17 May, 2016
The Court of Appeal (“the CA”) recently affirmed the High Court’s decision that a statutory demand is not defective if it only specifies security held by the petitioning creditor which had been provided by the debtor in respect of the debt, and does not specify security which had been provided by a third party:
Chan Siew Lee Jannie v Australia and New Zealand Banking Group Ltd [2016] SGCA 23 (“Chan Siew Lee Jannie”).
Facts
The Respondent bank (“the Bank”) extended banking facilities in the sum of $7.8m to Timor Global LDA (“TG”), of which the Appellant was a shareholder and director.
By way of a letter of offer (“LO”), the facilities were to be secured by a pledge provided by TG over some of its assets, as well as a joint personal guarantee executed by TG’s directors. The LO also provided that the facilities must be immediately repayable with interest in the event of default. Each of TG’s directors (including the Appellant) executed a personal guarantee (“the Guarantee”) under which they contracted to pay all debts owed by TG to the Bank under the facilities.
Following TG’s default on the loan, the Bank successfully obtained summary judgment against all the directors of TG. The Bank served a statutory demand (“the SD”) on the Appellant for a sum of $6.5m, which also referred to an “all-monies” mortgage over a property in Singapore (“the Property”) that the Bank intended to enforce in satisfaction of the debt owed under the Guarantee. The Appellant co-owned the Property, which had been provided as security for a separate loan.
However, the SD did not specify the value of TG’s assets under the pledge (“the Third Party Security”).
After a breakdown in the parties’ negotiations, the Appellant applied to the High Court to set aside the SD under r 98(2) of the Bankruptcy Rules (“the Rules”) for non-compliance with r 94(5) of the Rules. The Appellant contended that r 94(5) required the nature and value of “any property of the debtor or any security for the debt” to be specified in the SD, but the details of the Third Party Security had been omitted from the SD.
The CA noted that the Bank would have been precluded from instituting bankruptcy proceedings against TG because the value of the pledged assets exceeded the sum claimed in the SD.
The Appellant also applied to obtain an extension of time to set aside the SD on the basis that the negotiations with the Bank had delayed her application, which was filed 70 days late. The High Court dismissed both applications, and the Appellant appealed against the High Court’s decision.
Decision
The CA dismissed the appeal and upheld the debtor’s security construction adopted by the High Court, namely, that the word “security” in r 94(5) of the Rules referred only to “security provided by the person against whom the creditor is proceeding in bankruptcy” (in this case, the Appellant), and not to “security which has been provided by a third party” (in this case, TG).
1 A. Meaning of the word “security”
The CA emphasised that the provisions in the Rules relating to the form of a statutory demand, in particular rr 94(5) and 98(2) (“the statutory demand rules”), must be read in the context of the requirements of the Bankruptcy Act (“
the Act”), in particular s 63 of the Act. The CA highlighted the following general principles:
1. The bankruptcy process is a method for the collective realisation of assets of the debtor to maximise recovery for the general body of creditors. Its key objective is therefore to bring the debtor’s assets within the control of the
court for efficient and cost-effective redistribution for the benefit of all unsecured creditors.
2. In the interests of fairness to the body of creditors as a whole, a petitioning creditor who institutes bankruptcy proceedings has no special claim to the bankrupt’s estate and “stands pari passu with the general body of creditors to await the proportionate recovery of his debts”.2
3. However, a secured creditor is not such a creditor and can continue to realise or otherwise deal with his security outside the bankruptcy process. Secured creditors are therefore excluded from the bankruptcy process unless, as required by ss 63(1) and 63(2) of the Act, they are willing to give up their security for the general benefit of the creditors as a whole. In this regard, the statutory demand rules mirror the position under s 63 of the Act.
4. The fact that a creditor holds third party securities is irrelevant and does not preclude the creditor from presenting a bankruptcy application for three reasons:
- such securities, even if given up, do not form part of the bankrupt’s estate divisible among his creditors;
- a “secured creditor” is defined in s 2 of the Act as one who holds a “mortgage, pledge, charge or lien on or against the property of the debtor or any part thereof as security for a debt due to him from the debtor”. The italicized phrase indicates that “the security in question must be supplied by the debtor himself and not by a third party”; and
- the statutory demand rules are not intended to exclude creditors who hold third party securities because, vis-à-vis the bankrupt, they do not stand in a better position than other unsecured creditors.
Accordingly, the CA held that the word “security” in rr 94(5) and 98(2)(c) of the Rules can only refer to “security which is provided by the debtor against whom bankruptcy proceedings are being taken” as it is “the only construction which makes sense in the light of the overall purpose and intent of the Act and its Rules– it is not only consistent with principle, it is also congruent with the text of the relevant provisions, and supported by authority”.4
B. Is the debtor’s security construction unfair?
The Appellant’s solicitor argued that since the security provided by TG was sufficient to discharge the debt, it would be “oppressive” and “unnecessarily punitive” to allow the Bank to commence bankruptcy proceedings against the Appellant.5
However, the CA rejected this argument and reaffirmed the settled position at common law that a creditor has “an unfettered election as to his remedies”.6
Moreover, there was no legal principle that a creditor must realise the security it holds in respect of a debt first, before issuing a bankruptcy application against a surety or guarantor.
The CA also rejected the alternative argument that “a creditor should only be allowed to proceed against a guarantor in bankruptcy if he would also have been able to proceed against the primary debtor in bankruptcy”.7
The CA held that on a proper construction of the principle of co-extensiveness, a guarantor’s liability must mirror that of the principal debtor, i.e. the quantum of the guarantor’s liability should be co-extensive with that of the principal debtor. However, this principle did not say anything “about whether guarantors should be equally vulnerable to whatever compulsory process of law the creditor might have at his disposal for the recovery of the debt”.8
On the facts, the CA observed that, regardless of the fact that TG had also provided security, the Appellant had covenanted under clause 1 of the Guarantee to be liable for the full sum owed by TG to the Bank “on demand as principal debtor and not merely as surety”.9
Moreover, under clause 9 of the Guarantee, the parties had agreed that “the Respondent may exercise its rights under the [G]uarantee without first taking proceedings against TG”.10
C. Extension of time to set aside the SD
Although the CA did not need to address this issue, the CA emphasised that parties’ entry into negotiations “does not and cannot stop time from running”, 11 and that necessary steps should be taken to preserve parties’ legal positions, should
settlement negotiations fail and they wish to pursue other legal options.
Conclusion
The CA’s decision re-affirms the position that third party securities held by a creditor do not preclude the creditor from presenting a bankruptcy application under Singapore’s bankruptcy regime. Not including such securities in the statutory
demand is not fatal to its validity, and will not entitle the debtor to set it aside.
Individuals who are requested to stand as a surety or guarantor should read the terms and conditions of the guarantee carefully, and should seek legal advice before agreeing to stand as a personal guarantor in order to secure the provision of banking facilities to a third party. Even though the third party itself may also provide security that exceeds the quantum of the loan, creditors may, in the event of a default by the principal debtor, elect to enforce the guarantee against the guarantor only. In that event, the guarantor will not be able to rely on the security pledged by the third party as the guarantor remains fully liable for the sum owed.
1 Chan Siew Lee Jannie at [3].
2 Chan Siew Lee Jannie at [19]-[20].
3 Chan Siew Lee Jannie at [23].
4 Chan Siew Lee Jannie at [34].
5 Chan Siew Lee Jannie at [35].
6 Chan Siew Lee Jannie at [39].
7 Chan Siew Lee Jannie at [45].
8 Chan Siew Lee Jannie at [45].
9 Chan Siew Lee Jannie at [48].
10 Chan Siew Lee Jannie at [40].
11 Chan Siew Lee Jannie at [50].
12 Chan Siew Lee Jannie at [50
Vernon Voon, Partner, RHTLaw Taylor Wessing
