The judgment in Sriram v Revenue & Customs & Anor [2024] EWHC 853 (Ch) provides a detailed examination of key issues in insolvency law, particularly concerning the annulment of a bankruptcy order. The case highlights the connection of procedural compliance, the debtor’s mental capacity, and the competing interests of creditors and bankrupt individuals.

Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we can assist clients by helping them secure funding and insurance for insolvency cases.

Sriram v Revenue & Customs & Anor [2024] EWHC 853 (Ch)

In Sriram v Revenue & Customs & Anor [2024] EWHC 853 (Ch), ICC Judge Mullen considered an application by Ms. Sriram to annul a bankruptcy order made against her on HMRC’s petition. Central to the case were contested issues regarding proper service of the statutory demand and bankruptcy petition, as well as questions about Ms. Sriram’s capacity to understand the proceedings against her.

Background

Ms. Sriram, who was estranged from her husband, Mr. Ravi Gupta, argued that the service of the bankruptcy proceedings had not been properly effected and that her mental capacity to engage with the process was impaired. By way of context, the judge referred to Mr. Gupta’s separate case (Re Ravikanth Gupta (also known as Ravikanth Borra)), where he had been found to have acted dishonestly by using dual identities to challenge his bankruptcy.

However, the judge distinguished Mr. Gupta’s actions from Ms. Sriram’s application, emphasising that her case was not tainted by his behaviour. Nevertheless, the couple’s shared trustee in bankruptcy and the transfer of properties between them before and after Mr. Gupta’s bankruptcy in 2019 added complexity to the matter. HMRC relied on the opaque nature of Ms. Sriram’s financial affairs and her lack of cooperation in opposing her annulment application.

Service of the Statutory Demand and Petition

The court examined whether the requirements for service had been met under the relevant provisions of the Insolvency Rules 1986 and the applicable practice direction. Judge Mullen held that HMRC had fulfilled the standard of taking “all such steps as were reasonable in the circumstances” to effect service. He rejected the idea that creditors must adopt a “scattergun approach” by attempting service at every address with which a debtor might be connected. Instead, reasonable efforts to serve at known addresses were deemed sufficient.

Mental Capacity

A significant element of the case was Ms. Sriram’s claim that she lacked the mental capacity to understand or respond to the bankruptcy proceedings. The judge applied the framework under the Mental Capacity Act 2005, which requires both a diagnostic test (to determine if there is an impairment of the mind or brain) and a functional test (to assess whether the impairment renders the person incapable of making decisions).

Drawing on medical evidence and expert testimony, Judge Mullen concluded that Ms. Sriram had suffered from a psychotic illness that prevented her from comprehending the nature and implications of the proceedings. He acknowledged her condition was severe and long-standing, and her lack of capacity during the critical periods was undisputed.

Exercise of Discretion and Annulment

Despite finding that Ms. Sriram lacked capacity, the court declined to annul the bankruptcy order. Under section 282(1)(a) of the Insolvency Act 1986, the court has discretion to annul a bankruptcy if the order ought not to have been made. However, Judge Mullen noted several factors weighing against annulment. These included Ms. Sriram’s lack of cooperation with the trustee, the concealment of her marriage, and her involvement in property transfers that complicated the estate’s administration.

Additionally, her delay of 18 months in making the annulment application after regaining capacity was significant and raised concerns about prejudice to creditors. The judge highlighted the need for finality in litigation and found no sufficient justification for the delay.

The potential detriment to creditors was a crucial consideration. An annulment could lead to statute-barred debts and prejudice creditors who may have assumed the bankruptcy resolved their claims. The judge also noted that HMRC acted in good faith, unaware of Ms. Sriram’s incapacity, which had been concealed by those close to her.

Conclusion

The judgment underscores the balance courts must strike between rectifying procedural or capacity-related flaws and protecting the interests of creditors. While acknowledging the seriousness of Ms. Sriram’s mental health issues, the court prioritised the integrity of the insolvency process and the protection of creditors from further harm. This decision reinforces the importance of prompt action by bankrupt individuals seeking annulment and the need for full disclosure in dealings with insolvency practitioners and creditors.

This case serves as a crucial reference for insolvency practitioners, offering guidance on best practices in serving bankruptcy petitions, handling cases involving mental incapacity, managing annulment applications, and safeguarding the interests of creditors.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following methods:

After-the-event (ATE) legal insurance – ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award.

The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

Third party litigation funding – In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.

Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger claim disputes.

How can Annecto Legal assist?

When handling insolvency matters, insolvency practitioners are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners who are involved in dealing with insolvency and annulment of bankruptcy matters. If you are in the process of bringing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.