Singapore – What Is The “Security” That Is Required To Be Specified In A Statutory Demand Under The Bankruptcy Rules?

 

Under r 98(2)(c) of the Bankruptcy Rules (“BR”), the court shall set aside a statutory demand, if the creditor holds “security in respect of the debt” claimed in a statutory demand, and the court is satisfied that the value of such security is equivalent to or exceeds the full amount of the debt. Is the court required to set aside a statutory demand under r 98(2)(c) if it does not disclose the security offered by a third party, but only the security offered by a debtor? The meaning of “security” under r 98(2)(c) of the BR was recently re-examined in the recent High Court case of 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 Bank”). In the course of its business, the Bank extended a loan to Timor Global LDA (“TGL”), a company incorporated in Timor-Leste. Under the terms of the loan, TGL pledged its assets to the Bank (“TGL’s Security”). The plaintiff, a shareholder and director of TGL, executed a personal guarantee with the other directors of TGL in favour of the Bank.

 

Following TGL’s default on the loan, the Bank commenced legal action against the guarantors and obtained judgment against the plaintiff. When the plaintiff did not satisfy the judgment, the Bank served a Statutory Demand (“SD”) issued under r 94 of the BR on the plaintiff. The SD did not specify TGL’s Security.

 

Subsequently, the plaintiff applied to court to set aside the SD, and to obtain an extension of time to do so as her application was filed 70 days late. The plaintiff’s reason for not filing the application to set aside the SD on time was that she had been involved in negotiations with the Bank to forbear from presenting a bankruptcy petition against her.

 

Decision

 

The High Court dismissed both applications.

 

Setting aside The SD

 

The plaintiff’s case was that the word “security” in r 98(2)(c) of the BR should refer to all security held by the Bank, as creditor, vis-à-vis the debt (“the All-Security Construction”). Hence, the SD should be set aside as it did not list TGL’s Security.

 

On the other hand, the Bank took the position that the word “security” referred only to security provided by the debtor to whom the SD was issued (“the Debtor’s-Security Construction”), in this case the plaintiff’s personal guarantee. This position was supported by two prior Singapore High Court decisions, which held that the word “security” meant “security on the property of the debtor in the bankruptcy proceedings”. In one of those cases, a key reason given for this view was that it would be illogical for the court to take the third party’s security into account in deciding whether to make a bankruptcy order, when it was not necessary to mention the same in the creditor’s petition.

 

In this case, the High Court agreed with the settled position in the two previous cases and rejected the plaintiff’s two arguments that both cases had been decided wrongly.

 

Firstly, the High Court took the position that the overarching object of the Bankruptcy Act (“BA”) and the BR was not to give debtors “an opportunity to make a fresh start in their financial matters while recognizing the rights of the creditors”. Although the bankrupts’ recovery of their financial status was one of the objects of the BA, Ministerial speeches in Parliament indicated that the BA was intended to “balance and protect the interests of debtors, bankrupts, creditors and society”. Such a balance would not be achieved by interpreting the word “security” to enable the debtor to “rely on security which he has not provided, but has been provided by another party, to lower his indebtedness”.

 

Moreover, there were no strong and compelling reasons for interpreting the word “security” in r 98(2)(c) of the BR differently from the construction of provisions in the BA. The All-Security Construction did not make sense when examined against the provisions of the BA and the BR and ignored the clear logic behind the Debtor’s-Security Construction, which was the only possible construction.

 

Secondly, the plaintiff contended that where both the guarantor and the borrower came under the bankruptcy regime, a guarantor could end up being worse-off than the principal because the creditor has to take into account the assets pledged by the borrower in bankruptcy proceedings against the borrower but does not have to do that in bankruptcy proceedings against the guarantor.

 

However, the High Court held that the Debtor’s-Security Construction did not result in unfair consequences. It observed that an English Court of Appeal decision had adopted the same construction because if the word “security” in the equivalent English provision referred to a security offered by a third party, such a security was “not over an asset which can have any effect on the bankrupt estate of the particular debtor”. Hence, if the positions were reversed and the guarantor had provided the security, this security would not be considered in bankruptcy proceedings against the borrower.

 

In addition, the High Court held that the Debtor’s Security Construction was consistent with the legislative intention “to strike a balance between the interests of the debtor, the creditor, and society”. Such a balance would be reflected by “[r]ules which ensure that assets pledged to creditors to secure loans are reserved to reduce the pledgors’ indebtedness, and not the indebtedness of other parties”. Although a party in the plaintiff’s position might consider the Debtor’s Security Construction to be unfair, it was “not really unfair that a debtor is not permitted to rely on security put up by another party”.

 

Extension Of Time To File SD

 

The High Court held that the plaintiff’s 70-day delay in filing the SD was substantial as under r 97(1)(a) of the BR, the application to set aside the SD should have been made within 14 days from the service of the SD. The High Court found that the reason given for the delay was unsatisfactory because the parties did not agree that it was unnecessary to apply to set aside the SD while negotiations were on-going. Hence, the plaintiff did not establish a case for time to be extended.

 

Conclusion This case serves as a timely reminder for directors and/or shareholders to be careful and seek legal advice before agreeing to stand as a personal guarantor to a loan taken out by the company. Such personal guarantees are easily enforceable by the creditor and the debtor will not be able to rely on security pledged by a third party as a ground to set aside a SD issued by the creditor under the BR.

 

A debtor to whom a SD had been issued should also comply with the statutory timelines to set aside the SD. If a debtor wishes to preserve his/her right to apply to set aside a SD beyond the time prescribed by the BR, explicit consent should be obtained from the creditor in writing permitting the debtor to do so.