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©By Fiona Lee

It is not the intention of the bankruptcy legislation to imprison a man within its confines forever [Anandarajah, Parwani, Chan, Subramanian, Law and Practice of Bankruptcy in Singapore and Malaysia, 1999]. As explained by the court in Re Stern, ex parte Kayser Ullman & Ors [1982] 2 ALL ER 600, the underlying principle in bankruptcy is:

"The modern law of bankruptcy has its origins in a number of Victorian statutes which were intended to relieve those in financial difficulties from the burden of debt and the possibilities of loss of liberty in a debtors' prison and to enable them to make a fresh start free from debt. The price they had to pay for these benefits was the surrender to their creditors of all their property save the tools, if any, of their trade and the wearing apparel, and bedding of themselves and their families. It was recognised, however, that not all debtors were victims of misfortune. Some were rogues, some were fools and some were willing to risk other people's money when trying to make their own misfortunes. For over a hundred years, the law has required the bankruptcy court to consider whether the conduct of the bankrupt has been such that the public ought to be protected against his further operations for a period of time or even permanently."

Thus, bankruptcy terminates either upon the annulment of the bankruptcy order or upon the bankrupt obtaining a discharge from bankruptcy.

ANNULMENT OF BANKRUPTCY ORDER

The power to annul bankruptcy orders vests in the court. The exercise of that power is discretionary and this is evident from the use of the word 'may' in the sections on the court's power to annul bankruptcy orders.

The court may annul a bankruptcy order on the following grounds:

1. if the bankruptcy order ought not to have been made [s 105(1) Bankruptcy Act 1967];

2. if the bankrupt has settled his debts in full [s 105(1) Bankruptcy Act 1967];

3. if proceedings are pending in the Republic of Singapore for distribution of assets ought to be under the bankruptcy or insolvency laws of the Republic of Singapore [s 105(1) Bankruptcy Act 1967];

4. if the bankrupt's offer of composition or scheme of arrangement has been accepted by creditors and approved by the court [s 26(2) Bankruptcy Act 1967]; or

Under Section 105 (1) of the Bankruptcy Act 1967, the onus is on the bankrupt to satisfy the court that he ought not to have been made a bankrupt. Accordingly, the court may annul the bankruptcy order on the ground that it ought not to have been made, in the following cases:

1. where the bankruptcy proceedings constituted an abuse of process;

2. where the basis of the bankruptcy petition or the evidence upon which bankruptcy order was made turned out to be untrue;

3. where the debtor was a minor when the bankruptcy order was made.

In the recent case of Bungsar Hill Holdings Sdn Bhd v. Dr Amir Farid Datuk Isahak [2005] 2 AMR 749, the Federal Court dismissed the appeal by the judgment creditor against the decision of the Court of Appeal in upholding the decision of the learned High Court Judge in annulling the adjudication order and rescinding the receiving order. The learned High Court Judge made it clear that he was exercising his discretionary power under the first limb of s 105(1) of the Bankruptcy Act 1967 ("the Act") when he said:

"On that premises, I came to the conclusion that the debtor ought not to have been adjudged bankrupt because, at the time that he was adjudged a bankrupt, he was a person who was able to pay his debts, which is a ground under sub-section (3) of s 6 for refusing a petition. I was of the view that a debtor is able to pay his debts for the purposes of sub-section (3) of s 6 if he is solvent, that is to say, he has enough assets to meet his debts because that would be as good as requiring that he actually settles his debts to prove that he is able to pay his debts. But it must be borne in mind that when a petition is dismissed under sub-section (3) of s 6 on the ground that the debtor is able to pay his debts, he would not have actually paid his debts."

Abdul Hamid b Mohamad, FCJ in delivering the judgment of the Federal Court held, "To summarise I would answer the more important questions posed this way:

(a) the phrase "where in the opinion of the court a debtor ought not to have been adjudged bankrupt, ..." covers not only purely technical grounds like defective service of the bankruptcy notice or the creditor's petition but also covers other legal grounds like an abuse of the process of the court.

(b) While the debtor's "ability to pay his debt" may not be a "technical ground", it is a "legal ground" which falls within the scope of the said phrase;

(c) In the circumstances of this case, the fact that the debtor did not appear at the hearing to contest the petition does not disqualify him from applying for the annulment of the adjudication order pursuant to s 105(1) of the Act;

(d) On the facts of this case, there is no reason for this court to interfere with the findings of fact of the Learned judge that the respondent was solvent and was able to pay his debt or with the exercise of his discretion."

DISCHARGE FROM BANKRUPTCY

Section 33 of the Act provides for a discharge by the Court. It is therefore provided that at any time after the making of the bankruptcy order, the bankrupt may apply to court for an order of discharge. A bankrupt intending to apply for his discharge shall produce to the court a certificate from the. Director General of Insolvency [DGI] specifying the number of creditors of whom the bankrupt has notice, whether the creditors have proved or not. The court shall appoint a day for the hearing of the application. The registrar shall 28 days before the hearing of the application give notice of the time and place of the hearing to the DGI. The registrar shall forthwith send a copy of such notice to each creditor who has proved within 14 days before the hearing.

If a creditor who has proved intends to oppose the discharge of a bankrupt, he shall give notice of the intended opposition stating the grounds thereof to the DGI at least three days before the date of hearing of the discharge application. At the hearing of the application, the court shall take into consideration a report of the DGI as to the bankrupt's conduct and affairs including a report as to the bankrupt's conduct during the proceedings under his bankruptcy.

The granting of a discharge is entirely at the discretion of the court. The court shall have to take into consideration the said DGI's report, where the contents of the report of the DGI is prima facie evidence of the statements therein.

In all cases where it is proved to the satisfaction of the court that the bankrupt has committed an offence under the Act or under any written law repealed by it, or under sections 421 - 424 of the Penal Code, the court shall, unless for special reasons it determines otherwise, either refuse the discharge or suspend the operation of the order until a dividend of not less than 50% has been paid to the creditors and on proof of any of the facts mentioned in section 33(6) of the Act, the court shall either:

1. refuse the order; or

2. suspend the operation of the order for a specified time; or

3. suspend the operation of the order until a dividend of not less than 50% has been paid to the creditors; or

4. grant an order of discharge subject to such conditions as aforesaid. The conditions that may be imposed include conditions in respect of post-discharge income received or property acquired by the bankrupt.

The offences referred to under Sections 421, 422, 423 and 424 of the Penal Code includes dishonestly or fraudulently removing or concealing property to prevent it from distribution among creditors; dishonestly or fraudulently preventing any debt or demand due from being made available according to law for payment of debts; and dishonestly or fraudulently executes a deed of transfer which contains false statement of consideration.

Examples of the facts referred to in section 33(6) of the Act includes a bankrupt who omits to keep such books of account ' as will sufficiently disclose his business transactions and financial position within 3 years immediately preceding his bankruptcy, or within such shorter period immediately preceding that event as the court deems reasonable in the circumstances; or a bankrupt who continues to trade after knowing, or having reason to believe, himself to be insolvent; or a bankrupt who has within 3 months preceding the date of the receiving order, when unable to pay his debts as they become due, given an undue preference to any of his creditors.

In the exercise of its discretion under section 33 of the Act, the court must have regard to the following factors:

1. Public interest and commercial morality.

2. The interests of the bankrupt and his creditors.

3. The bankrupt's conduct prior to and during his bankruptcy.

4. Whether the bankrupt has committed any offence under the Act.

5. Whether the bankrupt has committed an offence under sections 421 - 424 of the Penal Code.

6. Whether the bankrupt has done any of the acts specified under section 33(6) of the Act (Re Mohana Sundari D/O M Subramaniam; Ex p United Prime Corp Bhd [2004] 5 MLJ 227).

In addition, the court may also take into account the following factors:

1. The age of the bankrupt.

2. The period of bankruptcy.

3. The cause of the bankrupt's insolvency and his 'culpability' in the incurring of his debts.

4. The magnitude of the deficiency in the bankruptcy estate, that is, the value of the bankrupt's assets against his total liabilities.

5. The number of creditors.

6. Objections to the application.

7. Bankrupt's domestic, social and financial circumstances.

8. Contributions made by the bankrupt for the benefit of his creditors.

In the recent High Court decision of Public Bank v. Kok Lee Wah [2004] 4 MLJ 433, the decision of the Senior Assistant Registrar for an absolute discharge when some debts was still unpaid was upheld by the court. Suriyadi J held that the bankruptcy was brought about by circumstances beyond the Bankrupt's control and the unfortunate factor which was instrumental for her misfortune not be held against her but should instead be viewed as a plus factor in her attempt to get back on her feet.

Section 33A of the Act provides that the DGI may, in his discretion but subject to objection by the creditors, issue a certificate discharging a bankrupt from bankruptcy, after a period of 5 years has lapsed since the date the receiving order and the order by which he was adjudged a bankrupt were made. Notice of every discharge under section 33A of the Act shall be given by the DGI to the registrar and the DGI shall advertise the notice in a local newspaper.

Section 33B of the Act provides that before issuing a certificate of discharge under section 33A, the DGI shall serve on each creditor who has filed a proof of debt a notice of his intention to issue the certificate. A creditor who has been served with the said notice and who wishes to object to the issuance of a certificate discharging the bankrupt shall, within 21 days from the date of service of the notice, furnish a notice of objection stating the grounds of objection. Failure to furnish such a notice of objection by a creditor shall be deemed to have no objection to the discharge. If the notice of objection has been rejected by the DGI, the creditor shall have 21 days to make an application to the court for an order prohibiting the DGI from issuing a certificate of discharge. The court, on hearing such an application by the creditor whose notice of objection has been rejected by the DGI, shall hear the DGI and the bankrupt before making an order on the application. The court may, if it thinks it just and expedient either dismiss the application or make an order that for a period not exceeding 2 years a certificate of discharge shall not be issued by the DGI.

CONCLUSION

After reading the cases referred to above, one can easily see that the courts are more willing to step in to annul an adjudication order, rescind a receiving order or even discharge a bankrupt from bankruptcy as long as the bankrupt is able to show either that he is able to pay his debts, although he would not have actually paid his debts or the bankruptcy was brought about by circumstances beyond the Bankrupt's control, as in the latter case. It is foreseeable, unless the Federal Court steps in and distinguished the judgment in the Bungsar Hill Holding's Sdn Bhd case, there will be more and more bankrupts flooding the courts with applications for annulment of the adjudication orders made against them just by showing that they were solvent i.e. some money tied up somewhere, at the time the adjudication orders were made against them, and just because they are unable to currently repay the debts, they should not be adjudged bankrupt.