This Federal Court case of Abdul Rashid bin Mohamad Isa v PTT International Trading Pte Ltd [2024] 5 MLJ 1 explores a critical question in bankruptcy law: does the withdrawal of a creditor’s petition terminate the entirety of bankruptcy proceedings? It examines the interplay between procedural rules and the underlying intent of the Insolvency Act 1967 and the Insolvency Rules 2017. This case also underscores the importance of understanding the legal significance of pending applications.
Introduction
A person is made a bankrupt when the court issues a bankruptcy order against him, after being presented by a creditor’s petition or debtor’s petition.
The petition must be founded on an ‘act of bankruptcy’. In the case of creditors, the common act of bankruptcy is where the debtor fails to comply with a bankruptcy notice served after a final judgment or order requiring payment of a debt, and cannot prove a valid counterclaim or set-off exceeding the judgment debt.
Upon being served with the bankruptcy notice, the debtor may file an affidavit opposing the bankruptcy notice which will act as an application to set aside the bankruptcy notice (Rule 93 of the Insolvency Rules 2017). Once this affidavit is filed, no act of bankruptcy shall be deemed to have been committed under the bankruptcy notice until the application to set aside the bankruptcy notice has been heard and determined.
Brief Facts
- On 17 December 2018, PTT International Trading Pte Ltd, the judgment creditor (“JC”) issued a bankruptcy notice to Abdul Rashid bin Mohamad Isa, the judgment debtor (“JD”).
- The JD filed a summons in chambers to set aside the bankruptcy notice under Rule 93 of the Insolvency Rules 2017 (“Setting Aside Application”), but did not file any affidavit in support of that Setting Aside Application.
- Since there was no affidavit filed, the Registrar found that the JD had committed an act of bankruptcy on 25 December 2018 because the non-filing of the affidavit means it is as if no application to set aside the bankruptcy notice was made.
- The JC then filed a creditor’s petition on the said act of bankruptcy.
- The JD appealed the Registrar’s decision to the High Court. The High Court overturned the Registrar’s decision, and held that no act of bankruptcy had occurred because there was a Setting Aside Application and it had not been heard and determined yet.
- The case was then remitted to the Registrar, where the JC decided to withdraw the creditor’s petition since the High Court found that no act of bankruptcy had been committed.
- The Registrar allowed the withdrawal with liberty to file afresh on 6 December 2021. However, the Registrar also ruled that all bankruptcy proceedings had come to an end due to the withdrawal of the creditor’s petition.
- The JC was of the view that the withdrawal of the creditor’s petition (which was founded on the Registrar’s erroneous declaration that there was an act of bankruptcy) did not terminate the bankruptcy proceedings, since the act of bankruptcy itself was merely stayed until the Setting Aside Application is determined. The JC appealed against the decision of the Registrar that deemed all bankruptcy proceedings were terminated due to the withdrawal of the creditor’s petition.
- The matter went all the way to the Federal Court.
High Court Decision
- The High Court agreed that no act of bankruptcy had occurred because the JD’s Setting Aside Application was still pending. Thus, the Registrar’s decision to declare an act of bankruptcy on 25 December 2018 was incorrect.
Court of Appeal Decision
- The Court of Appeal confirmed that there was no act of bankruptcy since the Setting Aside Application is still pending to be disposed of.
- As the existence of the act of bankruptcy depends on the decision of the Setting Aside Application, it was premature to conclude that the bankruptcy proceedings have also been terminated pursuant to the withdrawal of the creditor’s petition.
- The pending Setting Aside Application under Rule 93 of the Insolvency Rules 2017 effectively stayed any declaration of an act of bankruptcy until the Setting Aside Application is heard and determined.
Federal Court Decision
- The Federal Court agreed with the decisions of both the High Court and the Court of Appeal.
- The Court distinguished the case of Re Subramaniam a/l Paidathally; ex parte G Ragumaren & Co [2011] MLJU 1216. In the Re Subramaniam case, the Registrar struck out the first creditor petition due to an error in the date of the act of bankruptcy. The judgment creditor did not appeal against the decision but instead filed a second creditor’s petition based on the correct date. The Registrar struck out the second creditor’s petition because a second petition cannot be filed based on the same act of bankruptcy once the first petition was dismissed – the judgment creditor should have either appealed against the dismissal of the first petition or start the proceedings afresh. The High Court affirmed the decision of the Registrar.
- However, the Federal Court held that that case is distinguishable because it involved an undisputed act of bankruptcy, and because the reasons the first creditor’s petition was struck out were different (i.e.: it was due to an error in the date of the act of bankruptcy). The part of the decision in Re Subramaniam which decided that the termination of the creditor’s petition will terminate the entire bankruptcy proceedings had to be approached cautiously.
- Every case must be considered carefully when ascertaining whether or not an error in the creditor’s petition is substantive and the Courts have the jurisdiction to correct any error where it is suitable to do so. Whether the termination of a creditor’s petition ends the entire bankruptcy proceedings would likely depend on whether the case was being heard and resolved on its merits.
- The Federal Court also found that Section 6(7) of the Insolvency Act 1967 requires leave from Court to withdraw a creditor’s petition, reinforcing that withdrawal doesn’t necessarily terminate the proceedings, as the High Court has broad discretion to impose conditions, including allowing the petition to be filed afresh.
- The filing of another creditor’s petition by the JC cannot be taken to be a “second bite at the cherry” since there was no declaration of an act bankruptcy given the pending Setting Aside Application.
Key Takeaway
The Federal Court affirmed that the withdrawal of a creditor’s petition does not necessarily terminate bankruptcy proceedings, especially when there is a pending application to set aside the bankruptcy notice. This is because, the act of bankruptcy would have been stayed pending determination of the setting aside application. It is only after the setting aside application is determined, would there be an outcome as to whether an act of bankruptcy was committed in the first place (which is a necessary criteria for the creditor’s petition).
While this case involves a very unique set of facts which may not be so commonplace, this decision reinforces the position that the Courts will balance procedural compliance with the broader purpose of insolvency law — safeguarding creditors’ rights while ensuring that substantive justice prevails.
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This article was written by Sean Ferdinand Ng (Senior Associate) from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.
