Annulment of Bankruptcy Orders

The article discusses the operation of s 123 of the Bankruptcy Act (Cap 20) which deals with the court’s power to annul a bankruptcy order.

The 1999 Bankruptcy (Amendment) Bill made a number of changes to the Bankruptcy Act (‘BA’) including the amendment of s 123(1)(b) BA and the introduction of s 123A BA. These two provisions deal with the powers of the court and the Official Assignee (‘OA’) to annul a bankruptcy order. This article will focus mainly on the operation of s 123(1)(b) BA using s 123A BA for comparison.

For convenience, the relevant portions of these two provisions are set out below. Section 123 BA reads:

(1)  The court may annul a bankruptcy order if it appears to the court that:

(a) on any ground existing at the time the order was made, the order ought not to have been made;

(b) to the extent required by the rules, both the debts and the expenses of the bankruptcy have all, since the making of the order, either been paid or secured for to the satisfaction of the court;

(c) proceedings are pending in Malaysia for the distribution of the bankrupt’s estate and effects amongst the creditors under the bankruptcy law of Malaysia and that the distribution ought to take place there; or

(d) a majority of the creditors in number and value are resident in Malaysia, and that from the situation of the property of the bankrupt or for other causes his estate and effects ought to be distributed among the creditors under the bankruptcy law of Malaysia. [Emphasis added]

While s 123A BA reads:

(1) The Official Assignee may issue a certificate annulling a bankruptcy order if it appears to the Official Assignee that, to the extent required by the rules, the debts which have been proved and the expenses of the bankruptcy have all, since the making of the order, been paid. [Emphasis added]

It can be seen from these two provisions that the scope of the OA’s power to annul a bankruptcy order, as compared to the court’s power, is narrower.¹ In particular, the OA can only annul a bankruptcy order where it appears to the OA that the debts which have been proved and the expenses of the bankruptcy have both been paid. In contrast, the court can annul a bankruptcy order under four different limbs.² Limb (b) provides that the court may annul a bankruptcy order where it appears to the court that the debts and expenses of the bankruptcy have all been paid or secured to the satisfaction of the court.

There are two main differences in the wording of these two provisions. First, s 123A BA refers to debts which have been proved, while s 123(1)(b) BA refers to debts. Second, s 123(1)(b) BA provides for the debts to be paid or secured, but s 123A BA only provides for debts to be paid. This article will endeavour to highlight the implications that arise from these two differences. In relation to the first, it is submitted that despite the difference in wording, s 123(1)(b) BA also refers to debts which have been proved. In relation to the second, the question of what constitutes ‘secured’ will be considered.

Meaning of ‘Debts’ in Section 123(1)(b) BA

The scope of s 123(1)(b) BA has not been the subject of any locally reported decision. However, the authors³ of Law and Practice of Bankruptcy in Singapore and Malaysia, Butterworths 1999 make reference to the unreported decision in Re Chew Siang Heng, ex p American Express International Inc⁴ which held that the word ‘debts’ refers only to debts admitted to proof instead of provable debts.

In that case, the court⁵ applied the definition laid down by the English Court of Appeal case of In Re Keet, ex p Official Receiver⁶ of debts as ‘debts which have been proved in the bankruptcy and not provable debts which have not been proved.’ The court then stated that since no other debts had been proved in the bankruptcy, the pre-condition laid down in s 123(1)(b) BA had been fulfilled by the repayment of the petitioning creditor’s debt and annulled the bankruptcy order.

It should be highlighted that the applicable provision in that case was the pre-amendment s 123(1)(b) BA and it read:

(b) that, to the extent required by the rules, the debts which have been paid and the expenses of the bankruptcy have all, since the making of the order, either been paid or secured for to the satisfaction of the court. [underlining added]

As can be seen, the 1999 Bankruptcy (Amendment) Bill added the word ‘both’ before the first ‘the debts’ and removed the underlined words from this provision. The question is thus whether the definition adopted in Re Chew Siang Heng was correct and whether it still continues to apply after the amendment to s 123(1)(b) BA.⁷ This article replies in the affirmative to both questions. Two reasons are advanced for this proposition.

Before delving into them, I will first deal with the prima facie argument that the legislature in using different words must be taken to mean different things. The argument goes that since s 123A BA uses the phrase ‘debts which have since been proved’, while s 123(1)(b) BA uses the word ‘debts’ simpliciter, then s 123(1)(b) BA cannot refer to debts which have been proved.

However, canons of statutory interpretation are merely a guide and not conclusive. As such, it would be more useful to refer to the words of the Minister of State for Law, Associate Professor Ho Peng Kee (as he then was) during the second reading of the 1999 Bill.⁸ Associate Professor Ho then stated:

Sir, two amendments to the Act are proposed to streamline procedures and reduce the need to resort to the courts:

…

Secondly, there are currently two situations where a bankrupt is required to apply to court for a discharge. These are first when a bankrupt has fully repaid all his debts or when the creditors have, by special resolution, accepted an offer of composition or scheme of arrangement from the debtor. Sir, in these two situations, the courts will invariably discharge the bankrupt. The Bill amends the Act to provide for the Official Assignee to issue a certificate to discharge a bankrupt in these two situations.⁹

The above speech was made at the session when s 123A BA was introduced. Hence, although the passage appears only to refer to discharge, the same point applies by analogy to annulments. Further, it would appear that there was no distinction drawn by the legislature in their treatment of annulment and discharge. This can be seen in the words of Member of Parliament for Ang Mo Kio, Mr Inderjit Singh when he stated:

Similarly, the new section 123A does not require a person to go back to the courts to be discharged from bankruptcy if he has paid his debts. By empowering the Official Assignee to issue the Certificate of Annulment, or discharge, the process will be much faster, saving both time and cost.¹⁰

Thus, s 123A BA was clearly introduced to reduce the need to refer matters to the court. Hence, it does not make sense that legislature would have intended that the relevant test under s 123(1)(b) BA should differ from that of s 123A BA as it would otherwise render the amended s 123(1)(b) BA out of sync with s 123A BA.

The application of s 123(1)(b) BA to ‘debts that have been proved’ was further made clear by Member of Parliament for Pasir Ris, Mr Ong Kian Min, who stated that:

I would also like to raise an ancillary point on the present section 123(1)(b) of the principle Act where there appears to be a typographical mistake. The word ‘paid’ in the second line of subsection (b) should read as ‘proved’. This may be a good opportunity to rectify this error.¹¹

The word ‘paid’ that Mr Ong was referring to is underlined above.¹² Under Mr Ong’s suggested method of rectification, the provision would read:

(c) that, to the extent required by the rules, the debts which have been proved and the expenses of the bankruptcy have all, since the making of the order, either been paid or secured for to the satisfaction of the court.

It can thus be seen that the legislative intent was for debts to be proved.

That having been dealt with, I turn then to the policy reasons why ‘debts’ should be taken to mean ‘debts which have been proved’. First, the modern view of bankruptcy law is that of a socially and economically efficient alternative to the piecemeal dismemberment of a bankrupt debtor’s estate.¹³ As such, the paramount consideration in bankruptcy is the protection of the debtor’s estate against the claims of his creditors by ensuring that all creditors holding the same priority of debts are treated equally. This protection is encapsulated by the statutory replacement of the pre-existing right by creditors to bring an action against the debtor with the statutory right to share proportionally in the distribution of the bankrupt’s estate. As such, it is fundamental to the notion of bankruptcy that after bankruptcy, creditors only retain the right to debts that have been proved. Given the above, it is submitted that there is no reason for the legislature to have detracted from this approach in relation to s 123(1)(b) BA.

Second, there is no prejudice caused to creditors when only the debts, which have been proved, are paid or secured before annulment is granted. Annulment differs from discharge. Unlike a discharge, the annulment only puts the bankrupt into the same position as if no bankruptcy order was made against him.¹⁴ Hence, the right of any creditors, who had chosen not to prove in the bankruptcy, to sue upon their debts is unaffected.¹⁵ Thus no prejudice is caused to these creditors. Further, since these creditors had chosen not to participate in the bankruptcy process, it should not matter whether their debts have been paid or secured before the annulment is granted.

Given the above, since the pre-condition before an annulment can be given under s 123(1)(b) BA is that all debts, which have been proved, have been paid or secured, an opportunity must have been given to all creditors to prove these debts. It would otherwise make a mockery of the statute if the bankrupt was able to argue that because no debts have been proved yet, then it would be sufficient to just pay off the debts owed to the petitioning creditor. To do so would then go against the very cornerstone of bankruptcy law¹⁶  — the pari passu doctrine that advocates that all those who are similarly placed must be treated equally.¹⁷

Hence, the only way to ensure equal treatment is that all creditors must be given the opportunity to prove their debts. The minimum requirement for the provision of this opportunity would be via the advertisement of the bankruptcy order, which should be done as soon as possible,¹⁸ and allowing for three months to pass from the date of the bankruptcy order for creditors to file their proof of debts.¹⁹

However, it is not uncommon for bankrupts to come to a settlement with the petitioning creditors shortly after bankruptcy has been ordered. These debtors then take out an application for annulment on the basis that their debts have been paid in full. As argued above, such applications should not be allowed to succeed unless all other creditors have had an opportunity of proving their debts. The reason for this can be seen clearly in the words of Fry LJ in Re Hester:²⁰

I conceive that one of the objects of this statute was, if not to put an end to, yet at least to discourage, private arrangements between a debtor and his creditors. Anyone who knows the history of the law of debtor and creditor of this country, knows that private arrangements between debtors and their creditors have often been scandalous, and that they have given opportunities for misrepresentation, for private bargains, and for undue preferences. I for one should pause long before I allow the evils of private arrangements between a debtor and his creditors to creep into the administration of this Act.²¹

Practically, what this would mean is that creditors who seek to utilise the bankruptcy procedure as a means of pressuring debtors into making payment should understand that once the debtor has been made bankrupt, the pari passu doctrine would supervene and it is no longer a matter just between the bankrupt and the petitioning creditors. Instead, the statutory framework would immediately protect the interests of all other creditors, whether or not they were involved in the instant bankruptcy proceedings. Similar, debtors who flagrantly delay in making payment should understand that once the bankruptcy order has been made, then it will no longer be sufficient to just settle their debts with the petitioning creditor. Hence, where the bankrupt seeks an annulment of the bankruptcy order prior to the three months after the making of the order, then the court must be satisfied that all of the provable debts, which have not yet been proved, must be paid or secured to its satisfaction before annulling the bankruptcy order.

Meaning of ‘Secured’ in Section 123(1)(b) BA

It would be appropriate at this juncture to move on to the second part of this article  — the meaning of ‘secured’. The word ‘secured’ has not been defined in the BA. However, it has been judicially defined in many instances. In particular, a debt is said to be secured where the creditor holds any security for the debt, whether a mortgage, charge, lien or other security over any property of the debtor.²² This list is clearly not exhaustive as security can take many forms.²³ It would include money paid into court to abide the possible proof of debts,²⁴ a bond entered into with approved sureties or the signing of a guarantor.²⁵ The key question to ask is whether the arrangements make the debt more readily recoverable.²⁶

It must further be noted that s 123(1)(b) BA provides that the court must be satisfied as to the security. Hence, it is not sufficient for annulment if the creditors are themselves satisfied. The court must be independently satisfied, although the fact that the creditors are themselves satisfied as to the security is a relevant factor to be taken into consideration. As such, where the debts are clearly not secured (eg instalment payment plan entered into between the bankrupt and the petitioning creditor or the bankrupt tenders post-dated cheques to the creditors),²⁷ then this cannot be sufficient to bring the bankrupt within s 123(1)(b) BA even if the creditors state on affidavit that they are satisfied that their debts are secured. The fact of the matter is simply that it cannot be said that the debts are secured to the satisfaction of the courts.

Lastly, I would add for the sake of completeness that as it is common for the realisation of the security to take time (while the test is applied as of the time of hearing), it is entirely possible for the security to be ultimately insufficient to cover the entire debt by the time it is realised. In such a case, given the nature of an annulment, the creditor would still be entitled to claim for the balance owed.

Conclusion

Once the bankruptcy order has been given, the focus of the courts has shifted. The concern is how to protect the creditors as a class and this is done best via the process of proof of debts. Hence, the bankrupt can only annul his bankruptcy status under s 123(1)(b) BA if he manages to pay or secure all the debts proved in bankruptcy to the satisfaction of the courts.

Vincent Leow^*

Assistant Registrar, Supreme Court