Affin Bank Berhad v Abu Bakar Bin Ismail (NO:03(f)-05-10/2017 (W))

1 IN THE FEDERAL COURT OF MALAYSIA AT PUTRAJAYA (APPELLATE JURISDICTION) CIVIL APPEAL NO: 03(f)-05-10/2017 (W) BETWEN AFFIN BANK BERHAD … APPELLANT (FORMERLY KNOWN AS PERWIRA AFFIN BANK BERHAD) DAN ABU BAKAR BIN ISMAIL … RESPONDENT (NO. K/P: 540117-01-5829 / 4559118) [In the Court of Appeal of Malaysia at Putrajaya Appellate Jurisdiction No. W-03(IM)-18-02/2016 Between Affin Bank Berhad … Appellant (formerly known as Perwira Affin Bank Berhad) And Abu Bakar bin Ismail … Respondent] (No. K/P: 540117-01-5829 / 4559118) 2 CORAM: TENGKU MAIMUN BINTI TUAN MAT, CJ AZAHAR BIN MOHAMED, CJM DAVID WONG DAK WAH, CJSS ROHANA BINTI YUSUF, FCJ (now PCA) NALLINI PATHMANATHAN, FCJ Introduction [1] This appeal concerns the law on annulment of bankruptcy under section 105(1) of the Bankruptcy Act 1967 (“the BA 1967”). Background Facts [2] The appellant (“the Bank”) obtained a summary judgment against the respondent (“the debtor”) on 8.7.2004. Thereafter the Bank commenced bankruptcy proceedings against the debtor. The bankruptcy proceedings were resisted by the debtor wherein he filed –

(ii) Notice of Intention to oppose the Creditor’s Petition on 20.6.2012. [3] 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 3 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. [4] Following the dismissal of the debtor’s application to set aside the Bankruptcy Notice and to oppose the Creditor’s Petition, a Receiving Order and an Adjudication Order (“the AORO”) was recorded against him on 17.1.2013. [5] On 16.12.2013, the debtor filed an application to annul the AORO (“the first annulment application”) pursuant to section 105(1) of the Bankruptcy Act 1967 (“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. [6] In support of his first annulment application, the debtor averred that-

(ii) the damages awarded pursuant to the said Singapore judgment (if assessed) would have a value in excess of SGD$35 million; and

(iii) that he had various claims against third parties in Singapore and as a result of the AORO, he was prevented from conducting his cases in Singapore and that he had difficulties in paying legal fees in Singapore. 4 [7] On 7.1.2014, the registrar of the High Court dismissed the first annulment application. In her brief grounds of judgment the registrar made the following findings –

(ii) that the Singapore judgment was obtained after the AORO date and therefore could not be taken into account for an application under section 105 of the BA 1967;

(iii) that under section 105 of the BA 1967, the debtor has to prove that he ‘ought not to have been adjudged bankrupt’ at the time AORO was recorded against him which he had failed to prove;

(iv) that the debtor had failed to prove that he was solvent as at the date of the AORO; and

(ii) that the damages which was awarded against one Chenet Finance Limited was to be paid by Chenet Finance Limited to the Director General of Insolvency Malaysia (“DGI”) as the receiver of the debtor; and

(iii) that the debtor had been awarded costs of SGD$15,000.00. [10] The debtor thus alleged that he had assets in Singapore totalling SGD$12,684,960.97 (equivalent to RM33,551,721.76) which exceeded the Bank’s claim as admitted by the DGI, in the sum of RM8,342,774.10. [11] The second annulment application was allowed by the registrar of the High Court. The decision of the registrar was affirmed by the High Court judge. Against the decision of the High Court judge, the Bank appealed to the Court of Appeal. The appeal was dismissed. In dismissing the said appeal, the Court of Appeal held that:

(ii) when the Singapore judgment was delivered on 20.2.2013, the debtor had a right to apply under section 105(1) of the BA 1967 as there was sufficient evidence to show that he was solvent; 6

(iii) there was a change of circumstances as the DGI was not able to assess damages under the Singapore judgment since 17.1.2013; and

(iv) since there was a change of circumstances, res judicata does not apply. Proceedings in the Federal Court [12] The Bank obtained leave from this Court to appeal against the decision of the Court of Appeal on the following questions of law:

(ii) Whether the solvency of a debtor, under section 6(3) read with section 105(1) of the BA 1967, must necessarily relate to his ability to pay his debts as they became due, as at the time of the hearing of the creditor’s petition, and not relate to his ability subsequent to the receiving and adjudication orders made.

(iii) Where the adjudication and receiving orders 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 7 dismissed, does the principle of res judicata apply to preclude a second annulment application?

(iv) Where a debtor is able to recover monies subsequent to the proper making of the adjudication and receiving orders 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 Director General of Insolvency, for the settlement of his debts and to discharge his bankruptcy. [13] We had answered the first question in the negative and the second question in the affirmative. We found no necessity to answer the third and the fourth questions. We now provide our reasons. Parties’ Arguments [14] It was submitted for the Bank that the Court of Appeal erred –

(ii) in considering and taking into account the Singapore judgment of 20.2.2013 which took place subsequent to the making of the AORO and which had already been one of the grounds for the debtor’s failed first annulment application; and

(iii) in considering and relying on the DGI’s lack of ability in assessing damages in Singapore, which was not even raised as a ground under the second annulment application. 8 [15] For the debtor, learned counsel argued that the time to consider whether a bankruptcy order ought not to have been made at the date of the adjudication must be after such an order, not at the time of the order. To hold otherwise, submitted learned counsel, would be to frustrate the intent of section 105 which is to afford relief of annulment to a person adjudicated bankrupt. [16] Learned counsel for the debtor relied on Bungsar Hill Holdings Sdn Bhd v Dr Amir Farid Datuk Isahak [2005] 2 CLJ 809, where the Court of Appeal after reviewing the facts of the case and new evidence provided in the appeal regarding the debtor’s ability to pay his debt, exercised its discretion to annul the bankruptcy order. The decision of the Court of Appeal was affirmed by this Court. It was therefore posited for the debtor that the High Court registrar, the High Court judge and the Court of Appeal did not err in ordering/affirming the annulment of the bankruptcy order. Our Decision The first question [17] The issue in relation to the first question revolves on the point of time when the debtor is considered to be able to pay his debts. [18] Section 6 of the BA 1967 provides for proceedings and order on creditor’s petition where subsections (2) and (3) read: “(2) At the hearing the court shall require proof of –

(3) If the court is not satisfied with the proof of the petitioning creditor’s debt or of the act of bankruptcy or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or that for other sufficient cause no order ought to be made, the court may dismiss the petition.”. [19] The annulment of bankruptcy order is provided for in section 105 and subsection (1) of section 105 states: “(1) Where in the opinion of the court a debtor ought not to have been adjudged a bankrupt, or where it is proved to the satisfaction of the court that the debts of the bankrupt are paid in full, or where it appears to the court that proceedings are pending in the Republic of Singapore for the distribution of the bankrupt’s estate and effects among his creditors under the bankruptcy or insolvency laws of the Republic of Singapore and that the distribution ought to take place in that country, the court may annul the bankruptcy order.”. [20] The Court of Appeal, in affirming the decision of the High Court and in allowing the second annulment’s application had considered and accepted the argument raised by the debtor that he could pay his debts due to the Singapore judgment obtained subsequent to the AORO (“adjudication/bankruptcy order”) and subsequent to the dismissal of the first annulment application. 10 [21] Learned counsel for the debtor submitted that as in Bungsar Hill v Dr Amir Farid (supra), the debtor in the instant appeal had assets to satisfy his debt. [22] Given the reliance by the debtor on Bungsar Hill (supra), we will now examine the case. In Bungsar Hill (supra), the respondent/debtor had been a partner with two other doctors in a partnership called “Poliklinik Kotaraya”. The respondent had a 35% share in the partnership. In 1989, a dispute arose between the partners leading to the filing of several suits in court. On 13.3.1990, the High Court appointed two interim receivers and managers to manage the partnership pending final settlement of the dispute. The receivers were, among others authorised by the court to pay each of the partners a monthly allowance of RM4,000.00. On 30.11.1990, the appellant obtained summary judgment against the respondent for the sum of RM32,095.41 together with interest and costs. On 12.5.1993, a bankruptcy notice was issued. On 11.11.1993, the partners entered into a settlement agreement which among others provides for the appointment of interim receivers and managers “to receive and manage the affairs of the Practice pending the disposal of the Civil Suits …” and for the sale of the partnership. The bankruptcy notice was served on the respondent by way of substituted service on 31.1.1994 and on 29.7.1994, a creditor’s petition was filed. It was also served by way of substituted service on 11.5.1996. The creditor’s petition was heard by the senior assistant registrar of the High Court on 27.6.1995. The respondent did not appear nor contest the petition. The receiving order and adjudication order were thus made against the respondent. [23] On 10.1.1996, the respondent applied to set aside and to annul the receiving and adjudication orders on the sole ground that arising from the 11 dissolution of the partnership, monies would become due and payable to him upon the completion of the liquidation of the affairs of the partnership by the liquidator. [24] The senior assistant registrar of the High Court dismissed the respondent’s application to set aside the receiving and adjudication orders made against him. On the respondent’s appeal to the judge in chambers, the receiving and adjudication orders were set aside. The order of the learned judge was affirmed by the Court of Appeal. The appellant was granted leave by this Court to appeal on the following issues:

(1) whether the words “where in the opinion of the court a debtor ought not to have been adjudged bankrupt” in section 105(1) of the BA 1967 covered only technical grounds;

(2) whether the debtor’s “ability to pay his debt” was a legal ground that fell within the said provision;

(3) whether the respondent’s non-appearance at the hearing of the creditor’s petition disqualified him from making the setting aside application; and

(4) whether the learned judge was correct on the facts in finding that the respondent was solvent and able to pay his debt. [25] In delivering the judgment of this Court, Abdul Hamid Mohamed FCJ (as he then was) said at pg. 825: “(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 12 but also covers other legal grounds like an abuse of the process of the court.

(1) where in the opinion of the court the debtor ought not to have been adjudged bankrupt; or

(2) where the debts are paid in full. The first situation is relevant in our case. And, in considering whether a receiving order ought to have been made, the appellate court would consider the actual state of affairs at the date of the order and would, generally speaking, not take into account matters that had occurred after that date. In Re Dunn (A Bankrupt), ex p Official Receiver v Dunn [1949] Ch 640; [1949] 2 All ER 388, CA, Sir Raymond Evershed MR said at pg. 392: I think counsel for the Official is right in saying that, in judging whether the order ought to have been made, the court is entitled to have regard to the actual date of affairs at the date of the order, which may appear from evidence subsequently filed, and certainly would not appear from the bare statement on the formal petition which alone was before the 14 court when the order was made. I do not think, however, that one is entitled, in determining whether the order ought to have been made under the first limb of the subsection, to take into account facts which have occurred after the date of the order.”. [28] Similar principles were propounded by the English Court of Appeal in Paulin v Paulin and another [2010] 1 WLR 1057 where Wilson LJ stated thus at pg. 1074: “Section 272(1) of the 1986 Act provides “A debtor’s petition may be presented to the court only on the grounds that the debtor is unable to pay his debts.” Section 282(1) of the same Act provides: “The court may annul a bankruptcy order if it at any time appears to the court – (a) that, on the grounds existing at the time the order was made, the order ought not to have been made.” A reading of the above two subsections together yields the uncontroversial conclusion that a court may annul a bankruptcy order if it concludes that, on the date of that order, the bankrupt was able to pay his debts. But, even if it so concludes, the word “may” confers upon the court a discretion whether to annul the order.”. [29] The position is also clearly stated by the authors of Halsbury’s Laws of England 4th Ed Reissue, Vol 3(2) a p. 326-327 at para 598 and 599: “…The court may annul a bankruptcy order if it at anytime appears to the court:

(1) that, on the grounds existing at the time the order was made, the order ought not to have been made; or … … the grounds on which the order ought not to have been made must have been existing at the time the bankruptcy order was made.”. 15 [30] Thus, the authorities clearly established that the relevant date to consider whether the debtor is able to pay his debts is the date of the making of the AORO. [31] We therefore answered the first question in the negative. [32] Coming back to Bungsar Hill v Dr Amir Farid (supra), it was decided on its peculiar facts, in particular, when the bankruptcy order was made, the respondent/debtor was absent and there was already a settlement agreement which provides for the sale of the partnership. In the instant case, there was no evidence of the debtor’s solvency at the date of the bankruptcy order. After the decision of the Court of Appeal on the second annulment application, the solicitors for the Bank wrote to the debtor’s solicitors enquiring among others, the steps taken by the debtor to recover the judgment sum awarded by the Singapore High Court order dated 13.4.2015. Although there was a reply, the debtor’s solicitors did not address the Bank’s solicitors query as to the recovery effort. [33] Bungsar Hill v Dr Amir Farid is certainly not an authority to support the debtor’s contention that the date for consideration whether a debtor ought not to have been adjudged a bankrupt, is after the bankruptcy order was made. The position taken by the debtor goes against the principle of law. [34] Insofar as the DGI’s inability to assess damages pursuant to the Singapore judgment is concerned, with respect, we found that to be a non-issue. The DGI is not expected to pursue legal actions already instituted by the bankrupt prior to his bankruptcy. We noted that the DGI lack funds and resources and that most bankrupts would seek leave of the DGI to 16 appoint solicitors to represent his estate in such litigation and more often than not, the DGI would grant leave or sanction. Indeed in the instant case, the debtor did engage lawyers in Singapore during his bankruptcy, presumably with the sanction of the DGI, to have the damages assessed, which led to the Singapore High Court assessment order dated 13.4.2015. The second leave question [35] The second question is whether the solvency of a debtor under section 6(3) read with section 105(1) of the BA 1967 must necessarily relate to his ability to pay his debts as they became due, as at the time of the making of the AORO and not to his ability subsequent to the making of the bankruptcy order. [36] The debtor alleged that he was solvent premised on the Singapore judgment dated 20.2.2013, which he claimed would be more than SGD$ 35 million. The debtor’s contention found favour with the Court of Appeal. This same Singapore judgment was relied upon by the debtor in his first annulment application. And the High Court and the Court of Appeal dismissed the debtor’s first annulment application. [37] There are thus two Court of Appeal decisions. The first decision dated 17.9.2014 was in respect of the first annulment application where despite the Singapore judgment, the Court of Appeal found that the debtor was not solvent as at the date of the AORO. The second decision dated 6.3.2017 was the decision appealed against in the instant case where the Court of Appeal formed the view that the debtor was solvent based on the Singapore judgment and that the debtor had the right to apply for an annulment under section 105(1) of the BA 1967. 17 [38] As set out above, this Court in Bungsar Hill v Dr Amir Farid (supra) held that the material date to determine the solvency and ability of the debtor to pay his debts was the date when the creditor’s petition was heard and the AORO made. What then is the definition or meaning of “debtor was able to pay his debt” or the test of solvency or the ability of an individual to pay his debts? [39] In a corporate insolvency case of Lian Keow Sdn Bhd (in Liquidation) & Anor v Overseas Credit Finance (M) Sdn Bhd & Ors [1988] 2 MLJ 449 at 454, the Supreme Court held as follows: “In short, the question is not whether the debtor’s assets exceed his liabilities as appeared in the books of the debtor, but whether there are moneys presently available to the debtor, or which he is able to realize in time, to meet the debts as they become due. It is not sufficient that the assets might be realizable at some future date after the debts have become due and payable.”. [40] In Sri Hartamas Development v MBF Finance Bhd [1992] 1 MLJ 313, the respondent obtained judgment against the appellant. A demand under section 218(2)(a) of the Companies Act 1965 was then served on the appellant. As the appellant failed to pay the debt demanded, the respondent presented a winding up petition against the appellant, on the ground that having failed to comply with the statutory demand, the appellant was presumed insolvent and unable to pay its debts. The High Court granted the winding up order against the appellant. It was concluded that the appellant had not rebutted the statutory presumption. 18 [41] The appellant appealed to the Supreme Court where it was contended that the learned judge below had applied the wrong legal test and that the correct test should be whether the appellant would be capable, if necessary, of paying all its debts by a realization of its assets, including any immoveable property. [42] The Supreme Court dismissed the appellant’s appeal. Gunn Chit Tuan SCJ said: “In this case, the presumption of insolvency arises when the requirements of s 218(2)(a) of the Act have been satisfied and it is for the company to prove that it is able to pay its debts. In dealing with ‘commercial insolvency’, that is, of a company being unable to meet current demands upon it, we would respectfully follow the Privy Council in the Malayan Plant Case and cite the following observations from Buckley on the Companies Act (13th Ed) at p 460: In such a case it is useless to say that if its assets are realized there will be ample to pay twenty shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realizable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound up. Applying the test in the above-quoted observations, we therefore held that the learned judge had exercised his discretion correctly in ordering the appellant to be wound up.”. [43] Similar principles on the test of commercial insolvency were enunciated in the Court of Appeal decisions in Gulf Business Construction 19