Second Reading Speech by Senior Minister of State for Law, Indranee Rajah SC, on the Bankruptcy (Amendment) Bill 2015

13 JUL 2015

13 Jul 2015 Posted in Parliamentary speeches and responses

Mr Deputy Speaker,

I beg to move, “That the Bill be now read a Second Time”.

Introduction on Bankruptcy Regime

Mr Deputy Speaker, bankruptcy refers to the legal process whereby the debts that a person is unable to pay are resolved. The bankruptcy regime serves a number of objectives:
1. First, it provides an orderly regime for the resolution of unpaid debts.
2. Second, in so doing, the regime balances the interests of debtors, creditors and the wider society in the following ways:
  1. It ensures that bankrupts are held accountable for their debts, but allows them to make a fresh start in their financial matters after a reasonable period of time; and
  2. It provides incentives for creditors not to over-extend credit and for debtors not to borrow more than they can repay.

The Bankruptcy (Amendment) Bill (“the Bill”) furthers these objectives while ensuring that public resources are utilised more efficiently.

The Bill introduces four key sets of amendments:
1. First, it raises the debt threshold for obtaining a bankruptcy order;
2. Second, it allows creditors to make an expedited bankruptcy application;
3. Third, it requires or incentivises creditors to appoint private trustees in certain circumstances; and
4. Fourth, it introduces a “differentiated discharge” regime to allow bankrupts to be discharged within clear timeframes.

The Bill also contains a number of miscellaneous amendments.

As bankruptcy procedures are fairly technical, let me first begin by explaining how the process works under the current law.

A debtor or his creditors may apply for a bankruptcy order. In either case, it must be shown that the debtor is unable to pay his debts as they fall due and that such debts amount to at least $10,000. The Bankruptcy Act provides that a debtor is presumed to be unable to pay his debts if, having been served with a statutory demand, he does not settle it or set it aside, within 21 days.

Even if a debtor meets the requirements for being made a bankrupt, he may be eligible for the Debt Repayment Scheme (“DRS”). The DRS, which was introduced in 2009, allows debtors to avoid bankruptcy if they meet certain eligibility criteria. It also allows creditors to receive no less than what they would have, had the debtor been made a bankrupt. The DRS is being reviewed, but no changes are presently being made to it.

If a bankruptcy order is made, the bankrupt’s property will vest in a trustee in bankruptcy (or the “trustee”). The trustee may either be the Official Assignee (“OA”) or a private trustee appointed by the court. The trustee performs the following functions in administering the bankruptcy:
1. First, the trustee will investigate the bankrupt’s financial affairs to ascertain what is available for distribution.
2. Second, the trustee will adjudicate the proofs of debt filed by creditors, to determine which debts are valid and how much is owed to each creditor.
3. Third, the trustee will realise the property available for repayment, including any property acquired or contributed by the bankrupt, after the bankruptcy order is made.
4. Fourth, if there are sufficient funds, the trustee will declare a dividend in respect of the debts proved.

A bankruptcy terminates when the bankruptcy order is discharged or annulled. A bankruptcy order may be annulled by the court or by a certificate issued by the OA, if, for example, all the relevant debts and expenses have been fully repaid. Alternatively, the bankruptcy order may be discharged by the court or by the OA’s certificate, thus releasing the debtor from all the debts provable in the bankruptcy, apart from debts due to the Government.

With this general framework in mind, let me now explain the key amendments in the Bill.

Raising the Debt Threshold for Making a Bankruptcy Application

The first key amendment relates to raising the debt threshold before a bankruptcy application may be made in court.

Presently, a bankruptcy application can only be made if the debtor owes at least $10,000 in debts. This threshold was introduced in 1999. It is timely to review the threshold given the rate of inflation over the past years. The Bill therefore raises the debt threshold to $15,000.

Introducing an Expedited Bankruptcy Procedure

The second key amendment is to introduce an expedited bankruptcy procedure.

Earlier, I had explained that a debtor is presumed to be unable to pay his debts if he does not respond to a statutory demand within 21 days. Presently, a creditor must wait until the end of the 21-day period before he can make a bankruptcy application.

Clauses 14 and 15 of the Bill allow a creditor to make an expedited bankruptcy application after the statutory demand has been served, but before the 21-day period has expired. However, the creditor must show a serious possibility that the debtor’s property, or the value of all or any of the debtor’s property, will be significantly diminished before the 21-day period ends.

The amendments are being introduced because currently, a creditor can only appoint an interim receiver or prevent the bankrupt’s property from being transferred after a bankruptcy application has been filed, which can only be done after the 21-day period has expired. There is a risk that the debtor could dissipate his assets during this 21-day period. The amendments will therefore allow the creditor to take steps to preserve assets available for distribution to the creditors at an earlier stage, although the bankruptcy order will only be made upon the expiry of the 21-day period. This is to ensure that the debtor will still have the full 21-day period to settle or set aside the statutory demand.

Appointment of Private Trustees to Administer the Bankruptcy

The third set of amendments requires or incentivises institutional creditors to appoint private trustees to administer some bankruptcies.

Currently, it is not mandatory to appoint a private trustee to act as the trustee in bankruptcy. As a result, private trustees are seldom appointed, and the OA acts as the trustee in over 99% of bankruptcies. This includes those cases where the value of the bankrupt’s estate is insufficient to cover the OA’s costs. At present, creditors have no incentive to consider the costs of administering a bankruptcy before applying to make a debtor bankrupt.

This is unsatisfactory, because the State bears the cost of resolving debts entered into between private parties, and often, for the benefit of private parties. As such, the amendments seek to ensure better utilisation of public resources.

Clause 6 provides that a creditor must apply for a private trustee to be appointed at the time of making a bankruptcy application, under two circumstances:
1. First, where the creditor making the application is an institutional creditor or its subsidiary.
2. Second, where the debt, when incurred, was payable to an institutional creditor or its subsidiary. So, for example, where the debt was originally incurred to a bank, the bank assigns the debt to someone who is not an institutional creditor and the latter institutes bankruptcy proceedings.

An “institutional creditor” is defined as:
1. A bank or finance company that is licensed by the Monetary Authority of Singapore; or
2. A business undertaking with more than $100m in annual sales turnover and more than 200 employees.

So, take for an example, where a debtor has incurred debts from two sources, namely, a bank and a personal loan from a friend. If the debtor is unable to pay his debts, he may be made bankrupt in one of three ways:
1. First, if the bank makes the bankruptcy application. In this scenario, the bank would have to nominate a private trustee before the court will grant the bankruptcy order;
2. Second, if the personal creditor makes the bankruptcy application. In such a case, there is no need to nominate a private trustee;
3. Third, if the debtor files the bankruptcy application himself. In this case, he will not need to nominate a private trustee either.

Where no private trustee is appointed by the court, the OA will administer the bankruptcy. However, in such a case, clause 37 provides that where at least half of the value of the bankrupt’s debts is owed to institutional creditors or their subsidiaries, the OA may issue a written notice to inform all the creditors to consider applying for the appointment of a private trustee in place of the OA.

Any creditor can apply to appoint a private trustee. If a creditor chooses to do so, the costs and expenses of appointing the private trustee will affect the eventual returns on the debts.

But if the creditors choose not to do so, the OA is not required to incur further expenses to administer the bankruptcy, other than that related to the payments made by the bankrupt under the new differentiated discharge framework.

In the converse situation, that is where less than half the value of bankrupt’s debts is owed to institutional creditors, the OA will administer the bankruptcy in full until its conclusion.

Presently, it is common for the OA to administer bankruptcies where the value of the estate is insufficient to cover the OA’s costs which results in the taxpayers bearing such costs where there is little prospect of recovery. These amendments will encourage institutional creditors, who have sufficient resources and expertise to make credit assessments, to carefully consider whether to apply for a bankruptcy order. They will also encourage institutional creditors to be more prudent in extending credit and allow the OA’s resources to be better utilised elsewhere.

The Bill also contains some consequential amendments relating to the appointment of private trustees:
1. First, a private trustee may resign only if he nominates another private trustee who has consented to act, or if the OA consents in writing to the appointment. This ensures that a private trustee will see through the administration of the bankruptcy, unless the OA consents to take over.
2. Second, a private trustee has to provide security to the OA, to ensure that he performs his duties and duly observes all the requirements of the Act. The Bill introduces a new provision allowing the OA to forfeit the security furnished where the private trustee fails to comply with statutory timelines.

Introducing the Differentiated Discharge Framework

I will now explain the fourth set of key amendments, which introduces the differentiated discharge framework.

This framework addresses one of the key concerns that bankrupts have, namely, when they can be discharged from bankruptcy.

Presently, there are two ways for a person to be discharged from bankruptcy:
1. First, by an order of court. There is no change to this process.
2. Second, by the OA’s certificate. However, the OA’s certificate can currently only be issued 3 years after the bankruptcy order was made, and if the debts proved in bankruptcy do not exceed $500,000.

This monetary cap fetters the OA’s ability to discharge bankrupts in deserving cases. Clause 42 of the Bill removes this condition and introduces a differentiated discharge framework that will provide all bankrupts with greater certainty as to when they are eligible to be discharged. Let me explain the key features of this new framework.

The new framework provides bankrupts with clear goals and timelines to meet, in order to become eligible for a discharge. Whether a bankrupt is eligible for discharge depends on whether he has paid the target contribution, which refers to the total amount contributed to the estate from the bankrupt’s income or from third parties. The trustee will calculate the target contribution at the early stages of bankruptcy so that the bankrupt knows upfront the targets that he will have to meet in order to be eligible for discharge.

The framework will allow bankrupts who pay their target contribution expeditiously to be eligible for discharge earlier. With your permission, Mr Deputy Speaker, may I ask the Clerks to distribute copies of the infographic explaining the differentiated discharge framework to the Members?

As you can see from the infographic, there are three relevant time periods. For a first-time bankrupt:
1. He is eligible to be discharged after three years in bankruptcy if he has paid the target contribution in full. However, a discharge will not be granted if sufficient creditors object to it.
2. He is eligible to be discharged after five years in bankruptcy if he has paid his target contribution in full. Objecting creditors will need to obtain a court order to prevent the bankrupt from being discharged.
3. If a bankrupt has not paid the target contribution in full, he will be eligible for discharge after seven years. Likewise, a court order must be obtained to prevent a bankrupt from being discharged.

Bankrupts may also be discharged at the three- or five-year mark even if they have not paid the target contribution in full, if there are extenuating circumstances such as a debilitating illness.

For a repeat bankrupt, all the timelines I mentioned will be extended by two years as compared to a first-time bankrupt.

To address any concerns that bankrupts who have not paid their target contribution in full will be eligible for discharge, the OA will keep a public register containing a list of undischarged and discharged bankrupts. Only those who pay their target contributions in full will have their records expunged from the register five years from the date of discharge. For those who do not, their names will remain on the register permanently. This will also allow future creditors to make informed decisions on whether to extend credit.

There are two further important points about the differentiated discharge framework that I need to highlight:
1. First, bankrupts need to file their statement of affairs and any supplementary information on time. This is because the timeline for reckoning a bankrupt’s eligibility to be discharged does not start until these documents are filed. The later a bankrupt files these documents, the later the timeline will start to run.
2. Second, the timeline will be suspended if the bankrupt travels or remains overseas without the trustee’s permission. Bankrupts should not be allowed to benefit under this new framework if they fail to comply with their obligations under the law.

This framework introduces a new rehabilitative regime which gives bankrupts clear timeframes and goals to meet in order to become eligible for discharge. Co-operative bankrupts will be incentivised to make sufficient contributions to achieve an earlier discharge, but at the same time the framework has sufficient safeguards, in the form of permanent bankruptcy records and the OA’s and the Courts’ discretion to extend the bankruptcy, to prevent moral hazard.

Miscellaneous Amendments

I will now touch briefly on some of the miscellaneous amendments in the Bill:
1. Clause 27 requires a bankrupt’s creditor to file a proof of debt within four months from the date that the administration of the differentiated discharge framework begins, unless the time period is extended by the court, or by the trustee in certain circumstances. This will provide bankrupts’ creditors with greater certainty as to the value of their debts, and also will facilitate smooth administration of the bankruptcy.
2. Clause 37 provides that the OA will not be required to incur further expenses unless there is sufficient available property in the bankrupt’s estate. This ensures that the bankrupt’s estate will not be unnecessarily depleted. Any creditor may apply to the court to direct the OA to incur a particular expense, but only on the condition that the creditor indemnifies the OA and provides reasonable security to secure the indemnity.
3. Clause 49 provides that the offence of fraudulent disposal of property will be committed only if the bankrupt had the intention to defraud his creditors or to deprive his creditors of the property in the event of a bankruptcy order. Clause 51 introduces a new offence, which is committed when a bankrupt provides a guarantee, indemnity or security of at least $1,000 without disclosing that he is an undischarged bankrupt at that time.

Conclusion

The Bill contains a comprehensive suite of changes aimed at improving the bankruptcy regime. The changes are targeted at ensuring that public resources are better utilised, while providing greater certainty as to when bankrupts are eligible to be discharged and ensuring that the Act remains up-to-date.

The Bill strikes a balance between the need to hold the bankrupt accountable, while ensuring that bankrupts have the opportunity to make a fresh start in their financial affairs after a reasonable period of time.

Mr Deputy Speaker, I beg to move.

Last updated on 13 Jul 2015