Federal Court affirms tests of commercial solvency and material date in annulment cases

08 April 2020

1. In Affin Bank Berhad (formerly known as Perwira Affin Bank Berhad) v Abu Bakar bin Ismail  [2020] 2 AMR 417, the Federal Court (‘FC’) unanimously affirmed that the material date for determining whether an adjudication order can be annulled is the date of adjudication. It also affirmed that the test of ‘commercial solvency’ and not ‘balance sheet solvency’ was the relevant test to be applied in an annulment application.

2. The FC, in a judgment by the Chief Justice, disagreed with the decisions of the three judicial tiers below and allowed the appeal of the judgment creditor (‘JC’) against the annulment of the adjudication order against the bankrupt.

3. The debtor in this case, adjudicated a bankrupt on 17 January 2013, had applied for an annulment for the first time (‘first annulment application’) on 16 December 2013 pursuant to section 105(1) of the Bankruptcy Act 1967 (prior to the coming into force of the Insolvency Act 1967 amendments).

4. The grounds of the first annulment application were inter alia that the debtor had assets in Singapore in the form of a Singapore Court of Appeal judgment (‘Singapore judgment’) dated 20 February 2013 awarding damages in his favour in excess of SGD$35 million. This amount exceeded the JC’s claim as admitted by the Director General of Insolvency (‘DGI’) of RM8,342,774.10.

5. Although the Registrar had dismissed the first annulment application, the High Court (‘HC’) judge allowed it on appeal. However, the Court of Appeal (‘CA’) reversed the HC judge’s decision. The debtor did not apply for leave to appeal to the FC.

6. Instead, the debtor filed a second annulment application (‘second annulment application’) nine months later on the grounds that damages on the Singapore judgment had on 13 April 2015 been assessed in his favour and he therefore allegedly had assets in Singapore totalling an equivalent of RM33,551,721.76, which exceeded the JC’s claim as admitted by the DGI of RM8,342,774.10.

7. This time round, the Registrar allowed the second annulment application, which decision was affirmed by the HC judge. The JC’s appeal to the CA¹ was dismissed because inter alia the Singapore judgment dated 20 February 2013 constituted sufficient evidence to show that the debtor was solvent and there was a change of circumstances as the DGI was not able to assess damages under the Singapore judgment.

8. The two relevant questions of law for which the JC obtained leave from the FC were as follows:

• Whether the court may annul the adjudication and receiving orders (‘AORO’) on the basis of new arguments regarding the debtor’s ability to pay his debts or subsequent change of circumstances even though an earlier annulment application had failed; and


• Whether the solvency of a debtor must necessarily relate to his ability to pay his debts as they became due as at the time of the hearing of the creditor’ petition and not subsequent to the granting of the AORO.

9. In answering the first question in the negative, the FC pointed out that the case relied on by the debtor, Bungsar Hill Holdings Sdn Bhd v Dr Amir Farid Datuk Isahak [2005] 2 CLJ 809 (FC), was in fact against his case. Bungsar Hill had held that the date for consideration whether a debtor ought not to have been adjudge a bankrupt (including the issue of the debtor’s ability to pay his debt or solvency) is the date of adjudication. It should be noted that such a date is to be preferred to the date of creditor’s petition.

10. As to the second question, the FC affirmed the settled principle that the ability of a debtor to pay his debt or his solvency must relate not to whether his liabilities exceeded his assets (balance sheet insolvency) but whether he could meet his liabilities when they were due (commercial insolvency).

11. The FC held that any recovery of moneys by the debtor under the Singapore judgment was not material to determine the solvency of the debtor at the date AORO was made. It could be used to settle the debtor’s debt and, if fully settled, would entitle the debtor to apply for an annulment under the second limb of section 105(1).

12. An annulment application involves an exercise of discretion and it is rare for such an exercise to be interfered with as in this case², particularly where there the lower three tiers had been in consensus.

13. The principles (commercial solvency and date of adjudication as material date for annulment) affirmed by this case are not novel but the facts involving two annulment applications are unusual.

14. Although the Bankruptcy Act 1967 has been renamed the Insolvency Act 1967 and the concept of the AORO has been streamlined to a ‘bankruptcy order’, the principles affirmed by the FC in this case should still be applicable in the new bankruptcy law regime.

15. This case demonstrates how even well-settled principles may be misapplied by consecutive judicial tiers and the role the apex court plays in decisively laying down the correct law.