CLAIMS FOR INTEREST IN WINDING UP AND BANKRUPTCY

• Published date: 01 December 1997
• Author: LEE ENG BENG
• Date: 01 December 1997

After some hesitation, this writer has concluded that an article on the rather dry and technical subject of claims for interest in winding up and bankruptcy can no longer be delayed. The applicable legislative provisions, especially after the recent revamping of the bankruptcy legislation,1 are less than clear and contain a number of pitfalls for the unwary. The unnecessary and annoying importation of bankruptcy provisions into the insolvent winding up regime is another fertile source of difficulty and confusion.2 Further, the relevant case law, decided in the context of similarly but not identically worded predecessor provisions, deserves careful examination in order to determine the extent to which they are applicable in the current legislative regime. Finally, the issue is one of considerable practical significance, though not attracting frequent litigation presumably because of the relatively small amounts usually involved.

I. THE FRAMEWORK OF DISCUSSION

Three regimes — bankruptcy, solvent liquidation and insolvent liquidation — merit separate discussion. In particular, the issues of whether a claim for interest may be made, for what period interest may be charged and the applicable or permissible rate of interest will be examined with respect to each of these regimes.

The uninitiated may be forgiven for wrongly assuming that the bankruptcy and liquidation regimes respectively contain independent rules for determining these questions. There is indeed a division, but it is not the simple one between those two regimes. While the provisions relating to the winding up of companies are found in the Companies Act3 (‘CA’) and the provisions relating to personal insolvency are found in the Bankruptcy Act4 (‘BA’), s 327(2) of the former provides:

… in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable … as are in force for the

time being under the law relating to bankruptcy in relation to the estates of bankrupt persons, and all persons, who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.

The rules governing claims for interest are clearly ‘rules … with regard to the respective rights of secured and unsecured creditors and debts provable’.5 In the winding up of insolvent companies, therefore, one must look to the bankruptcy regime to dispose of claims for interest. The true dichotomy, then, is between bankrupt individuals and the winding up of insolvent companies on the one hand, and the liquidation of solvent companies on the other. In the former case, the bankruptcy rules apply; in the latter, the position under the CA applies. However, the division is not an entirely neat one. While the position in insolvent liquidation is basically governed by the bankruptcy law, there are significant modifications and adjustments which have to be made before the bankruptcy rules may sensibly be applied in the winding up of an insolvent company. Further, there exists some uncertainty as to the situations in which and the extent to which the bankruptcy rules are so applicable.

The following discussion will first examine the bankruptcy rules with respect to the treatment of the various types of claims for interest. The position of such claims in a solvent liquidation will then be considered and compared. Finally, the problematic position in an insolvent liquidation will be analysed.

II. BANKRUPTCY

1. Unsecured claims for pre-bankruptcy interest

It is clear that interest which may be charged on a debt of the bankrupt for periods before the date of the bankruptcy order constitutes a provable claim. A claim for pre-bankruptcy interest is no different from any other claim made against a bankrupt, provided that the claimant is entitled to such interest as a matter of general law. However, there has been some legislative intervention, in a restrictive sense as to the permissible interest rate to be charged, and in an enabling sense as to the entitlement to interest in bankruptcy even though the claimant would not have been entitled to it otherwise.

S 87(3) BA refers to the debts or liabilities to which a bankrupt is subject at the date of the bankruptcy order or may become subject before his discharge by reason of any pre-bankruptcy obligation and goes on to state that:6

… any interest on such debt or liability which is payable by the bankrupt in respect of any period before the commencement of his bankruptcy shall be provable in bankruptcy.

Pursuant to this provision, therefore, interest up to the commencement of bankruptcy, that is, the date of the bankruptcy order,7 is provable.8 If the interest is incurred in a foreign currency, it must be converted to Singapore currency at the exchange rate prevailing at the date of the bankruptcy order.9

However, pre-bankruptcy interest is not provable at the contractual rate or the rate to which the creditor is entitled under the general law, for s 94(1) BA provides:

Where a debt which has been proved in a bankruptcy includes interest, that interest shall, for the purpose of distribution of dividend, be calculated at such rate as may be prescribed by the rules…

R 185 of the Bankruptcy Rules10 (‘BR’) declares that the rate of interest under s 94(1) BA shall be 8% per annum.11 This would mean that pre-bankruptcy interest is always quantified by using a rate of 8% per annum, regardless of the rate the parties had contracted for or which is imposed by the general law; even if the latter rate is less than 8% per annum, that rate is chargeable. This is a somewhat uncomfortable conclusion, as a creditor may become entitled to interest which he could not have claimed if his debtor had not gone into bankruptcy. For example, judgment debts carry interest at 6% per annum;12 r 185 BR would cause the interest rate

to be suddenly increased to 8% upon the bankruptcy of the judgment debtor.13 This was not the position under the previous bankruptcy regime, for the relevant predecessor provision provided that the interest should be calculated at a rate not exceeding the then statutory rate of 4% per annum;14 it was thus contemplated that a lower rate may be applicable in some cases. The present position under s 94(1) is not entirely logical, and the argument may be made that, by necessary implication, r 185 BR should be interpreted to refer to a rate of 8% per annum or such lower rate as may be stipulated by the contract between the parties or imposed by the general law. This argument is probably unsustainable for two reasons. Firstly, the level of incongruity in the result is probably not high enough to override the ordinary meaning of the prima facie mandatory ‘shall’ in r 185. Secondly, as pointed out in the following paragraph, it is provided elsewhere in the BR that, even where no interest has been previously reserved or agreed, a creditor may still be entitled to pre-bankruptcy interest at the rate of 8% per annum. If one were to hold that r 185 BR only imposes a maximum but not mandatory interest rate of 8% per annum, a new anomaly would be created in that a creditor who has not contracted for interest at all may claim interest at 8% per annum while a creditor who has contracted for interest at a lesser rate is constrained to charging that lesser rate.

Where no interest has been previously reserved or agreed, a creditor can, in two situations, claim interest at a rate not exceeding 8% per annum for periods before the bankruptcy order in two situations. These situations are provided for in r 184 BR:

In the following circumstances, the creditor’s claim may include interest at a rate not exceeding 8% per annum on the debt for periods before the bankruptcy order, although not previously reserved or agreed:

1. (a) if the debt is due by virtue of a written instrument and payable at a certain time, interest may be claimed for the period from that time to the date of the bankruptcy order;

2. (b) if the debt is due otherwise, interest may only be claimed if, before the presentation of the bankruptcy petition, a demand for payment was made in writing by or on behalf of the creditor, and notice given that interest would be payable from the date of demand to the date of payment, in which case interest may be claimed under this rule for the period from the date of the demand to that of the bankruptcy order.

With respect to limb (a), an ‘instrument’ must probably be a document which creates or affects rights or liabilities, rather than merely evidencing liability; thus, a trade invoice is not an ‘instrument’, as no liability arises by virtue of an invoice.15 A debt which is repayable within a certain period after service of a written notice of demand is a debt payable at a certain time by virtue of a written instrument,16 and so is the claim of a surety against the principal debtor on a promissory note.17 Further, the written instrument must state the time at which the debt is payable, and the debt cannot be payable at a time fixed by reference to a contingent event.18 With respect to limb (b), it is to be noted that, while the notice must state that interest would be payable from the date of demand to the date of payment, interest in fact may be claimed only for the period from the date of the demand to that of the bankruptcy order.

If the bankruptcy estate has a surplus after discharging all the proved debts and the accompanying interest claims at the statutory rate of 8% per annum, a creditor may prove for the balance of interest to which he is entitled under his contract or under the general law. The latter part of s 94(1) BA states that the proof of pre-bankruptcy interest at 8% per annum shall be:

… without prejudice to the right of a creditor...