Lee Kiang Leng Stanley v Lee Han Chew (trading as Joe Li Electrical Supplies)

Woo Bih Li J:

[2] The petitioner who had filed bankruptcy proceedings was one Lee Han Chew trading as Joe Li Electrical Supplies (“the Petitioner”). The debtor was Lee Kiang Leng Stanley (“the Debtor”).

[3] The Petitioner had commenced proceedings against a company by the name of R & N Engineering Construction Pte Ltd (“the Company”) and against the Debtor as guarantor. The Petitioner then applied for summary judgment. On the eve of the hearing of the application for summary judgment, a settlement was reached with the Company and the Debtor. However, there was a default on the first payment under the settlement agreement and the default clause therein kicked in. Under the terms of the settlement agreement, both the Company and the Debtor were liable to the Petitioner, the Debtor being liable still as guarantor.

[4] As a result of the default, the Petitioner commenced winding up proceedings against the Company and bankruptcy proceedings against the Debtor. The former was to be heard in the morning of 30 April 2004 and the latter in the afternoon of 30 April 2004. In anticipation of an order being made to wind up the Company, the Debtor filed an application and an affidavit on 29 April 2004 seeking a stay of the bankruptcy petition (“the Petition”).

[5] On 30 April 2004, an order was made to wind up the Company. On the hearing of the Debtor’s application for a stay, an assistant registrar made the following orders on 3 June 2004:

(a) that the Petition be stayed pending the outcome of Originating Summons No 251 of 2004 (“the OS”) filed in the subordinate courts;

(b) that the Debtor furnish security in the amount of $171,797.36 and $15,000 in costs in cash or through a banker’s guarantee, on terms to be agreed upon;

(c) that the security be furnished by 17 June 2004, failing which the parties were to appear again before the assistant registrar.

[8] The Debtor was represented by Mr Michael Por. The Debtor alleged that he would be relying on certain acts of the Petitioner which caused the Debtor to lose his right of recourse against the Company and thus prejudiced his position as guarantor. For this general proposition, Mr Por relied on Watts v Shuttleworth (1860) 5 H&N 234; 157 ER 1711.

[9] As regards the facts, Mr Por relied on Bank of Montreal v Wilder [1987] 1 WWR 289, a decision of the Supreme Court of Canada, in which guarantors were released from their liability as a result of certain acts of the creditor. I will elaborate on this case later.

[10] Mr Por also argued that requiring the Debtor to provide security for the full sum of the debt was unreasonable in view of the OS and the fact that the Petitioner had no judgment against the Debtor, although a statutory demand had been sent. He urged me to revise the amount of the security downwards to 10% of the debt but only if I was satisfied that such security would not constitute an unfair preference under s 99 of the Bankruptcy Act (Cap 20, 2000 Rev Ed) (“the Act”).

[11] On the point about unfair preference, Mr Por argued that an order requiring security for the debt would result in an unfair preference. He relied on two cases: Commercial Banking Company of Sydney Limited v Colonial Financiers of Australia Pty Ltd [1972] VR 702 and Re Australian Co-Operative Development Society Limited [1977] Qd R 66 for this proposition. He further argued that even if a payment under the security were to be set aside eventually for unfair preference, and therefore would not prejudice other unsecured creditors, the court should not make an order knowing that it would result in an unfair preference.

[13] Mr Por also argued that it was incorrect that the order below was made pursuant to s 65(5) of the Act, as the order was made not at the hearing of the petition itself but at the hearing of the Debtor’s application. It should therefore have been made under s 64 of the Act.

[14] Sections 64(1), 64(2) and 65(5) of the Act state:

[15] Section 99(1), (3), (4) and (6) states:

[16] As can be seen, the terms of s 65(5) suggest that the provision applies when a debtor appears at the hearing of the petition. Section 64(1) appears to be wider. It may be that s 64 is meant to apply to cases where there is a default by the petitioner, especially when one considers s 64(2). However, the terms of s 64(1) are wide and not limited only to defaults by a petitioner. It also seemed to me that if s 64 is restricted to defaults by a petitioner, then there is a lacuna since s 65(5) seems to apply only at the hearing of the petition and not to any application made and heard before the hearing of the petition.

[17] Accordingly, I was of the view that s 64(1) is not limited to instances of defaults by a petitioner. If I am right, then s 65(5) is superfluous unless it is used as an illustration of what the court may do under s 64(1). Also the following words in s 65(5) are unnecessary: “appears at the hearing of the petition and”.

[18] As for the amount of the security, I was of the view that s 65(5) allowed the court to order security for the full amount of the debt. There is no mention in s 65(5) of security for part of the debt although it is arguable that this could also be ordered. However, under s 64(1), the court’s discretion is couched in such wide terms as would allow the court to order security for part or all of the debt.

[20] However, it seemed to me that the OS was without basis. The facts in Bank of Montreal v Wilder, which Mr Por relied on, were different from those before me. I set out part of the headnote there, as follows:

[21] In the case before me, the Petitioner was entitled to wind up the Company just like any other creditor could have done. I did not see how that step would discharge the Debtor from his guarantee. However, there was no appeal by the Petitioner against the order granting a stay of the bankruptcy proceedings pending the outcome of the OS. Therefore, I was minded to allow the condition for providing security to remain with minor variations as I shall elaborate on below. Accordingly, the view I have expressed on the Debtor’s action for a discharge of his guarantee is tentative and not meant to bind the court hearing the OS.

[24] As for the question of unfair preference, I should say at the outset that Mr Por had proceeded on the basis that if security for the full debt was provided, the Petitioner would still have to obtain a bankruptcy order if the Debtor were to fail in his OS, before calling on the security. However, in my view, the reverse was true. If security for the full sum was provided, the Petitioner would look to the security and not the Petition. Indeed, if the Petitioner chose to continue with the Petition in the face of the security, the Debtor would be justified in seeking the dismissal of the Petition.

[25] As for the two cases which Mr Por had relied on, they dealt with s 122(1) of the Australian Bankruptcy Act 1966. Under this provision, a charge on property or a payment made in favour of a creditor “having the effect of giving that creditor a preference” is void against the trustee in bankruptcy. Those cases were cited to illustrate that a charge or payment made pursuant to an order of court could still constitute an unfair preference. However, in those cases, the effect of a preference per se was sufficient to avoid the charge or payment. As can be seen, our provisions are different. Indeed s 99(4) suggests that the debtor must intend to prefer the creditor concerned. This in turn, suggests that a payment pursuant to an order of court is not necessarily an unfair preference as the debtor would be compelled to pay. However, it is still possible to argue that such a payment is an unfair preference, for example, where a defendant does not resist a claim in circumstances where he should have done so. Thus, s 99(6) of the Act stipulates that the fact that something is done pursuant to an order of court “does not, without more, prevent the doing … of that thing from constituting the giving of an unfair preference”.

[26] Furthermore, ss 64(1) and 65(5) of the Act allow the court to order a debtor who resists a bankruptcy petition to provide security. It seemed to me that where a debtor has resisted having to provide security, and then is ordered to do so whereupon he provides the security, this would not constitute an unfair preference. Otherwise, it would be inconsistent with the scheme in the Act of allowing the court to make such an order in the first place.