In Chan Siew Lee Jannie v Australia and New Zealand Banking Group Ltd  SGCA 23, the Singapore Court of Appeal was faced with the issue of whether a statutory demand issued to a guarantor would be deemed defective and liable to be set aside if it did not include the details of a pledge given by the principal debtor. The apex court held that such a statutory demand would not be defective, as neither the Bankruptcy Act nor the Bankruptcy Rules require a petitioning creditor to specify the details of security provided by third parties within the statutory demand.
The Appellant is a shareholder and director of Timor Global LDA (“TG”). The Respondent, the Australia and New Zealand Banking Group Ltd, had extended banking facilities in the sum of $7.8 million to TG. These facilities were secured by:
- a pledge provided by TG over some of its assets (the “Pledge”);
- a joint personal guarantee executed by the directors of TG; and
- personal guarantees by each of the directors of TG whereby each of them agreed to pay all sums of money which were owed by TG to the Respondents. The said personal guarantees all provide that the Respondent may exercise its rights under the guarantee without first taking proceedings against TG.
TG subsequently defaulted on repayment of the facilities. The Respondent commenced a suit against TG’s directors and obtained summary judgment against each of them.
On the basis of the summary judgment, the Respondent served a statutory demand on the Appellant. The statutory demand disclosed that the Respondent held an “all-monies” mortgage over a property in Singapore, co-owned by the Appellant, which it intended to enforce in satisfaction of the debt owed to it. The statutory demand, however, did not specify the value of assets under the Pledge.
Following the failure of “without prejudice” negotiations, the Appellant commenced an application to, amongst others, set aside the statutory demand. One of the grounds relied upon for setting aside the statutory demand was that the Respondent had failed to specify the third party security (i.e. the Pledge) within the statutory demand.
Decision of the High Court
The High Court held that a statutory demand only needs to specify the security provided by the Appellant, and that it need not specify any security provided by a third party.
Court of Appeal’s finding on the issue of third party security
On appeal, the Appellant challenged the decision of the High Court on the following grounds:
- Firstly, the Appellant argued that the bankruptcy regime has become more “debtor-centric” and as such, a creditor ought to be required to specify third party security within the statutory demand so that the principal debtor would have greater opportunities to forestall the institution of bankruptcy proceedings against them.
- Secondly, the Appellant argued that if third party security were not required to be specified within the statutory demand, this would unfairly place a guarantor at a disadvantage vis-à-vis the principal debtor, because creditors may present a bankruptcy petition against the guarantor when the same cannot be presented against the principal debtor.
The Court of Appeal dismissed the appeal on, in summary, the following grounds:
- The bankruptcy process is intended as a method for collective realization of the debtor’s assets in order to maximise recovery for the general body of creditors. Its objective is to bring within the control of the court all the estate of the bankruptcy for distribution amongst the creditors. As secured creditors could deal with their security outside of the bankruptcy process, they ought not to be allowed to initiate bankruptcy proceedings unless they were willing to give up any first party security which would help to augment the bankrupt’s assets for distribution. The position is different however with regard to third party security. Third party security is irrelevant in the context of determining whether a creditor may present a bankruptcy petition. This is because third party security, even if given up by the creditor, will not form part of the eventual estate of the principal debtor divisible amongst his creditors.
- Consistent with the foregoing, an examination of the Bankruptcy Act and Bankruptcy Rules does not support the interpretation advanced by the Appellant that it is necessary for the creditor to specify third party security within the statutory demand.
- Such a position is also consistent with common law authorities which have held that:
- the existence of third party security does not affect the right of a creditor to be admitted to the bankruptcy process and prove the full amount of his debt; and
- a creditor with several remedies at his disposal can choose which remedy to exercise, and where and when to do so, subject only to the rule that he cannot recover more than what is due to him. This is not unfair given that the availability of multiple routes of recovery was the very basis on which the banking facility was extended in the first place.
Impact of this decision
The Court of Appeal’s decision is consistent with guarantees being a low-cost and relatively burden-free form of personal security for the creditor. This is consistent with the aims of the Bankruptcy Act to strike a balance between the interests of the debtor, the creditor, and society. This case also allays concerns that institutional lenders may have about the bankruptcy regime becoming “more debtor-centric”.
A key takeaway from this decision is that company directors must be aware of the potential ramifications when giving a personal guarantee. The director may wish to negotiate for the personal guarantee to be linked to a specific loan rather than being an "all monies" guarantee of all the company's borrowings from time to time. Otherwise, the director should negotiate a cap on the amount he can be asked to pay under the guarantee. Also, if the director wants the enforcement of the guarantee to be conditional on the lender having first enforced its security over the company's assets, this should be expressly set out in the guarantee.