is significant and may very well lead to prejudice to creditors were I to annul the bankruptcy. There must, as observed in Masterman-Lister, be finality in litigation. An applicant for an annulment should act as promptly as circumstances allow. While inevitably there will be a period in which a bankrupt who has previously been unaware of the fact of his bankruptcy will have to establish just what has happened, this is a case where there was a tax debt and bankruptcy proceedings of which Ms Sriram says she was unaware. There is no proper reason for the delay in making the application. In the circumstances, I decline to annul the bankruptcy.”
In short, the factors weighing against annulment were of such significance that there was a real risk of detriment to creditors.
Earlier in his judgment the judge noted that HMRC had acted in good faith and in ignorance of Ms Sriram’s incapacity, which had been concealed: various people concerned in Ms Sriram’s care could have disclosed her mental health condition to HMRC; instead, they had misled HMRC. The result may have been different if the petitioner had pressed on with knowledge of all the relevant facts without drawing them to the attention of the court.