BANKRUPTCY: WHETHER DISPOSITION OF PROPERTY SHOULD BE RATIFIED
In Ong Dan Tze Magdalene v Chee Yoh Chuang and another [2021] SGHC 129, the High Court dismissed the application to ratify the dispositions under Section 77 of the Bankruptcy Act (Cap 20, 2009 Rev Ed), given that there was lack of good faith by the applicant and the dispositions would not benefit the general body of creditors.
Facts. Ong Dan Tze Magdalene (“the Applicant”) brought an application seeking ratification under Section 77 of the Bankruptcy Act (“BA”) of the Interim Judgment (“IJ”) dated 7 November 2019 (at [1]) which was granted for the dissolution of the marriage between her and Wong Kwet Yoong (“the Bankrupt”) (at [2]).
The IJ included the following consent orders (after the Bankrupt had endorsed his consent on the draft order) (at [2]):
“[The River Valley Property] shall be sold in the open market within 6 months from the date of the Final Judgment…
The [Bankrupt’s] right, title and interest in [the West Coast property] be transferred to the [Applicant] with no cash consideration and no refund …”
The significant dates were as follows (at [2]-[4]):
8 August 2019 – The Applicant commenced divorce proceedings against the Bankrupt.
Between 8 August 2019 and 25 September 2019 – The Applicant “saw the actual Statutory Demand against the Bankrupt” and “received a copy of a letter of demand dated 17 September 2019 from … one of the Bankrupt’s creditors” sent to the address where she and her son were residing.
25 September 2019 – CTBC Bank Co., Ltd. commenced a bankruptcy application against the Bankrupt.
11 October 2019 – The Bankrupt endorsed his consent on the draft order.
14 October 2019 – The sale of the River Valley property was completed, with the balance sale proceeds (the “14 Oct sale proceeds”) issued to the Applicant by way of cashier’s orders.
7 November 2019 – The Applicant obtained the grant of the IJ (which included the consent orders) for the dissolution of the marriage.
23 January 2020 – A bankruptcy order was made against the Bankrupt.
10 February 2020 – The IJ was made final.
Ratification under s 77 BA. Although the prayer sought by the Applicant was for the ratification of the IJ (at [14]), the High Court observed that the Applicant was in substance seeking ratification of the dispositions of the River Valley property (or the 14 Oct sale proceeds) and the West Coast property pursuant to the consent orders and hence proceeded on this basis (at [15]).
The onus was on the Applicant to persuade the court that such dispositions should be ratified, whereby the court “must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced” (at [16], citing the observation in Cheo Sharon Andriesz v Official Assignee of the estate of Andriesz Paul Matthew, a bankrupt [2012] 4 SLR 89; emphasis added by the High Court).
As for the test for ratification under s 77 of the BA, the High Court cited the observations in Sutherland, Hugh David Brodie v Official Assignee [2021] SGHC 65 (“Sutherland”) (at [17]; emphasized portions by the High Court excerpted below):
“… Good faith, notice and value will be relevant when considering ratification, but how important or necessary they are will have to be considered as part of the overall exercise of discretion. Considerations of good faith and notice will figure differently. Transactions may be ratified even though the third party had notice of the bankruptcy application, if it is otherwise fair and just to do so. On the other hand, the absence of good faith would almost certainly rule out a successful application for ratification. The presence of good faith would not in itself be sufficient.
Returning to the test for ratification, the starting point is the objective of s 77 of the BA. It is to preserve the bankrupt’s assets for orderly and rateable distribution to the general body of creditors. For this reason, the first consideration must be whether ratification promotes this objective or undermines it. A disposition that was, at the time it was made, in the interests of the general pool of creditors fits with the objective of the provision. Such a disposition may be ratified, if it is otherwise fair and just to do so. …”
Both dispositions were made by the Bankrupt between the date of the bankruptcy application and the date of the bankruptcy order (at [19] and [28]).
On ratification of the disposition of the River Valley property. The Bankrupt disposed of his interest in the River Valley property to the purchasers of the said property (at [18]-[19]). But as the purchasers were not represented at the proceedings, the High Court did not have any information necessary (such as whether there were requisite checks on the bankruptcy status of the sellers prior to completion) to determine whether the disposition should be ratified and hence made no finding on this (at [19]-[20]).
In any event, the High Court observed that the Applicant was not seeking ratification for the disposition of the property to the purchasers, but for the “disposition of the 14 Oct sale proceeds from the bankrupt to her” pursuant to the IJ (at [20]).
The High Court found that this was “fundamentally flawed” and rendered her request for ratification a non-starter since there was no “disposition” within the meaning of s 77(1) BA: the express wording of the IJ plainly contemplated that the River Valley property was still a matrimonial asset as at the date of the IJ, and not the 14 Oct sale proceeds (at [21]).
More significantly, “the inescapable inference to be drawn from the terms of the consent orders in the IJ is that the district judge who granted the IJ was never informed of the River Valley sale on 14 October 2019” (at [22]), contrary to the Applicant’s duty to make full and frank disclosure of all material facts when seeking the court’s approval for a consent order (at [23]).
The High Court drew the further inference that the Applicant presented the consent orders on such terms “because she knew there was something untoward about the transaction … the bankrupt had purported to dispose of his interest in the River Valley property to the purchasers after bankruptcy proceedings had been filed against him, and in the absence of any ratification of such disposal” (at [23]; emphasis in original).
The High Court made other observations (at [24]-[26]) and having considered the circumstances, stated that the Applicant would not have remained ignorant of the bankruptcy proceedings against the Bankrupt by the time she obtained the consent IJ.
The conclusion reached was that the Applicant did not act in good faith when she obtained the consent IJ (at [26]).
On ratification of the disposition of the West Coast property. This disposition was void under s 77(1) of the BA and the issue was whether it should be ratified (at [28]).
Similarly, the Applicant had notice of the bankruptcy proceedings (at [31]) and “the absence of good faith will almost certainly rule out a successful application for ratification” (at [33]).
At this juncture, the court highlighted that in respect of both dispositions, “the foremost consideration in an application for ratification under s 77 of the BA is whether the ratification promotes the interests of the general pool of creditors” (at [34]).
The High Court cited Sutherland as an example where the application for ratification was allowed. In that case, the applicant had agreed to pay a sum to the respondent bank in repayment of mortgage instalments owed by the debtors to the bank. By persuading the bank “to hold off on enforcing their rights, the debtors could sell the mortgaged property on the open market for a better price, which would benefit the unsecured creditors. In return, the applicant expected to be repaid from the surplus sale proceeds, after [the bank] was paid, but ahead of the unsecured creditors. This arrangement was recorded as an assignment agreement. The debtors were made bankrupt before they could sell the property; and the applicant applied under s 77(1) of the BA for ratification of the assignment agreement. The High Court allowed his application because the court found that the assignment agreement would benefit the creditors, firstly by fending off a fire sale by the bank; and secondly, by saving on interest payable to [the bank] …” (at [34]).
This was in contrast with the present case, where the evidence “strongly suggests that the consent IJ was really an attempt to put the bankrupt’s assets out of the reach of his creditors” (at [35]). Therefore, the High Court could not conclude that the dispositions would benefit the general body of creditors (at [36]).
Significance. This decision makes clear that the purpose of s 77 of the BA is to promote the interests of the general pool of creditors. Therefore, in seeking ratification under this provision (or the corresponding s 328 of the Insolvency, Restructuring and Dissolution Act 2018 (No. 40 of 2018) which is in pari materia), the foremost consideration is whether the dispositions will benefit the creditors, while considering factors such as good faith of the applicant (which weighs strongly) and whether the disposition is for value without notice of the bankruptcy proceedings.
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