Bankruptcy (Amendment) Bill

Mdm Speaker, I support the Bill. In a nutshell, the main aim of the Bill is to introduce a fixed timeframe of seven or nine years for bankrupts to be discharged even if they have not met their target contribution. The trade-off is that the bankrupt will have his name permanently on a public register. This Bill reminds me of a point I raised some years back.

After the Asian Financial Crisis, many businessmen were declared bankrupt with enormous debts, some amounting to tens of millions of dollars. One would intuitively think that a bankrupt with a small debt would find it easier to get himself discharged than one with a large debt. But things did not always work out that way. Some bankrupts with large debts were able to secure a discharge because, as the Courts have rightly and logically pointed out, there was no purpose keeping them bankrupt because it would be impossible for them to ever fully discharge their debts. On the other hand, those with smaller debts could, over time, pay off their debts and, therefore, found it difficult to be discharged until their debts were fully paid off. That did not seem to be correct.

Under the Bill, bankrupts can now look forward to a fixed point of discharge, even if they do not repay the target sum. This is more equitable, so everyone is treated the same. But as the rule may encourage bankrupts to drag their feet and wait out the time period, the

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Bill provides that those who do not fully discharge their debts will have their names permanently retained on a register that the public and financial institutions can access. This strikes a sensible balance. It treats all bankruptcies equally regardless of the value of the debt and allows their discharge. It also incentivises a bankrupt to pay off his debts, which is also fair to his creditors.

The road out of bankruptcy is not always a road. Nonetheless, I would suggest that the OA be given a wider discretion to remove a bankrupt's name from the public register in appropriate cases, even though the target contribution has not been fully paid. There may be instances where a person was made bankrupt not because of any financial irresponsibility or culpability, but in cases where he is not to be blamed – large medical bills or because he guaranteed a relative's debts. The OA's wider discretion would allow our new scheme to apply in a compassionate and flexible way where the circumstances warrant it.

Next, a point on the OA's power to vary the bankrupt's monthly contribution and target contribution. Under the Bill, the OA determines the bankrupt's monthly and target contribution after the administration date of the bankruptcy. With regard to variations after the initial determination, section 86D only specifies three circumstances in which the OA may issue a certificate reducing the bankrupt's monthly and target contributions. Reductions in all other circumstances, as well as any upward revisions, will fall to be handled by the Court upon the application of the OA.

There should be no need for the OA to apply to Court to vary the contributions. After all, the OA makes the initial determination after taking into account a wide range of factors. Requiring the OA to seek a Court order makes the process cumbersome, adds to the Court's burden and increases costs. The Court already has the power to review the decisions of the OA where a bankrupt or his creditor is dissatisfied with the OA's decision. The OA should be given the power to make all variations and the Court should step in only where the bankrupt or a creditor challenges that decision.

Lastly, I would like to comment on the move to require institutional creditors to appoint private trustees when applying for bankruptcy proceedings. This is, in principle, a good idea. The OA's resources are limited and I have received feedback from residents that its officers are sometimes difficult to reach. The Bill seeks to lighten the burden on the Insolvency Office. Banks, finance companies and large businesses will be made to play a more active role in managing the bankrupt's affairs and they have the resources to do that.

The question then becomes one of impartiality and even-handedness. Since private trustees are appointed by the creditors, how will they ensure that they will act fairly? This is a matter of concern, since some 51% of bankruptcies involve financial institution creditors. I note that the OA is still responsible for overseeing and monitoring the private trustees. But

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given the OA's resources, how effective will that oversight be? Hence, I would like to ask the Minister: what assurance do we have that this new scheme will work fairly?

Mdm Speaker, I thank the Members for speaking in support of the Bill. Let me now respond to the queries raised by Members.

Mr Zainal Sapari suggested debt advisory services to educate Singaporeans on the risks of obtaining unnecessary credit. We do have in place educational programmes. As Mr Zainal noted, the MoneySENSE programme provides the public with education on financial management. MOE also has programmes to educate our students on the need to be prudent. MinLaw will, nevertheless, pass on Mr Zainal's feedback to the relevant agencies for consideration as to what else can be done by way of public education.

At the end of the day though, it really boils down to one principle – which is, not to spend or borrow more than you can afford to pay or repay. In cases of genuine need, rather than seeking credit which one cannot afford to service or to repay, I would urge those in that situation to seek financial assistance or financial counselling, which is available, before incurring the debt.

Mr Thomas Chua spoke about the need to promote entrepreneurship and be less risk-averse. We are mindful of this. But we are also mindful of the fact that some bankruptcies arise from business failures. So, the issue is how to encourage financial prudence without stifling entrepreneurship. There needs to be a balance between taking risks and being responsible. The amendments in this Bill are intended to strike the right balance between these two objectives.

Mr Gan Thiam Poh suggested having an alternative process to deal with those who default on debts that do not exceed the new threshold of $15,000. We have a threshold for bankruptcy because it is costly and it impacts the debtors and creditors and, hence, it should not be undertaken lightly. However, bankruptcy is not the only means of recovery. We do already have in place other means for recovery, which is through the Court process.

Disputes on lower value claims can be resolved or pursued at the Small Claims Tribunal or the Magistrate's Courts using the new simplified civil process. Organisations, such as Credit Counselling Singapore, also assist debtors to negotiate debt repayment plans with

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financial institutions.

Mr Gan was concerned that the increased debt threshold could encourage creditors to lend more or impose more costs. It is unlikely that creditors will lend more simply because of the raised threshold. In deciding whether and how much to lend, the primary consideration for creditors is the debtor's ability to repay the debt. That assessment would have to made independent of the mode of recovery, whether it is bankruptcy or some other means.

Mr Zainal Sapari, Mr Hri Kumar and Ms Sylvia Lim had queried on the checks and balances in place to ensure that private trustees carry out their jobs properly and do not overcharge. There are a number of checks and balances in respect of private trustees in the Bill. Private trustees are required to put up security, which can be forfeited by the OA if the private trustee does not fulfil his duties and obligations.

Private trustees are supervised by the OA and are required to submit reports to the OA at specified times. Bankrupts can provide feedback or make complaints at any time – they need not wait until the fifth or seventh year.

As for Members' letters, if it relates to offences or the conduct of a private trustee, they should be addressed to the OA. But if it relates to the administration of the bankruptcy estate, they can write to the private trustee directly. They may write to the OA also, who will help liaise with the private trustee.

Ms Lim asked how the appointment of private trustees may affect the administration of bankruptcies. As mentioned in my speech yesterday, the OA acts as trustee in over 99% of bankruptcies. Out of the total number of bankruptcies, it is estimated that about 60% are brought by institutional creditors. With the requirement for institutional creditors to nominate private trustees, the number of cases handled by the OA would be reduced. Basically, the approach is that institutional creditors should bear the cost of administration, which will allow the OA to focus more on the smaller businesses and lenders who have lent to someone who goes into bankruptcy.

With regard to the cost of private trustees, the Target Contribution is calculated without reference to the private trustee's fees. The fees, therefore, will not affect one's eligibility to be discharged.

Ms Lim and Mr Zainal asked whether the appointment of a private trustee would add to the bankrupt's costs and Ms Lim raised the example of a situation where the debt is, let us say, $20,000, and, in that case, would the debtor have to bear a heavy cost burden,

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especially if lawyers or accountants are appointed as private trustees.

I think here, again, the point is that we must first look at the creditors. If the creditor is an institution, then it is likely to have calculated its risks, including the costs of bankruptcy. The basic question is whether the ordinary taxpayer should pay for the bankruptcy administration when the creditor is a big bank, or whether we should ask the bank to pay for the costs. Our view is that the bank should pay. The way it works in practice is that private trustees are likely to have provided estimates or ballpark figures of their fees to the bank beforehand.

The private trustees will also usually not agree to act unless the creditors agree to indemnify them for their fees and expenses in the event that the bankrupt's estate is insufficient to cover their costs.

Taking all of these into account, the net effect of the amendments is that the institutional creditors will now have to calculate before deciding whether, having regard to the total debt, it is cost-effective to proceed with the bankruptcy at all.

There is also a check on the private trustee's fees – they have to be approved by the creditors or the Court. And creditors have strong interests to approve reasonable fees because, ultimately, it affects their returns.

Mr Zainal Sapari queried if the amendments would increase the costs of borrowing. As to this, I would say that the amendments will encourage institutional creditors to be more prudent in granting credit and recovering unpaid debts. This may reduce the rate of default, which, in turn, will help lower the overall costs of borrowing. The alternative is for taxpayers to continue to subsidise the costs of the OA administering these bankruptcies, which is not desirable.

Mr Zainal also queried whether the fixed timelines for discharge will increase moral hazard associated with bankruptcy. We do not think it will. In fact, the opposite is intended. Bankrupts will have strong incentives to cooperate with the trustee as the trustees retain the discretion to discharge a bankrupt. And even if the trustee decides to discharge the bankrupt, the creditors may still apply to the Court to object. Bankrupts who do not pay their Target Contribution in full will have a permanent record of their bankruptcy, which will affect their ability to obtain credit in future.

Mr Hri Kumar suggested giving the OA a discretion, either for a bankrupt to be discharged without his name appearing on the public register, or to remove a person's name

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from the register thereafter even though he has not paid his debts in full.

The provisions give the OA wide discretion on what may be available for inspection by the public. The Target Contribution is determined without reference to the debts owed by the bankrupt, but according to what reasonably their income is. Therefore, bankrupts who fail to pay the Target Contribution ought to remain on the register permanently. And the OA will exercise its discretion while taking this into consideration.

Mr Hri Kumar queried why the OA needs to apply to Court to vary the Target Contribution after the initial determination. The Target Contribution is the key factor that affects a bankrupt's eligibility to be discharged. Once it is set, it becomes the reference point by which both the debtor and the creditor base their decisions and take their actions. Parties would have acted on the basis of certain expectations. If it can be changed too easily, it could be disruptive and could operate unfairly on either one of the interested parties, depending on the variation.

For that reason, if there are to be any changes, it should be done by the Court, giving interested parties an opportunity to be heard. Since the scheme is new, we would prefer at this stage not to let the Target Contribution to be changed too easily. After the framework has been in place for a sufficient time for us to assess how it is working, we can always review it.

Ms Sylvia Lim queried how the Government arrived at the timeframes for differentiated discharge. The rationale for the timeframes is as follows.

Currently, the OA can issue a certificate of discharge only after three years. We have retained this. The seven-year period was introduced because reviews show that further realisations are minimal after seven years for most bankruptcies; and in recent years, most bankrupts were discharged about eight years after being made bankrupt. So, between three years and seven years, to strike a balance and to incentivise bankrupts to keep up with their monthly contributions, we decided that they should be eligible to be discharged in five years. That is approximately two months to calculate the Target Contribution, 52 monthly contributions and six months to process the discharge. That comes up to 60 months – or five years.

Ms Lim also asked about the number of repeat bankrupts and why they are subject to higher Target Contributions. Repeat bankrupts form under 4% of all bankrupts currently. So, it is really an exercise in balancing the interests of the people who have lent money and the interests of the bankrupt. If it is too easy to get out of bankruptcy, then there will be a moral hazard – and society as a whole loses. The loss will also be on small creditors who will be less

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able to do the risk analysis, compared with larger creditors. Credit flow as a whole will be impacted. If a person who has been a bankrupt gets discharged and then becomes a bankrupt again, it is fair that he be held to stricter standards. The higher Target Contribution emphasises this. Nevertheless, the framework provides them with a chance to make a fresh start.

I believe I have addressed Members' queries. I would like to thank the Members for their support of the Bill, which will put bankruptcy in Singapore on a new and more progressive framework. Mdm Speaker, I beg to move.

Thank you, Madam. I have one clarification for the Senior Minister of State. She mentioned that as far as the private trustees' fees are concerned, they do not factor into the calculation of the Target Contribution. At the same time, it is provided under the law that the debtor bears the primary responsibility of paying those fees. So, from where in the bankrupts' estate will these fees be paid out of?

I believe we are talking about two separate issues. One, when I talked about setting the Target Contribution, when we look at the Target Contribution, you are really looking at the amounts that the debtor should repay. In calculating that, what is looked is at is the debtor's reasonable income or what he is likely to receive. So, the Target Contribution is set without reference to the private trustee's fees.

I believe what Ms Lim is asking about is where do the private trustees' fees get recovered from. She is right that, ordinarily, they will come from the bankrupt's estate. So, if there is anything left over, obviously, it would have to go to the private trustee first. But in doing that, for small amounts, obviously, if the private trustee's fees are too large, then it is not going to be recoverable and that operates as a disincentive for creditors to go after bankrupts for smaller amounts. My answer was in the context of the question of what happens when you have a relatively smaller amount and whether the debtor will bear a heavy burden in fees.

So, you can see that the way it is designed is intended to make the creditors sit down and think, "Okay. This is how much the debt is. This is how much the debtor likely has in his estate. This is the amount of fees that the private trustees will have to be paid. If I appoint lawyers, there will be more fees as well. At the end of the day, is there anything left for me to recover?" In that sense, it encourages, firstly, the creditor to be prudent in lending; secondly, to make a very careful decision before deciding to go after somebody in

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bankruptcy.

*Question put, and agreed to.*

*Bill accordingly read a Second time and committed to a Committee of the whole House.*

*The House immediately resolved itself into a Committee on the Bill. – [Ms Indranee Rajah].*

*Bill considered in Committee; reported without amendment; read a Third time and passed.*

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