Bankruptcy – Whether proper for third party to settle debts of a bankrupt without the knowledge of or reference to Director General of Insolvency and Offical Assginee

Ketua Pengarah Insolvensi v Goh Ah Kai & Anor, [2016] 1 MLRA 419, CA

• The first respondent [R] was adjudged a bankrupt in January 2013.
• In November 2013, a third party fully paid the judgment debt owed to the Judgment Creditor.
• The Judgment Creditor wrote to the Director General of Insolvency (DGI) stating that the third party had fully paid the amount owing to it and that it was withdrawing its proof of debt.
• The R then applied for the bankruptcy order against him to be annulled.
• The DGI opposed the application on the grounds that the;
• i. Debt was not settled in accordance with the correct procedure;
• ii. Third party is not allowed to make payment on behalf of the debtor;
• iii. Before any annulment, the DGI is entitled to realise distribution fees.
• The High Court allowed the R’s application to annul the Bankruptcy Order.
• Hence, the present appeal by the DGI.
• The issue for appeal was that whether a third party can pay R’s debt directly to the Creditor without referring to the DGI and Official Assignee (OA).

• The law relating to bankruptcy in Malaysia is governed by the Bankruptcy Act 1967 (BA).
• Bankruptcy laws are premised on the need to protect creditors.
• Accordingly, the conduct of the debtors’ affairs is taken out of his hands and vested in the office of the OA; OA’s function is to realise the assets of the debtor and from the proceeds make such payments (in the form of dividends) to the creditors, insofar as that is possible.
• The OA is empowered to trace and recover any property of the debtor in the hands of third parties.
• The estate of the debtor is distributed among the creditors who are able to satisfy the OA that the debtor owes them a legally recoverable debt.
• In exercising its discretion whether or not to annul adjudication, the Court is bound to consider not only the interest of creditors.
• The Court must also consider the also consider whether an annulment is conducive or detrimental to commercial morality and to the interest of the public at large.
• As such, any private arrangements between a debtor (and a third party) and his creditor is to be condemned.
• Hence, all matters relating to the bankrupt’s estate shall be dealt through the OA.
• Whatever private arrangemnet or transactions entered into between the bankrupt or any third party and his creditors without reference to or knowledge of the OA is not binding on the estate of the bankrupt.
• The purported payment was not made through the OA.
• The OA has no knowledge of the payment transactions and such the OA is unable to verify whether the debt has in fact been paid full in cash.
• In addition, it has never been held that the consent of the creditors alone will justify the Court in annuling the adjudication.
• In any application for annulment of an adjudication, it is necessary that DGI is made party in the proceedings and it is for the official assignee as receiver and manager of the estate of the bankrupt to satisfy the Court that the conditions for annulment are satisfied.
• Therefore, the Court is not bound to exercise its discretion in annulling an adjudication simply because the creditors consented to the same.