The Curious Case of Aparna Donti

An Inconsistency in the IRDA

A recent case in the High Court has highlighted an inconsistency in sections 367 and 368 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) relating to priority over a bankrupt’s assets. This article discusses the inconsistency and the problems it poses, with reference to some of the fundamental principles undergirding Singapore’s insolvency regime.

Introduction

In Abuthahir s/o Abdul Gafoor v Bangkok Bank Public Co Ltd [2022] SGHC 274 (Abuthahir), the High Court considered a dispute over which of the parties had a prior right to a bankrupt’s share of the surplus proceeds from a mortgagee’s sale of a property. It emerged that sections 367(1) and 368(4) IRDA are inconsistent with each other, with the Honourable Justice Chua Lee Ming remarking that a legislative review of these provisions may be necessary. This article discusses the facts and judgment in Abuthahir, before considering the effects of this inconsistency and making a case for a possible reform of sections 367 and 368.

Background

The proceedings in Abuthahir were commenced by the Private Trustee of the estate of Aparna Donti (the Bankrupt), who sought a determination from the Court as to which party could claim the surplus proceeds of the mortgagee’s sale of the Property (the Surplus Proceeds). These proceedings were, in essence, a dispute between a judgment creditor and the bankrupt’s estate over the surplus proceeds from the mortgagee’s sale of the property (the “Property”). The point of interest in this case is that there were two separate processes by two unsecured creditors of the bankrupt moving toward a claim over the bankrupt’s share of the surplus proceeds.

The first process was a writ of seizure and sale. This process was initiated before Aparna was declared bankrupt. In February of 2021, Bangkok Bank (the Defendant) entered judgment in default of appearance against the bankrupt. Then, in April of 2021, Bangkok Bank obtained an order of court for the bankrupt’s interest in the property to be attached and taken in execution to satisfy the Judgment. Subsequently, Bangkok Bank issued a writ of seizure and sale (the WSS) in respect of the bankrupt’s interest in the property. At this point, the mortgagee of the bankrupt’s property, Standard Chartered Bank (SCB), repossessed the property, and began taking steps to sell the property. Bangkok Bank then requested that the Sheriff take no further steps on the WSS.

The second process were the bankruptcy proceedings: In July 2021, OCBC commenced bankruptcy proceedings against Aparna. In September 2021, Aparna was adjudged bankrupt, and later in the month the Sheriff wrote to the Private Trustee stating that the seized property would be handed over to the Private Trustee for administration. At this point, the Sheriff informed the parties that they should commence proceedings to obtain a determination by the Court as to who is entitled to the Surplus Proceeds. This was the beginning of the dispute between the Private Trustee and Bangkok Bank (the judgment creditor) over who was entitled to the surplus proceeds of the mortgagee sale.

For ease of reference, a table setting out the chronology of the events follows:

The Inconsistency Between Sections 367(1) and 368(4) of the IRDA

The source of the contention over who was entitled to receive the Surplus Proceeds was the ostensible overlap between sections 367(1) and 368(4). Parties disagreed over which of sections 367 and 368 should apply, as section 367 favoured the defendant and section 368 favoured the claimant. Section 367 reads:

“367. – (1) Where the creditor of a bankrupt has issued execution against the goods or lands of the bankrupt or has attached any debt due or property belonging to the bankrupt, the creditor is not entitled to retain the benefit of the execution or attachment against the Official Assignee unless the creditor has completed the execution or attachment before the date of the bankruptcy order, except that –

[…]

(2) For the purposes of this Act –

[…]

(c) an execution against land or any interest in land is completed by registering under any written law relating to the registration of land a writ of seizure and sale attaching the interest of the bankrupt in the land described in the writ of seizure and sale.”

(emphasis added)

In other words, section 367(1) provides that if a creditor completes the WSS by registering it before the date of the bankruptcy order, the creditor is entitled to retain the benefit of the execution or attachment. Section 367(2) defines “completion” of an execution against land or an interest in land as the registration of the WSS.

Meanwhile, section 368 reads:

“368. – (1) Where any property of a debtor is taken in execution, then, if before the completion of the execution, notice is given to the Sheriff that a bankruptcy order has been made against the debtor, the Sheriff must deliver the property or the possession of the property and any such moneys to the Official Assignee.

[…]

(3) Where a writ of seizure and sale has been issued in respect of a judgment for a sum exceeding $2,000, the Sheriff must hold all moneys coming to the Sheriff’s hands under the writ of seizure and sale for 14 days starting from the receipt of the moneys.

(4) If within the time mentioned in subsection (3) —

(a) notice is served on the Sheriff of a bankruptcy application having been made against or by the debtor; and

(b) a bankruptcy order is made against the debtor on the bankruptcy application or on any other application of which the Sheriff has notice,

the Sheriff must deduct the costs of an incidental to the execution and pay the balance to the Official Assignee, who is entitled to retain the same as against the execution creditor.”

(emphasis added)

As Justice Chua observed in Abuthahir at [36], section 368 can be distilled into four requirements. Once the four requirements are met, the Official Assignee is entitled to retain the balance of the debt. The four requirements are:

1. A writ of seizure and sale must have been filed;
2. The seized property must have been sold pursuant to the writ of seizure and sale;
3. The Sheriff must have received the proceeds of the sale; and
4. The Sheriff must have been notified of the bankruptcy application, and the bankruptcy order must have been made, within the 14-day period.

The issue between the two provisions is that section 367(1) becomes operative with respect to immovable property the moment the WSS is registered. Therefore, in the words of Justice Chua in Abuthahir at [37], “any case that falls within s 368(4) would also fall within s 367(1). Yet, the party entitled to the balance proceeds of sale under s 367(1) is the judgment creditor whilst under s 368(4) it is the Official Assignee.”

So, if a WSS is registered in respect of immovable property, but all four requirements of section 368(4) are subsequently met – who is to receive the proceeds of the sale? The judgment creditor under section 367(1), or the Official Assignee under section 368(4)? Unfortunately, there does not appear to be any reported decision from the Singapore Courts that has discussed the interplay between sections 367 and 368 (or their predecessors).

Ms Kala Anandarajah in The Law and Practice of Bankruptcy in Singapore and Malaysia (1999), discusses section 106 of the then Bankruptcy Act 1995 and stated as follows at page 2995:

“If the creditor has not completed the execution or attachment before the date of bankruptcy order, the creditor cannot retain the benefit of the execution or attachment against the OA. The goods or land seized will then be available for distribution to the creditors, provided that s 78(2) of the BA does not apply. Even if execution has been completed within the meaning of section 105(2) of the BA, the execution creditor is not out of the woods yet. He may still lose the right to retain any subsequent sale proceeds or payments made under the WSS if in the circumstances, section 106(2) of the Act [Malaysian section 51(2)] is applicable.”

(emphasis added)

There are some English cases that lend support to this view. In the English case of In re Greer (1895) 2 Ch 217, Chitty J at page 221 of the judgment held that the underlying principle of section 41(2) of the English Bankruptcy Act 1914 (broadly equivalent to sections 368(3) and (4) of IRDA) was to direct the sheriff to retain the money for 14 days; and in the event of bankruptcy supervening the execution creditor loses his right to the money:

“The effect is to place a temporary embargo or stop on the money. If more technical language is requisite, I say the execution creditor’s right to the money is vested, but liable to be divested. His right to the money is not a contingent right.”

The English case of Latter v Juckes and Page [1927] 1 KB 17 (Latter) is instructive. In Latter, a creditor obtained judgment against Juckes, and as such the Sheriff seized the debtor’s goods, and the goods were then sold. Another creditor filed a bankruptcy petition against the debtor, notice of which was given to Sheriff on the following day. The Sheriff held the sale proceeds, and nothing was done until the debtor obtained his own bankruptcy order. In Latter, notice of the debtor’s bankruptcy order was served on the Sheriff after the 14-day period.

The issue in Latter was whether the execution creditor was entitled to the monies in the hands of the Sheriff, or whether it falls into the estate of the bankrupt. The Court also considered the interpretation of the sub-section “any other petition of which the sheriff has notice”.

The English Court of Appeal found in favour of the trustee. It held that “the sheriff here has levied execution and has been paid out, and the money he has received would, but for this sub-section, belong to the execution creditor, but the Act steps in and requires the sheriff to retain the money in his hands for fourteen days” (at page 31). (Emphasis added).

The English Court of Appeal also rejected a narrow and literal construction of the section which would “militate against the true principles of the bankruptcy laws, which are directed to securing the distribution of the assets of the bankrupt among his creditors equally” (at page 29). It was of the view that is not necessary that the bankruptcy order should be made within the 14 days, neither was it necessary that notice to the sheriff must be served on him during the currency of the 14 days and not later.

The Judgment

Regrettably, the issue of the inconsistency between sections 367 and 368 was to remain unresolved in Abuthahir. Justice Chua agreed with the defendant that the present case did not fall within section 368(4), because the property in question had been sold by a mortgagee’s sale, and not by the Sheriff under the WSS. Therefore, the second of the four requirements of section 368(4) was not made out, and no conflict between the two provisions of the IRDA arose on these facts. Section 367(1) was satisfied on the facts, and was applied in favour of the judgment creditor, Bangkok Bank.

Commentary

Even though the judgment in Abuthahir was unable to provide a solution to the problem posed by the inconsistency between sections 367(1) and 368(4), it is noteworthy for bringing into the spotlight an area of law which is in clear need of reform.

In its present state, the interplay between sections 367(1) and 368(4) leads to results that, in this author’s view, are inconsistent with the principles undergirding the insolvency regime. If the provisions are to be interpreted and applied literally, they are liable to privilege one creditor over another simply because one creditor has initiated their claim over the bankrupt’s estate before the other. Thus, on a literal reading of sections 367(1), a judgment creditor becomes entitled to the whole of the bankrupt’s share of a property simply because they have registered a WSS, notwithstanding that notice of a bankruptcy application may have been given to the Sheriff. This is questionable for several reasons.

First, a winner-takes-all outcome of this nature fosters an environment where it is in the interest of creditors to scramble to pursue the bankrupt and try to steal a march over their peers. It is trite that this is undesirable and in opposition to one of the fundamental objectives of the insolvency regime, the pari passu principle: that all unsecured creditors should share rateably in the estate of the bankrupt. The distribution of a bankrupt’s estate should not be determined solely by procedural details such as when the WSS was registered.

This is especially so when it is considered that this seems to be the very mischief that section 368(4) IRDA was meant to target. Sections 367 and 368 IRDA sit within Division 6 of the IRDA, which is titled “Effect of bankruptcy on antecedent transactions”. Alongside section 361 (transactions at undervalue) and section 362 (unfair preferences), section 368 was evidently meant to target the unfair depletion of the debtor’s assets where certain creditors may be preferred. Specifically, it could be argued that section 368 was intended to balance out the effect of section 367 by protecting the interests of unsecured bankruptcy creditors vis-à-vis the interests of judgment creditors.

Second, it is unclear how the current inconsistency came about, as the equivalent provisions before 1995 did not produce the same contradiction. Prior to 1995, the “completion” of a WSS had always been linked to the sale of the property, not just the registration of the WSS. This was the case in section 49(2)(c) of the Bankruptcy Act 1985, and section 43(2) of the preceding Bankruptcy Ordinance 1888. To illustrate, section 49(2)(c) of the Bankruptcy Act 1985 reads:

“[…] an attachment of property is completed by the sale of such property and the satisfaction out of the proceeds of the sale of the judgment in execution of which the attachment was made.”

Yet, in section 105(2)(c) of the Bankruptcy Act 1995, the position changed to define “completion” as the mere registration of the WSS:

“[…] an execution against land or any interest therein is completed by registering under any written law relating to the registration of land a writ of seizure and sale attaching the interest of the bankrupt in the land described therein.”

The reason for this divergence is unclear. Attempts to trace the history of the Bankruptcy Act 1995 provided no answers: parliamentary materials, parliamentary speeches, and the Select Committee Report on the Bankruptcy Bill in 1994 all shed no light on this.

Then, when the provisions of the Bankruptcy Act 1995 were eventually ported over to the IRDA 2018, this altered provision followed. It is surprising that this issue went unnoticed during this particular period of reform, because a known objective behind implementing the IRDA 2018 was to synthesise the personal and corporate insolvency regimes into one omnibus legislation. However, as observed by the Honourable Pang JC (as he then was) in Peter Low LLC v Higgins, Danial Patrick [2018] SGHC 59, this is an instance where there is a discrepancy between the regimes for corporate and personal insolvency (at [60]):

“Where the judgment debtor is insolvent, then:

(a) in the case of an individual judgment debtor who has gone into bankruptcy, execution against land is deemed complete when the WSS is registered – ie, the step described at [58(c)] above (s 105(2)(c) of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“Bankruptcy Act”)); and

(b) in the case of a corporate judgment debtor which has gone into liquidation, execution against land is deemed complete when the land is sold – ie, the step described at [58(f)] above (s 334(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”)).

The discrepancy between the positions under the Bankruptcy Act and the Companies Act arose as a result of the repeal and re-enactment of the predecessor Bankruptcy Act in 1995. Before 1995, the position under both Acts was consistent – see Official Assignee of the Estate of Lim Chiak Kim, a bankrupt v United Overseas Bank Ltd [1988] 2 SLR(R) 88 at [22], [29] and [30].”

The discrepancy between the corporate insolvency and personal insolvency regimes is yet another reason why the existing inconsistency between sections 367(1) and 368(4) IRDA is unsatisfactory. Not only does the definition in section 367(1) IRDA create a conflict with section 368(4) IRDA, it also contradicts the idea that the personal insolvency regime should mirror the corporate insolvency regime. The idea of symmetry between the insolvency regimes has been espoused by the Singapore court well before the IRDA came into being. As the Honourable VK Rajah J noted in Re Rasma Rasmachayana Sulistyo (alias Chang Whe Ming), ex parte The Hongkong and Shanghai Banking Corp Ltd and other appeals [2005] 1 SLR(R) 483 (at [25]):

“Finally, there is much to be said for the attainment and implementation of a symmetrical approach in dealing with this procedural thicket vis-à-vis both insolvent debtors and companies. After all, the objectives of and policy considerations relating to bankruptcy and liquidation mirror each other in many essential aspects. Both procedures signal a change in the status of the debtor. To protect the community at large, the debtor is prevented by the abasement of his or its contracting status from pursuing further commercial activity. Both procedures herald the onset of a process that permits the equitable and fair distribution of the assets of the insolvent debtor amongst creditors. The maxim “equity is equality” is the underpinning policy percolating through all aspects of insolvency, whether corporate or personal. As mentioned earlier, public policy will require the court to intervene and avoid contractual provisions that purport to exclude or modify the principle of pari passu distribution whether in bankruptcy or liquidation.”

(emphasis added)

Concluding Remarks

Should the appropriate case arise for the Court’s determination, the interaction between section 367 and section 368 IRDA would pose an interesting problem. However, given the inconsistencies that have already been highlighted, the time would be ripe for a review of the provisions.

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