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    02:01 AM Mitchell Yeo (Associate, Rajah & Tann Singapore LLP)

    Bankruptcy: the statutory demand and the security held by the creditor - Chan Siew Lee Jannie v Australia and New Zealand Banking Group Ltd [2015] SGHC 157

        

    Facts

    The Plaintiff was a debtor of the Defendant bank. The Defendant had made a loan to Timor Global LDA (“TGL”), in respect of which TGL provided security by pledging its assets to the Defendant. The Plaintiff, as a shareholder and director of TGL, had executed a personal guarantee in favour of the Defendant. TGL defaulted on the loan, and the Defendant obtained judgment against the Plaintiff on the guarantee. When the Plaintiff failed to satisfy the judgment, the Defendant served a statutory demand on the Plaintiff. The Plaintiff then applied to:

    (a) obtain an extension of time to apply to set aside the statutory demand; and

    (b) set aside the statutory demand under r 98 of the Bankruptcy Rules.

    Relevant rules of the Bankruptcy Rules

    Under r 98(2)(c) of the Bankruptcy Rules, the Court shall set aside the statutory demand if:

    “it appears that the creditor holds assets of the debtor or security in respect of the debt claimed by the demand, and either rule 94(5) has not been complied with, or the court is satisfied that the value of the assets or security is equivalent to or exceeds the full amount of the debt …”

    (emphasis added)

    Rule 94(5) goes on to state:

    “If the creditor holds any property of the debtor or any security for the debt, there shall be specified in the demand –

    (a) the full amount of the debt; and

    (b) the nature and value of the security or the assets

    ...”

    (emphasis added)

    Application to set aside the statutory demand

    The proper meaning of “security” had been settled in Re Loh Lee Keow and another, ex parte Keppel TatLee Bank Ltd [2000] 3 SLR(R) 283 and Sia Leng Yuen v HKR Properties Ltd [2001] 3 SLR(R) 587; it refers only to security on the property of the debtor in the bankruptcy proceedings. The Plaintiff’s position was that the statutory demand should be set aside under r 98(2)(c) because the security offered by TGL ought to have been listed in statutory demand. The Plaintiff argued that Re Loh Lee Keow and Sia Leng Yuen were wrongly decided and the security offered by TGL was a “security” within the meaning of rules 94(5) and 98(2)(c) because “security” referred to all security held by the creditor in relation to the debt:

    The High Court rejected the Plaintiff’s arguments:

    (a) The Plaintiff first argued that the overarching object of the Bankruptcy Act was to give debtors an opportunity to make a fresh start in their financial matters while recognising the rights of the creditors (at [12]). Therefore, on a purposive interpretation of rules 94(5) and 98(2)(c), all security held by the creditor in relation to the debt should be listed in the statutory demand. The High Court disagreed, holding that the Bankruptcy Act aimed to balance and protect the interests of debtors, bankrupts, creditors and society. Therefore, the debtor should not be able to rely on security which he has not provided (having been provided by another party) to lower his indebtedness (at [13]-[16]).

    (b) The Plaintiff’s second argument was that it was unfair to only require security on the property of the debtor to be listed in the statutory demand. This was because if both guarantor and principal were to come under the bankruptcy regime, a guarantor could end up worse off than the principal because the creditor would have to take into account the security given by the borrower against the borrower, but would not have to do so against the guarantor (at [10]). The Court disagreed, holding that this was in fact the intention of the legislation, to have rules which ensured that security given to creditors were reserved to reduce the indebtedness of the party providing the security, and not the indebtedness of other parties. It was not unfair that a debtor was not permitted to rely on security put up by another party. This was consistent with the aim of the Bankruptcy act to strike a balance between the interests of the debtor, the creditor, and society (at [18]).

    Senior Judge Kan Ting Chiu also observed that the position at law was the same in England, that the security contemplated by the equivalent bankruptcy rule in England was one provided by the debtor (at ([9]). His Honour also reiterated the reasoning of Woo Bih Li JC (as he then was) in Re Loh Lee Keow at [33], that it did not make sense that while the creditor’s bankruptcy application did not have to mention a security on the property of a third party, the Court should be obliged to take the third party’s security into account in deciding whether to make a bankruptcy order on hearing the petition (at [6] and [17]).

    Application to extend time

    Under r 97(1)(a) of the Bankruptcy Rules, an application to set aside a statutory demand may be made within 14 days from the date the statutory demand was served. In the present case, the Plaintiff was 70 days late in filing her application, giving the reason that she had taken steps to set aside the statutory demand only after negotiations with the Defendant had broken down.

    In determining whether to grant the extension, Senior Judge Kan Ting Chiu (at [22]) applied the factors in Rafat Ali Rizvi v Ing Bank Hong Kong Branch [2011] SGHC 114:

    (a) the period of the delay;

    (b) the reasons for the delay;

    (c) the grounds for setting aside the statutory demand; and

    (d) the prejudice that may result from an extension of time

    Although little or no prejudice would result if time were extended, the Senior Judge refused to grant the extension of time. This was because the 70 days’ delay was substantial, and the reason for delay was unsatisfactory because there was no agreement that there would be no need to apply to set aside the statutory demand while negotiations were ongoing. Further, the grounds for setting aside the statutory demand were unsound (at [23]).

    Conclusion

    Chan Siew Lee Jannie is a welcome decision for it further cements the position at law that only security on the property of the debtor needs to be stated in the statutory demand. Taken together, the reasoning in Chan Siew Lee Jannie, Re Loh Lee Keow and Sia Leng Yuen is unimpeachable and this writer doubts that any successful challenge could be mounted. This writer would only add, for the avoidance of doubt, that the security on the property of the debtor should also be in respect of the debt claimed in the statutory demand: see Goh Chin Soon v Oversea-Chinese Banking Corporation Limited [2001] SGHC 17 at [9]-[12].

    * This blog entry may be cited as Mitchell Yeo, “Bankruptcy: the statutory demand and the security held by the creditor”, Singapore Law Blog (8 October 2015) (http://www.singaporelawblog.sg/blog/article/139)

    ** A PDF version of this entry may be downloaded here

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