Is Leave Required to Commence Bankruptcy Proceedings on a Judgment That Is More Than Six Years Old?
30 September 2015
A commentary on Dr Shamsul Bin Abdul Kadir v RHB Bank Berhad by David Tan.
The Federal Court in its recent decision of Dr Shamsul Bahar Bin Abdul Kadir v RHB Bank Berhad  4 CLJ 561 held that a judgment creditor (“JC”) who commences bankruptcy proceedings against a judgment debtor (“JD”) in respect of a debt under a judgment where six years or more have lapsed since the date of the judgment must obtain prior leave of the court pursuant to Order 46 Rule 2 of the Rules of the High Court 1980 (now Rules of Court 2012).
At first blush, the Federal Court’s decision in Shamsul Bahar seems a peculiar decision since a fairly recent Federal Court decision of Ambank (M) Bhd v Tan Tem Son  3 MLJ 179 had held that a bankruptcy proceeding is not a writ of execution within the meaning of Order 46 Rule 2. This article will examine the reasoning of the Federal Court in Shamsul Bahar.
A consent judgment dated 10 October 2000 was entered into between the JD and the JC whereby the JD was ordered to pay RM554,000.00 to the JC by way of a first instalment of RM54,000.00 on or before 15 November 2000 followed by monthly instalments of RM20,000.00 each from 15 November 2000 until full settlement.
The JD failed to settle the judgment sum. Consequently, the JC issued a bankruptcy notice for the sum of RM350,000.00 against the JD on 3 January 2011 and served the same on the JD on the following day. The JD applied to set aside the bankruptcy notice on the ground that the bankruptcy notice was invalid as it was issued without the leave of court pursuant to Order 46 Rule 2 which, inter alia, requires a JC to obtain leave of court in order to enforce a judgment where six years or more have lapsed since the date of the judgment.
DECISION OF THE HIGH COURT
In September 2011, the Senior Assistant Registrar dismissed the JD’s application to set aside the bankruptcy notice. The JD appealed to the judge in chambers. On 9 November 2011, the learned High Court Judge dismissed the JD’s appeal, holding that he was bound by the Federal Court decision of Perwira Affin Bank v Lim Ah Hee  3 MLJ 253 which held that a bankruptcy proceeding is a continuation of a judgment and that no leave is required to issue the bankruptcy notice after six years.
DECISION OF THE COURT OF APPEAL
The JD’s appeal was dismissed by the Court of Appeal which affirmed the decision of the High Court. The Court of Appeal held that the words “writ of execution” in Order 46 Rule 2, as interpreted by the Federal Court in Lim Ah Hee, did not include a bankruptcy proceeding.
DECISION OF THE FEDERAL COURT
The JD obtained leave to appeal to the Federal Court on two questions of law - the first being whether it is a mandatory requirement under Section 3(1)(i) of the Bankruptcy Act 1967 (“BA 1967”) for a JC to obtain leave pursuant to Order 46 Rule 2 in order to commence bankruptcy proceedings on a judgment debt where six years or more have lapsed since the date of the judgment.
The Federal Court answered the above question in the affirmative and set aside the bankruptcy notice issued against the JD. Their Lordships opined that it was not necessary to answer the second leave question.
According to their Lordships, the appeal turned on the interpretation of Section 3(1)(i) of the BA 1967, in particular, the words “execution thereon having not been stayed”.
Section 3(1)(i) of the BA 1967 reads:
(1) A debtor commits an Act of bankruptcy in each of the following cases:
(i) If a creditor has obtained a final judgment or final order against him for any amount and execution thereon not having been stayed has served on him in Malaysia, or by leave of the court elsewhere, a bankruptcy notice under this Act requiring him to pay the judgment debt or sum ordered to be paid in accordance with the terms of the judgment or order with interest quantified up to the date of issue of the bankruptcy notice ... ;” (emphasis added)
The Federal Court traced the origins of the BA 1967 and found that Section 3(1)(i) of the BA 1967 is almost an exact duplicate of Section 4(1)(g) of the English Bankruptcy Act 1883 and Section 1(1)(g) of the English Bankruptcy Act 1914.
After examining the decisions of the English Courts in Re ex parte Woodall (1884) 13 QBD 479, Re ex parte Ide (1886) 17 QBD 755 and Re Connan, ex parte Hyde  20 QBD 690, the Federal Court concluded that:
“ The ratio that determined the outcome in those three English cases was not that bankruptcy was a form of execution and therefore had to comply with the Rule of Court relating to execution. Rather, the ratio was that the creditor must be in a position, when he issued the bankruptcy notice, to levy immediate execution upon the judgment, should he choose to levy execution.” [emphasis added]
Their Lordships then observed that the Malaysian Courts in Re SMRM Sithamparam Chettiar; ex parte Sundra Singh  1 MLJ 38, Low Mun v Chung Khiaw Bank Ltd  2 CLJ 400, Wee Chow Yong, Ex P; Public Finance Bhd  1 CLJ 176 and Re Ahmad Lazim & Anor, Ex P Bank Kerjasama Rakyat (M) Bhd  2 CLJ 101 had accepted the ratio of the decisions in Woodall and Ide and this represented the state of the law prior to Lim Ah Hee and Tan Tem Son.
Distinguishing Lim Ah Hee
The Federal Court distinguished Lim Ah Hee on the ground that Lim Ah Hee had nothing to do with the meaning of the words “execution thereon not having been stayed” in Section 3(1)(i) of the BA 1967. Rather, the issue in Lim Ah Hee was whether the second limb of Section 6(3) of the Limitation Act (which, inter alia, prohibits the recovery of interest in respect of a judgment debt after six years from the date on which the interest became due) applied to a bankruptcy proceeding. It was in the context of Section 6(3) of the Limitation Act that the Court decided in Lim Ah Hee that a bankruptcy proceeding is not a writ of execution.
Consequently, the Federal Court concluded that Lim Ah Hee was not an authority for the proposition that leave is not required to issue a bankruptcy notice where six years or more have lapsed from the date of the judgment or on the interpretation of the words “execution thereon not having been stayed” in Section 3(1)(i) of the BA 1967.
Departure from Tan Tem Son
The Federal Court then referred to Tan Tem Son where it had disapproved Woodall and Ide on the basis that the Section 4(1)(g) of the English Bankruptcy Act 1883 did not contain the proviso found in Section 3(1)(i) of the BA 1967.
The Federal Court in Shamsul Bahar disagreed with the reasoning in Tan Tem Son and stated:
“ We do not dispute that when Woodall and Ide were decided, s. 4(1)(g) of the Bankruptcy Act of 1883 did not contain the proviso similar to the proviso to s. 3(1)(i) of the BA 1967. But we fail to appreciate how the absence of that proviso to s. 4(1)(g) of the Bankruptcy Act of 1883 could militate against the reasoning in Woodall and in Ide ...
 It is however pertinent that apart from the proviso, s. 3(1)(i) of the BA 1967 is in pari materia with s. 4(1)(g) of the English Bankruptcy Act of 1883 and with s. 1(1)(g) of the English Bankruptcy Act of 1914, and as such, due regard should be given to the enunciation by English courts on the meaning and application of the English provisions ... A bankruptcy proceeding is not execution. But the right of the creditor to issue bankruptcy notice is pegged to the right of the creditor to proceed to execution. A creditor is not entitled to issue bankruptcy notice if he is not in a position to issue execution on his judgment at the time when he issues the bankruptcy notice”.
The Court concluded that Tan Tem Son had clearly departed from history and case law. Accordingly, their Lordships felt compelled to bring the law back to where it was before Tan Tem Son, that is, to be in line with the law in other jurisdictions that had provisions equipollent to Section 3(1)(i) of the BA 1967.
A careful examination of the ratio in Shamsul Bahar reveals that the Federal Court did not in fact extend the definition of a writ of execution to include bankruptcy proceedings under Order 46 Rule 2.
The effect of Shamsul Bahar is that a JC who wishes to commence a bankruptcy proceeding based upon a judgment where six years or more have lapsed since the date of the judgment will need to obtain leave of Court to execute upon the judgment as a precondition to issuing a bankruptcy notice against the JD. The requirement in Order 46 Rule 2 is therefore applicable to bankruptcy proceedings, albeit in a roundabout manner, without straining or extending the definition of a writ of execution as per Order 46 Rule 2.
In view of the decision of the Federal Court in Shamsul Bahar, it would be prudent for a JC to commence bankruptcy proceedings within six years from the date of judgment to avoid the risk of leave to execute on the judgment being refused by the courts and also to avoid unnecessary legal costs.
The decision in Shamsul Bahar raises the possibility that a JD who was made bankrupt pursuant to a bankruptcy proceeding commenced six years or more after the date of judgment in reliance on Lim Ah Hee or Tan Tem Son may seek to rescind and annul the bankruptcy orders issued against him by reason of the JC’s omission to obtain prior leave of court under Order 46 rule 2.