When is the point of time when a debtor is considered to be unable to pay his debts?

AFFIN BANK BERHAD V. ABU BAKAR ISMAIL [2020] 2 MLRA 99

• Affin Bank Berhad (“Bank”) had obtained a judgment against Abu Bakar Ismail (“Debtor”) on 8 July 2004.

• Thereafter, the Bank commenced bankruptcy proceedings against the Debtor.

• The Debtor then applied to set aside the Bank’s bankruptcy notice and to oppose the Bank’s petition, which applications were dismissed by the High Court and upheld by the Court of Appeal.

• Following this, a receiving order and an adjudication order were recorded against the Debtor on 17 January 2013 (“AORO”) [bankruptcy order].

• On 16 December 2013, the Debtor filed an application to annul the AORO pursuant to section 105(1) of the Bankruptcy Act 1967 (“BA”), on the basis that the Debtor ought not to have been adjudged a bankrupt as he was solvent and had means to repay his debts.

• The Debtor sought to prove his solvency in the form of a Singapore Court of Appeal judgment dated 20 February 2013 (“Singapore Judgment”), where damages awarded pursuant to the Singapore Judgment would have a value in excess of SGD$35 million, amongst other claims against third parties in Singapore.

• On 7 January 2014, the Registrar of the High Court dismissed the application for annulment on the basis that, amongst others, the Singapore Judgment was obtained after the AORO date whereas the material date for consideration in an annulment application is the AORO date.

• The Debtor appealed to the High Court, which appeal was allowed.

• However, on appeal by the Bank to the Court of Appeal, the decision of the High Court Judge was reversed and the AORO was restored.

• Instead of filing an application for leave to appeal to the Federal Court, nine (9) months later, the Debtor filed a second annulment application which was allowed by the Registrar of the High Court and which decision was affirmed by the High Court judge and the Court of Appeal.

• The Bank appealed to the Federal Court.

The Federal Court allowed the appeal on the following basis:

• The relevant date to consider whether the Debtor was able to pay his debts was the date of the making of the AORO and not the date after the bankruptcy order was made.

• The test for solvency of a debtor must be of the debtor’s ability to pay his debts as they become due, as at the time of the hearing of the creditor’s petition which was in this case, when the AORO was made.

• On the facts of the instant case, at the time the AORO was granted against the Debtor, there was no evidence that he was solvent. No consideration ought to be given to the Debtor’s ability to pay his debts based on subsequent change of circumstances. If at all, the Debtor should have paid the debts in full after recovering monies from the Singapore Judgment which would then enable him to obtain an annulment order, having repaid the debts in full. However, this was not done and the Debtor had made no payment to satisfy the judgment debt.