LEGAL UPDATES: Matrimonial Property in Divorce When One of the Parties is a Bankrupt – The Case of Ong Dan Tze Magdalene v Chee Yoh Chuang and Another [2021] SGHC 129

DIVORCE (Division of matrimonial assets)
BANKRUPTCY (Courts’ ratification of dispositions of property made between bankruptcy application and bankruptcy order)

The Law on the Courts’ Ratification of Disposition of Properties by Bankrupts

The law serves to protect creditors of a bankrupt by rendering void any disposition of any of his property if that disposition occurs between the time of the bankruptcy application and the time of the bankruptcy order.

Nevertheless, the law allows for exceptions, one of which is when the disposition of the property was made with the consent of the courts, or has subsequently been ratified by the courts. These aims of the law manifested themselves in the old Section 77(1) of the Bankruptcy Act (although this section has been repealed, it has been retained in the current section 328(1) of the Insolvency, Restructuring and Dissolution Act).

Section 77(3) of the Bankruptcy Act stipulates that no judicial remedy should be given under section 77, including section 77(1), against a person in respect of property or payment which he received from the bankrupt before the commencement of the bankruptcy in good faith, for value and without notice of the bankruptcy application. This protects genuine buyers of property and persons in receipt of money (such property or money which could have fallen under the pool of assets available to the creditors).

The Problem with the Exception

The problem with the exception in section 77(1) is that errant and insincere bankrupts may use their families and the law to make sure their creditors cannot get their hands on the bankrupt’s assets.

Upon knowing of the bankruptcy application against them, they may arrange a sham divorce with their spouse and expedite the legal process by agreeing to an uncontested divorce or agreeing to the terms of the divorce relating to property. The court order which formalizes an uncontested divorce would include the disposition of matrimonial assets.

If there was no divorce, these assets would have fallen into the pool of assets ‘reserved’ for the creditors. With the divorce however, the bankrupt is given an opportunity by Section 77(1) of the Bankruptcy Act to obtain the court’s ratification of the divorce court order disposing of his assets, and thereby frustrate his creditors, who would then not receive the money which should rightfully go to them.

The Facts of this Case

In this case, the husband faced bankruptcy proceedings first. The wife then applied for divorce. The Interim Judgment dissolving the marriage included a consent order for the disposition of 2 properties. After the bankruptcy order was made against husband, and after final judgment was made on the divorce, the wife then applied to court to ratify the disposition of the 2 properties. The wife claimed to be unaware of the bankruptcy proceedings against the husband when she made the divorce application. The effect of the ratification would have meant that the creditors would not get a single cent out of the value of the 2 properties.

The Court had the opportunity in this case to decide the following:

Judicial Test/Considerations/Thresholds for Ratification:

• Application of section 77(1) of the Bankruptcy Act: The Court confirmed that the section does apply to a disposition of property pursuant to court order, including a consent order.
• Protecting the Interests of Unsecured Creditors: The court referred to Denney v John Hudson & Co Ltd [1992] BCLC 901 and re-affirmed that when considering whether to ratify any disposition, the court must ensure that the interests of the unsecured creditors are not prejudiced. The objective of section 77 is to preserve the assets of the bankrupt for distribution to the general body of creditors. The court’s foremost consideration should be whether the ratification would benefit the general pool of creditors.
• Close Scrutiny of the courts: a case where the bankrupt attempts to transfer assets to his spouse after the commencement of bankruptcy procedures, the disposition should be closely scrutinised. In this regard, the court followed Cheo Sharon Andriesz v Official Assignee of the estate of Andriesz Paul Matthew, a bankrupt [2012] 4 SLR 89, a case with similar facts.
• Onus of Proof: The onus was on the applicant to persuade the court that the dispositions of the 2 properties should be ratified.
• Reading of 77(1) and 77(3): The Court made it clear that ratification is only necessary if the disposition does not fall within the exception set out in section 77(3). Section 77(3) is to protect a good faith purchaser who is unaware of the bankruptcy application.
• Is it possible for the courts to ratify a disposition of assets if the applicant was aware of the bankruptcy application before acting to dispose it? The court referred to Sutherland, Hugh David Brodie v Official Assignee and another [2021] SGHC 65, where the High Court noted that a transaction may be ratified, even though the third party had notice of the bankruptcy application, if it was otherwise just and fair to do so. The absence of good faith, however, would almost certainly rule out ratification.

Property Number 1 (River Valley)

This property was sold even before the divorce application. The judge making the consent order did not know this and made the consent order under the misapprehension that it was still a matrimonial asset which was yet to be sold (and not sales proceeds). The ratification did not fall under section 77(1) and should thus not be allowed at all – the consent order did not give rise to a disposition of either the property or the sales proceeds. The court also found that the wife did not act in good faith.

Property Number 2 (West Coast)

This property was another subject of the consent order. It was unsold at the time of the consent order. While it was possible to use section 77(1) to ratify this property’s disposition under the consent order, the court declined to do so because the evidence strongly suggested that the consent order was an attempt to put the husband’s assets out of the reach of his creditors, clearly evidencing the lack of good faith.

Conclusion

Although this is a bankruptcy matter, the judgment is a good indication of how the Family Justice Courts will treat consent orders relating to matrimonial property where one of the parties is bankrupt – with circumspection and close scrutiny.

The requirement for good faith and the interests of unsecured creditors in ratification applications was repeatedly emphasised in this judgment. At the end of the day, while the courts must recognise genuine dispositions of property under family court orders for the division of matrimonial assets, the courts should not allow such ratifications if divorce applications are used as a convenient backdoor or technicality to unlawfully divert assets from unsecured creditors.

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