Challenging A Bankruptcy Notice – Understanding The 7-Day Rule
11 October 2021, by Mohd Shukri Zulkipli, Advocate & Solicitor
Where a creditor has obtained final judgment against a debtor and served on him a bankruptcy notice requiring him to pay the judgment debt in accordance with the said judgment, an act of bankruptcy will be committed by operation of law in the event of failure to comply with that notice within seven days after its service.
That being said, upon receipt of the bankruptcy notice, a debtor has seven days to comply with the same, eg to pay the sum as demanded. Else, he can satisfy the Court that he has a counterclaim, set off or cross demand against the creditor that equals or exceed the amount so stated in such notice which he could not set up in the action in which the judgment was obtained. Apart from that, the debtor can also dispute the validity of such bankruptcy notice on the ground that the amount claimed exceeds what is actually due.
As clear as it can be, these options have to be exercised within seven days after service was affected. What the debtor has to do is to file an affidavit which will then operate as an application to set aside the bankruptcy notice. This mode of challenge is provided in the bankruptcy notice itself. Once the affidavit is filed within the prescribed seven days, the act of bankruptcy shall be deemed to have been committed until the application has been heard and determined by the Registrar. In short, the seven days period is extended pursuant to rule 93 of the Insolvency Rules 2017 (“Rule 93”). The best case to illustrate is the Federal Court decision in Westech Sdn Bhd v Thong Weng Lock [2017] 8 CLJ 257, which is a high authority. In the context of Rule 93, it must be emphasised that the act of bankruptcy shall be deemed to have been committed until the application is heard and determined by the Registrar. So, it does not foresee subsequent extension should the Registrar’s decision is subject to further appeal to the Judge in Chambers or eventually to the Federal Court. Resulting from this, the calculation of six months period to present bankruptcy petition begins once the Registrar has heard and determined the said application.
As far as the bankruptcy notice is concerned, it does not state any other grounds that judgment debtors may rely to attack it. One might say that the challenge to bankruptcy notice appears to be limited only to set off, counter claim, cross demand or when the sum claimed exceeds from what is actually due. Further, it is also silent on the possibility to have it challenged after seven days. However, that is not necessarily the case. So, in absence of these elements and where a judgment debtor has other grounds to rely in order to attack the bankruptcy notice, what will be his recourse?
Procedurally speaking, the Insolvency Rules 2017 recognizes another mode of challenge against the bankruptcy notice other than by filing the affidavit, that is by way of Summon in Chambers as provided by Rule 17 of the Insolvency Rules 2017 (“Rule 17”). Essentially, Rule 17 refers to the procedure for making any application to Court. By necessary implication, it follows that in cases other than set off, counter claim, cross demand or when the sum claimed exceeded from what is actually due, judgment debtors can invoke Rule 17 independently from section 3 (1) (i) and section 3 (2) of the Insolvency Act 1967. Rule 17 actually broadens the spectrum to all other possible types of challenge.
But, our focal point is this – does Rule 17 carry the same benefit enjoyed by Rule 93 in the sense that the act of bankruptcy shall only be committed until the Summon in Chambers is heard and determined by the Registrar? In other words, does the 7-day rule still bite?
Understanding this issue will help practitioners to foresee a technical difficulty in cases where the Summon in Chambers cannot be heard and determined within a specific time. This is pretty obvious when one considers that a creditor shall not present a bankruptcy petition unless the act of bankruptcy occurred within six months before the presentation of such petition. In this context and assuming that such a challenge fails, judgment creditors will have to consider whether to file the petition straightaway with a fear of another objection coming from the debtor, or to file a fresh bankruptcy notice (possibly renders the previous proceeding a waste, additional time and costs involved as a result). Moreover, it also helps practitioners to plan their case tactically and economically. Determination on this point will definitely assist the bankruptcy Court in dealing with the issue of whether the act of bankruptcy is to be deferred or not.
Perhaps, guidance on this issue can be found in the Court of Appeal’s decision in J Raju M Kerpaya v Commerce International Merchant Bankers Bhd [2000] 3 MLJ 177, a case of considerable importance. There, it was held that where a challenge is taken upon a bankruptcy notice, the court needs to decide whether it is a jurisdictional challenge or an objection on some other ground.
Jurisdictional challenge, as the Court of Appeal put it, means a challenge that goes to the condition precedent to the exercise of bankruptcy jurisdiction. Exempli gratia, a challenge is made that a bankruptcy notice is not in accordance with the judgment or on irregularities. This is envisaged by Rule 17. Meaning a debtor can raise any other grounds not limited to counter claim, set off or cross demand or disputing the amount.
On the other hand, the second one refers to the situation where a judgment debtor applies to set aside the bankruptcy notice by the process of filing an affidavit asserting that he has a counterclaim, set off or cross demand against the judgment creditor or the sum claimed is excessive as contemplated by Rule 93.
Once the type of challenge is determined, the Court of Appeal went further to stress that when a challenge falls under the first type (jurisdictional challenge), the 7-day period as provided in the bankruptcy notice is not applicable. The 7-day period is only confined to cases where the judgment debtor applies to set aside bankruptcy notice by the process of filing an affidavit asserting that he has a counterclaim, set off or cross demand against the judgment creditor.
Applying the principle gleaned from J Raju M Kerpaya v Commerce International Merchant Bankers Bhd (supra), it can be understood that if a debtor opted under Rule 17 and his application failed, the act of bankruptcy is committed 7 days after service of bankruptcy notice on him, even if the application is filed within 7 days. The act of bankruptcy is not extended until such application is heard and determined by the Registrar. It therefore follows that the time of which the Summon in Chambers is filed is immaterial for the purpose of calculating the act of bankruptcy as it is imperative by the wording of the bankruptcy notice itself, read together with Rule 93.
Another important aspect of the Court of Appeal decision in J Raju M Kerpaya v Commerce International Merchant Bankers Bhd (supra) is that a Summon in Chambers can be filed to challenge the bankruptcy notice even after seven days of service expired. Challenge other than having a set off, counterclaim or cross demand as well as the excessive amount can be made at any time. Viewing from this, even if the act of bankruptcy is not extended and already committed, it does not stop the debtor from challenging the validity of bankruptcy notice on the ground of irregularity. Interestingly, challenge in that case was made after eight years. Quite often, due to certain valid problem that may occur, the debtor could only be able to file the application after those seven days have passed.
Based on this authority, while it can be argued that the debtor may have more than seven days to challenge, he cannot take shelter under Rule 93 to defer the act of bankruptcy. But, if the Court in the end found that the bankruptcy notice is null and void for whatever reason attributable to the jurisdictional challenge or on irregularity, no act of bankruptcy can be committed based on that particular notice.
All in all, if we look from the scheme of the Insolvency Act 1967 and the decided cases, it is safe to conclude that the law in our jurisdiction recognizes that there is no blanket application of the 7-day period as prescribed in the bankruptcy notice to all kind of challenge. Similarly, judgment debtors can still challenge the bankruptcy notice even after the act of bankruptcy is committed provided that he manages to bring his case within the contemplation of J Raju M Kerpaya v Commerce International Merchant Bankers Bhd (supra).
As bankruptcy is a creation of statute where strict construction applies, due compliance to the words creating the act of bankruptcy must be given its utmost attention and religiously observed. To sum up, it is only appropriate to recall the Court of Appeal’s decision in Poh Gaik Lye v Amfraser Securities Pte Ltd [2015] 1 MLJ 453 at Para 19 of the report where David Wong Dak Wah, JCA said:
“Further it must be remembered that bankruptcy proceedings against anyone is a drastic measure with great and damaging ramifications to one's livelihood. A bankrupt's life in many respects is shackled by many chains and is under the supervision by the Official Receiver during his bankruptcy life. As such, the courts cannot accept any cavalier approach, a strict approach must be the order of the day.”
On the strength of authorities cited above, practitioners ought to be able to manage the risk properly. At bankruptcy stage, judgment creditors are usually reluctant to spend extra money, what more than having to pay costs to the judgment debtor in successfully attacking the bankruptcy notice, thereby reducing their hard-earned fruits of litigation. In short, everything must be right at the first instance.