Introduction
The Federal Court recently discussed the position of law on the annulment of bankruptcy under s. 105(1) of the Bankruptcy Act 1967 ("the BA 1967").
Brief Facts
The appellant (‘the Bank’) obtained a summary judgment against the respondent (‘the debtor’) on 8 July 2004. Thereafter the bank commenced bankruptcy proceedings against the debtor. The bankruptcy proceeding was resisted by the debtor wherein he filed an application to set aside the bankruptcy notice and notice of intention to oppose the creditor's petition. The High Court dismissed his application to set aside the bankruptcy notice. The decision of the High Court was affirmed by the Court of Appeal. The debtor's attempt to oppose the creditor's petition also suffered the same fate. His notice of intention to oppose the creditor's petition was dismissed by the High Court and was upheld by the Court of Appeal. The Bank then obtained a receiving order and an adjudication order (‘the AORO’) against the debtor on 17 January 2013.
On 16 December 2013, the debtor filed an application to annul the AORO ("the first annulment application") pursuant to s. 105(1) of the BA 1967. The first annulment application was made on the ground that the debtor ought not to have been adjudged a bankrupt as he was solvent and that he had the means to repay his debts. He had assets in Singapore in the form of a Singapore Court of Appeal judgment (‘the Singapore judgment’) dated 20 February 2013 which was granted in his favour.
The High Court dismissed the first annulment application mainly on the ground that in an annulment application, the material date for consideration is the AORO date, since the Singapore judgment was obtained after the AORO date and therefore could not be taken into account for an application under s. 105 of the BA 1967.
Dissatisfied with the decision of the Registrar, the debtor appealed to the High Court, which appeal was allowed. However, on appeal by the bank to the Court of Appeal, the decision of the High Court was reversed and the AORO was restored.
After 9 months, the debtor filed the second annulment application and alleged that he had assets in Singapore totaling SGD$12,684,960.97 (equivalent to RM33,551,721.76) which exceeded the Bank's claim as admitted by the Director-General of Insolvency (DGI). The second annulment application was allowed by the Registrar of the High Court. The decision of the Registrar was affirmed by the High Court. Against the decision of the High Court, the Bank appealed to the Court of Appeal. The appeal was dismissed. In dismissing the appeal, the Court of Appeal held that despite the AORO was rightly made, there was a change of circumstances when the Singapore judgment was delivered on 20 February 2013. The debtor had a right to apply under s. 105(1) of the BA 1967 as there was sufficient evidence to show that he was solvent. Dissatisfied with the decision, the Bank apply for leave to appeal against the decision of the Court of Appeal at the Federal Court on the following issues.
Questions of Law before the Federal Court
The following questions of law were raised for determination by the Federal Court:-
Where the court had already found that the adjudication and receiving orders had been rightly made, whether the court may subsequently annul the AORO under s. 105(1) of the BA 1967, on the basis that such orders "ought not to have been made", based on new arguments regarding the debtor's ability to pay his debts or subsequent change of circumstances?
Whether the solvency of a debtor, under s. 6(3) read with s. 105(1) of the BA 1967, must necessarily relate to his ability to pay his debts as they become due, as at the time of the hearing of the creditor's petition, and not relate to his ability subsequent to the AORO made.
Where the AORO have been made on the basis that the debtor is unable to pay his debts and where the debtor's first application for the annulment of the adjudication and receiving orders have already been dismissed, does the principle of res judicata apply to preclude a second annulment application?
Where a debtor is able to recover monies subsequent to the proper making of the AORO against him, whether the court ought to allow his application to annul the adjudication and receiving orders, rather than for him to forward such monies to the DGI, for the settlement of his debts and to discharge his bankruptcy.
Decision of the Federal Court
YAA Tengku Maimun Tuan Mat CJ in delivering the judgment of the Federal Court held inter-alia that :
The relevant date to consider whether the debtor was able to pay his debts was the date of the making of the AORO. There was no evidence of the debtor's solvency at the date of the bankruptcy order. The case of Bungsar Hill Holdings Sdn Bhd v. Dr Amir Farid Datuk Isahak [2005] 2 CLJ 809 was certainly not the authority to support the debtor's contention that the date for consideration whether a debtor ought not to have been adjudged a bankrupt, was after the bankruptcy order was made. The position taken by the debtor went against the principle of law.
The solvency of a debtor, under s. 6(3) read together with s. 105(1) of the BA must necessarily relate to his ability to pay his debts as they become due, at the time of hearing of the creditor's petition. No consideration ought to be given to the debtor's ability to pay his debts based on subsequent change of circumstances. If at all, any change of circumstances post the AORO i.e. any recovery of monies by the debtor would offer the debtor an opportunity to pay the debts in full which would enable him to obtain an annulment order, having made such full payment. However, this was not done. The debtor made no payment to satisfy the judgment debt.
In consequence of the above, the Federal Court answers to:-
Question (i) is that the relevant date to consider whether the debtor is able to pay his debts is at the time of the hearing of the creditor's petition, when the AORO was made and in the circumstances of this case the AORO Order was rightly made on 17 January 2013 as at that material time the Singapore Judgment was not in existence;
Question (ii) is that the test for the solvency of a debtor must be of the debtor's ability to pay his debts as they become due, as at the time of the hearing of the creditor's petition, when the AORO was made. The argument of learned counsel for the debtor that the time to consider whether a bankruptcy order ought to have been made, must be after such an order and not at the time of the order, is against the established principles of law;
Question (iii) need not be answered because having found that AORO was rightly made, the Court of Appeal erred in taking into consideration the Singapore judgment obtained after the AORO, which was not material to determine the solvency of the debtor at the date the AORO was made. The decision of the Court of Appeal in allowing the second annulment application by the debtor was, with respect contrary to the established principles of law and warrants appellate intervention; and
Question (iv) need not be answered because at the time the AORO was granted against the debtor, there was no evidence that he was solvent. No consideration ought to be given to the debtor's ability to pay his debts based on subsequent change of circumstances. If at all, any change of circumstances post - AORO i.e., any recovery of moneys by the debtor would offer the debtor an opportunity to pay the debts in full which would enable him to obtain an annulment order, having made such full payment. But this was not done. The debtor made no payment to satisfy the judgment debt.
Conclusion
In sum, the following are the principles laid down by the Federal Court:-
Under any bankruptcy proceedings, the relevant date to consider whether the debtor was able to pay his debts was the date of the making of the AORO and not any other or future date or any date after the bankruptcy order was made.>
The solvency status of a debtor, under s. 6(3) read together with s. 105(1) of the BA must necessarily relate to his ability to pay his debts as they become due, at the time of hearing of the creditor's petition and AORO. No consideration ought to be given to the debtor's ability to pay his debts based on subsequent change of circumstances.
If at all, any change of circumstances post the AORO i.e., any recovery of monies by the debtor would offer the debtor an opportunity to pay the debts in full which would enable him to obtain an annulment order, having made such full payment to the petitioner.
The DGI is not expected to pursue legal actions already instituted by the bankrupt prior to his bankruptcy due to lack funds and resources and that most bankrupts would seek leave of the DGI to appoint solicitors to represent his estate in such litigation and more often than not, the DGI would grant leave or sanction.
For further advice on the above, you may contact Cik Azreen Latif at 03-2171 1484 or at 03-2171 1484 or at mail@azamlaw.com.
