BALANCING COMPETING INTERESTS IN BANKRUPTCY: DISCHARGE BY CERTIFICATE OF THE OFFICIAL ASSIGNEE IN SINGAPORE

Citation(2008) 20 SAcLJ 464
Date01 December 2008
Published date01 December 2008

After more than a hundred years, Singapore made major reforms to its bankruptcy laws in 1995. These changes attracted considerable public interest, with the Government taking pains to emphasise that the new law was designed to “strike a balance between the interest of the debtor, the creditor and society”. The greatest scrutiny of the provisions, to determine whether in law and in practice the competing interests of debtors and creditors could effectively be balanced, was in respect of the discharge provisions. In this article, the writer, who was then the Official Assignee, discusses how the novel remedy of discharge by certificate of the Official Assignee was conceived, drafted and successfully implemented.

I. Introduction

1 Bankruptcy or personal insolvency results from a debtor’s inability or refusal to settle his debts. It is, therefore, nothing more than a private dispute between a debtor and his creditors. Yet, it has never been treated in Singapore, as in England, “as an exclusively private matter”.1 It is surprising, for instance, that there has been no objection to the need for special bankruptcy rules and regulations beyond existing laws and procedures governing civil disputes. Nor have serious questions been raised on the propriety of state intervention, at public expense, in such private disputes which involve possible conflicts of interest between debtors, creditors and the public.

2 In recent years, the most important insolvency issue that has engaged public attention is the manner in which bankrupts are discharged from bankruptcy.2 There are various reasons for this. The

growing population of undischarged bankrupts has raised concerns in a country which uses public funds for bankruptcy administration. The provision of an orderly process for dealing with the financial affairs of insolvent persons is important for Singapore, an international financial centre and trading hub, which encourages investors and entrepreneurs. Unlike corporations under liquidation which can finally be put to rest, bankruptcies involve people who need a fresh start in life. This is especially so if their insolvency is the result of misfortune rather than malpractice. Finally, there is the realisation in all quarters that proceedings in bankruptcy cannot always be terminated solely by the private efforts of combatants with conflicting interests.

II. The move towards bankruptcy reforms
A. The archaic Bankruptcy Act

3 Until 1995, Singapore’s bankruptcy laws were based on the archaic, excessively pro-creditor, Bankruptcy Ordinance of 1888.3 This was modelled by the British colonial government on the English Bankruptcy Act of 1883, “developed during the period of the Industrial Revolution against a backdrop of Victorian values”.4 Other than for minor amendments, the 1883 Ordinance remained unchanged for more than a hundred years. It is indeed astonishing that Singapore, a developing country and reputable financial centre, was functioning with archaic bankruptcy laws for more than a hundred years.

4 Since 1987 there were renewed calls in Parliament to the Minister of Law for the review of the bankruptcy laws. These came more frequently after the enactment of the UK Insolvency Act of 19865 which had made substantial amendments to the insolvency laws in the UK.

5 The quick fix that was first proposed in 1990 was to import into Singapore the whole of the UK Insolvency Act of 1986 “lock, stock and barrel” and the massive 600-odd subsidiary rules needed to support the UK Act.6 Fortunately, the introduction of this massive Bill was delayed because of disagreements over the qualifying period for the proposed automatic discharges when the Bill was circulated amongst various

professional bodies. It was subsequently abandoned on the advice of new office-holders in the offices of the Attorney-General7 and the Official Assignee in 1991. With that began the daunting task of drafting a new Bankruptcy law.

B. Problems under the old legislation
(1) Cumbersome procedures

6 It had been apparent for sometime that the existing Bankruptcy Act had a number of weaknesses8 which contributed to costs and substantial delays in bankruptcy administration. The law facilitated bankruptcies as the minimum debt level for a bankruptcy petition was a paltry $500 that had been set in 1955. It contained cumbersome and archaic procedures long abandoned in many Commonwealth countries. To begin with, petitioning creditors had to establish one of ten acts of bankruptcy and issue a bankruptcy notice, before filing a bankruptcy petition. Non-compliance with rules of procedure was a serious breach resulting often in the dismissal of the petition.9 If successful, the petitioning creditor would obtain two orders of court — a receiving order and an adjudicating order. The limited powers of the Official Assignee caused difficulties in his adequately supervising the affairs of a bankrupt.

(2) Weaknesses in the discharge mechanisms

7 The most significant problem, however, was the one most relevant to this discussion. Due to weaknesses in the discharge mechanisms, undischarged bankrupts remained within the bankruptcy regime almost indefinitely.

8 It was not possible for a bankrupt to be discharged without a court order. Such an order could only be obtained if a bankrupt had

paid his debts in full or had proposed a scheme of arrangement or composition which was acceptable to his creditors. For “special reasons” and usually where at least 50%10 of the debts had been paid, a bankrupt could obtain a court order for a discharge. Court applications for a discharge, therefore, were hardly made especially as the application had to be made by the bankrupt himself.

9 With poor prospects of securing a discharge from bankruptcy, there was very little incentive for a bankrupt to seek a discharge by contributing to his bankruptcy estate for the benefit of his creditors or to obtain the help of his friends and relatives to do so. Consequently, the number of undischarged bankrupts grew exponentially over the years.11

10 From 1984 to 1994, when new legislation was proposed, their numbers increased from 4,297 to 14,495, a phenomenal 337% increase.12 In view of the high volume of undischarged bankrupts, the bankruptcy clearance rate, or the number of cases discharged compared to the number of new cases, was well below 40% until 1994.13 Consequently, staff morale remained low due to high volume of work. There was also a substantial increase in the costs of bankruptcy administration over the years.

11 The constant growth in the already large number of bankrupts caused considerable difficulties to the Official Assignee in investigating into and realising the assets of bankrupts and in generally administering the affairs of the bankrupts. As a result, the vast majority of creditors received little or no dividend payments for years and were disillusioned with the insolvency administration in the country. In view of the poor conduct of bankrupts in regularly contributing to their bankruptcy estate, creditors were largely unwilling to even consider realistic proposals for settlement of debts.

III. Drafting new bankruptcy legislation
A. The challenge to the Official Assignee

12 The Official Assignee’s task was then to put together a new Bankruptcy Act that would draw from the best of the existing legislation14and from the insolvency provisions in other jurisdictions15 and yet address the current problems. As Singapore is an international financial centre and a trading hub which encourages both investments and entrepreneurship, the need to have a bankruptcy regime which balanced both the interests of creditors and debtors was considered critical.

13 In proposing new bankruptcy provisions we had the benefit of examining two law commission reports on insolvency reform which have been described as representing “the freshest and most inclusive approach to insolvency”.16 These were the 1982 report of the UK Insolvency Law Review Committee under Sir Robert Cork (commonly referred to as the “Cork Report”)17 and the 1988 report of the Australian Law Reform Commission under Ron Harmer (the “Harmer Report”).18 There were consultations with international insolvency administrators and visits to the UK, Australia and Germany. It was thought that an examination of the insolvency regime of a non-commonwealth country like Germany, with its stringent approach towards consumer bankruptcies, might prove useful, especially with the recent unification of East and West Germany.

B. Key reforms under the new 1995 Bankruptcy Act 19

14 It was finally decided that the main aims of the new Bankruptcy Act (the “Act”) ought to be to:

(a) Reduce instances where parties resort to bankruptcy proceedings and to encourage the settlement of debts. The minimum debt for petitioning for bankruptcy was raised from $500 to $2,00020 and a voluntary arrangement system prior to bankruptcy was introduced.21

(b) Simplify cumbersome and archaic bankruptcy procedures. Outdated acts of bankruptcy and bankruptcy notices were replaced by a statutory demand and the ground of the inability to pay debts as the basis for commencing bankruptcy proceedings.22 There was to be a single bankruptcy order to replace the adjudication and receiving orders.23

(c) Enhance the Official Assignee’s powers to enforce the bankrupt’s legal obligations. The Official Assignee was empowered to detain travel documents, to enter premises and take inventory and seize assets.24 More importantly, bankrupts could be prosecuted for breaches of their legal obligations instead of being hauled into court for contempt of court which previously proved costly and rather circuitous.25

(d) Encourage unsecured creditors to assume a more active role in bankruptcy proceedings by appointing private trustees and a creditors’ committee to advise on the administration of the bankruptcy estate.26 An Insolvency Assistance Fund was...

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