Can Someone Who is Bankrupt Transfer Property to Another Person?

Can an individual who is declared bankrupt transfer a movable property to another person?

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This issue is dealt with in Yui Chin Song & Ors v Lee Ming Chai & Ors. While the case dealt with other matters of law, we will be solely focusing on the above issue in this article.  

Brief facts of the case

Tampin Theme Park is a family company founded by Yui Cha Bok and his wife, Lee Tui Eng. In 2003 all their shares were transferred to their son and wife, Yui Chin Chau and Tew Su Keow. Once that was done, the plaintiffs (Yui Chin Song and others) were also made shareholders and directors of the company. 

The company however, was suffering from financial difficulty. To circumvent this issue, the company made Ming Chai as one of the directors of the company on a promise to obtain a bank loan for the company and to exonerate Cha Bok of his debts. It was alleged by the plaintiffs that once the bank loan is obtained, Ming Chai will resign as a director and surrender the shares of the company back to the plaintiffs. 

Ming Chai obviously did not kept his promise. To make matters worse, Cha Bok, Tui Eng and Chin Chau were made bankrupt in 2007. Before Chin Chau were declared a bankrupt, he and his wife transferred all their shares to the plaintiffs. However, the plaintiffs subsequently discovered that they were no longer the directors or shareholders of the company (the plaintiffs alleged that the shares were purchased and transferred to Ming Chai and the new directors of the company i.e. the rest of the defendants by fraudulent means, which was dismissed by the court as there was no evidence adduced by the plaintiffs their claim). 

Chin Song and the rest of the plaintiffs brought the matter before court, seeking to invalidate the entire transfer of the shares (from Chak Bok and Tui Eng) based on section 52 of the Bankruptcy Act (now known as Insolvency Act).

The decision of the court

The High Court and the Court of Appeal held that as Cha Bok and Tui Eng were declared bankrupt, as any transfer of movable properties by a bankrupt to another person is null and void up to a certain period of time. The Federal Court agreed to a certain extent. In the judgement, the Federal Court held that:

  1. While it is not disputed that Cha Bok and Tui Eng were declared bankrupt and the transfer of the shares falls within the time limit stipulated under section 52 of the Act, only the Director of Insolvency (‘DGI’) can invoke section 52 of the Act.
  2. In any event, the High Court and the Court of Appeal had erred when it decided that the transfer from Chin Chau and Su Keow to the Plaintiffs were void. This is because section 52 of the Act was created to invalidate only immediate transaction i.e. between the bankrupt and the immediate transferee (the transfer of shares from Cha Bok and Tui Eng to Chin Chau and Su Keow). 
  3. Section 53B (3) of the Act which states that the DGI does not have any recourse against any person (not being immediate transferee) to whom the movable property was sold, resold or otherwise disposed of, had paid or given valuable consideration and acted in good faith in acquiring the shares; and
  4. Section 54 (d) of the Act states that nothing can invalidate any contract, dealing or transaction that took place before the bankruptcy provided that the contract, dealing or transaction was done for valuable consideration i.e. the movable property was paid for with a fair and reasonable money value and that the transferee was unaware that he was dealing with a transferor who is facing a potential bankruptcy suit.

Based on the facts of the case, the court held that as Ming Chai and the rest of the defendants obtained the shares through valuable consideration (they bought the shares for RM60,000.00) and the fact they could not have known Cha Bok, Tui Eng and Chin Chau are facing imminent bankruptcy (the shares were bought more than one year before Cha Bok, Tui Eng and Chin Chau were declared bankrupt), the transfer or the sales of the shares to them could not be declared void. 

In conclusion

To summarize, if an individual who is bankrupt wishes to transfer movable properties to another person, it has to fulfil the strict requirement that is laid down (amongst others) in the provision of the Act. If not, the transfer will be considered null and void by the court.

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