Appeal Against A Bankruptcy Order

A bankruptcy has far-reaching consequences. Fortunately, a bankruptcy order can be set aside by lodging an appeal. This effectively reverses the consequences of the bankruptcy. Below we explain how this works.

Declaration of Bankruptcy

A debtor may be declared bankrupt when the following requirements are met:

1. there is prima facie evidence of the petitioning creditor's right of claim;
2. there is prima facie evidence of a supporting claim – establishing plurality of creditors, with the important condition that at least one of the claims is due and payable;
3. (the debtor is in a state of having ceased to pay – plurality is a necessary, but not sufficient, condition for this.

The court assesses whether these criteria are satisfied on the basis of the facts and circumstances as they exist at the time of its decision. This is referred to as an ex nunc assessment.

Strict Time Limits

The debtor may lodge an appeal within eight days from the date of the bankruptcy order. This short time frame makes it essential to engage a solicitor immediately after the order has been made. Legal representation is mandatory and, in practice, indispensable. The notice of appeal must set out the grounds on which the appeal is based, which requires specialist expertise.

An appeal is only available if the debtor has been heard on the bankruptcy petition. Please note that merely appearing in the proceedings does not automatically mean that the debtor has been heard. If the debtor has not been heard, an objection procedure may be initiated to have the bankruptcy set aside. Furthermore, no appeal is possible where the debtor has personally applied for their own bankruptcy.

Two Routes to Setting Aside the Bankruptcy

On appeal, the Court of Appeal may set aside the bankruptcy order on two grounds:

1. a new ex nunc assessment of the substantive requirements for the bankruptcy declaration; or
2. an ex tunc  assessment of the lower court's decision.

In conducting its review, the Court of Appeal is not passive. In an ex nunc assessment, it is also irrelevant whether the petitioning creditor's claim has since been satisfied. The bankruptcy order may remain in force even if that claim has been paid. The rationale is that the petitioning creditor cannot unilaterally determine the legal position of the debtor's other creditors.

In an ex nunc  review, the Court of Appeal reassesses whether the debtor is in a state of bankruptcy at the time of the appeal hearing. If the parties' submissions give cause to do so, the appellate court must re-examine whether the statutory requirements for bankruptcy are met. The debtor may undertake to pay one or more debts subject to the suspensive condition that the bankruptcy order is set aside, or a third party may give such an undertaking. However, a more effective strategy is often to undertake to pay all known creditors subject to the appeal succeeding, or to arrange for a third party to make actual payment during the appeal proceedings. The latter is permitted.

In an ex tunc review, the Court of Appeal reassesses the lower court's decision based solely on the information that was available at that time. For example, it may consider whether there was indeed prima facie evidence of the petitioning creditor's claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.