Proof of Debt Regime: When is it inappropriate for resolving claims?

Creditors might generally be reluctant to embark on litigation in order to recover debts owing from an insolvent company or bankrupt – even if it involves a complex and highly disputed claim. This is understandable since the prospects of success and eventual recovery may be limited. To save time and costs, they would much rather file a proof of debt and have it adjudicated by the liquidator / private trustee in bankruptcy (PTIB).

The case of Yit Chee Wah (as private trustee of the estate of Chan Siew Lee Jannie, a bankrupt) v Fulcrum Distressed Partners Ltd [2026] SGHC(A) 1 provides guidance on when the proof of debt regime is unsuitable for resolving such claims, and what to do next.

Background

1. This case concerned the admission/rejection of certain parts of a proof of debt filed against the bankruptcy estate of Ms Jannie Chan Siew Lee.

2. The liquidators of Timor Global Pte Ltd (“TGPL”) filed a proof of debt against Ms Chan’s bankruptcy estate for four sums, including the TL Sum and Finished Goods Sum which were the subject of the appeal.

3. TGPL was in the business of agricultural trading, such as coffee beans. It was involved in a joint venture with a Timor Leste company, Timor Global (TL) Pte Ltd (“TL”) and Intraco Trading Pte Ltd (“Intraco”) for the processing and trading of coffee beans, with the profits to be shared between TGPL and Intraco.

4. Under the terms of the JV agreement:

(a) TGPL would place orders for processed coffee beans from Intraco, and Intraco would in turn order an equivalent amount from TL. Intraco would make an advance payment to TL to enable it to purchase raw materials from third parties, and then process them into coffee beans.

(b) Intraco would on-sell the coffee beans to TGPL at cost, who would then market and sell them to third party buyers.


(c) TGPL and Intraco split the profits according to a formula.

5. At the material time, Ms Chan was one of the directors of TGPL, and a shareholder in TL.

6. The TL Sum was S$15,766,460 and referred to receivables allegedly owed by TL to TGPL as at 31 December 2014.

7. The Finished Goods Sum referred to a sum of US$2,301,767.43 which allegedly represented sales proceeds from coffee beans sold by TGPL in 2008 which were allegedly paid directly by TGPL’s customers to TL between 19 June 2008 and 14 November 2009.

8. The basis of the claim for both sums was that Ms Chan had breached her fiduciary duties as a director of TGPL. This arose because TGPL’s liquidators found discrepancies in the records of TGPL as to the amounts due from TL.

9. TGPL subsequently assigned its claims against Ms Chan to Fulcrum Distressed Partners Ltd (“FDPL”).

10. Ms Chan’s private trustee in bankruptcy, Mr Yit Chee Wah, adjudicated the proof of debt and rejected the claims for both the TL Sum and the Finished Goods Sum.

(a) The TL Sum was rejected because (i) the documents did not provide satisfactory evidence that Ms Chan breached her custodial fiduciary duties to TGPL, and (ii) the claim was time-barred.

(b) The Finished Goods Sum was rejected because (i) there was insufficient evidence that Ms Chan instructed the customers to make these payments to TL or knew about them, and (ii) there was no evidence that Ms Chan directly benefitted from TL’s receipt of the Finished Goods Sum.

11. FDPL appealed against Mr Yit’s adjudication decision to the Court, which found that:

(a) The TL Sum and the Finished Goods Sum were capable of being provable debts, if established by the evidence.

(b) The TL Sum should be admitted in full, and was not time-barred.

(c) The Finished Goods Sum should be admitted.

12. Mr Yit appealed against the lower Court’s decision, to the Appellate Division of the High Court.

Legal Framework

13. The proof of debt regime is not meant to be used to adjudicate matters involving controversial disputes of fact. There is a policy of efficiency underlying this regime. When faced with a proof of debt that involves disputes of fact that cannot be easily resolved on documentary evidence, the liquidator/PTIB is entitled to reject it.

14. When serious allegations are made (such as misfeasance and fraud), this suggests that cross-examination of witnesses is necessary and it is inappropriate for the disputed claim to be resolved under the proof of debt regime. This is unless the serious allegation is clearly made out on the documentary evidence, or there is no serious dispute about the existence of such misconduct.

15. The proper recourse for a liquidator/PTIB when faced with factually complex disputes is to either (a) reject the proof of debt with reasons or (b) seek directions from the Court on the manner in which it should be resolved (pursuant to s 145(3) of the IRDA for corporate insolvency cases, or s 43(2) of the IRDA / s 40(2) of the BA for personal insolvency cases).

16. In the latter case, the Court may find that a full trial, or limited cross-examination of key witnesses, is necessary for the resolution of the issues. The paramount consideration is whether oral examination of witnesses and/or discovery is necessary for fairly disposing of the particular issue. This depends on the facts of each case, and the court will not order oral examination of witnesses where such an order would be unnecessary or oppressive. The court may also consider whether there are gaps in the documentary / affidavit evidence.

17. These principles apply with equal force in both corporate and personal insolvency proceedings.

The Court’s Holding

18. The Appellate Division allowed the appeal and set aside the lower Court’s orders for Mr Yit to admit the TL Sum and the Finished Goods Sum. Instead, the Appellate Division ordered a full trial on the claims by FDPL against Ms Chan’s bankruptcy estate.

19. This was because the documentary and affidavit evidence did not clearly establish whether Ms Chan was in breach of her duty to act honestly and bona fide in TGPL’s interests in respect of the TL Sum and the Finished Goods Sum. Further, the material disputes of fact in relation to FDPL’s claims render them unsuitable to be decided without a trial. FDPL ought to be given an opportunity to properly prove its claims through the trial process.

20. The five issues to be determined in respect of FDPL’s claims were:

(a) Whether the TL Sum represents a genuine debt owed by TL to TGPL, in particular, whether they were made pursuant to the JV agreement, or loans from TGPL to TL;

(b) What is the quantum of the TL Sum and the Finished Goods Sum;

(c) Whether Ms Chan authorised or caused TGPL to make payments comprising the TL Sum, and gave instructions to TGPL’s customers to pay the Finished Goods Sum to TL;

(d) Whether Ms Chan breached her fiduciary duties by failing to cause TGPL to recover the TL Sum and the Finished Goods Sum from TL (assuming they were genuine debts owed by TL to TGPL); and

(e) If the answer to the third or fourth issues were in the affirmative, whether FDPL’s claims against Ms Chan are time-barred.

21. Ordering a full trial was appropriate on the facts of the case. Ordering cross-examination of the deponents of the affidavits would not be sufficient. The points in contention had not been clearly defined, there were numerous gaps in the affidavit and documentary evidence, and certain individuals with knowledge of the material facts would have to be ordered to give evidence and examined in court.

22. To give some examples:

(a) On the first issue, it appeared that TGPL had made payments of certain sums within the TL Sum to TL pursuant to the JV agreement (i.e., for TL to purchase raw materials and process them into coffee beans). If so, there could be no issue of any breach of fiduciary duty by Ms Chan. However the TL Sum also appeared as a receivable in the management accounts of TGPL, and there were significant unexplained variances between this and the company’s audited financials statements between 2005 and 2008. The directors/staff of TGPL who had handled these payments should give evidence on the reasons for these payments and might be able to shed light on the reasons why they were made to TGPL instead of TL, and why they were recorded as loans in TGPL’s books. Ms Chan had also made contradictory statements as to whether these were loans due from TL to TGPL, and the extent of her involvement in TGPL. These are clear material disputes of fact which ought to be resolved by way of cross-examination.

(b) On the third issue of whether Ms Chan authorised TGPL to grant the TL Sum and instructed customers to transfer the Finished Goods Sum to TL, the only evidence before the Court was an observation by TGPL’s liquidators that the books and records of TGPL were under the management and control of Ms Chan until its winding up, and that Ms Chan had signed off on TGPL’s financial statements and was an authorised bank signatory. There was however no evidence as to Ms Chan’s knowledge at the time the payments were made. This was also contradicted by Ms Chan’s evidence in her sworn statements on the extent of her involvement in TGPL. She ought to be cross-examined on these apparent contradictions.


(c) On the fourth issue, the legal test of whether a director had breached her duty to act bona fide and honestly is part-subjective and part-objective. For example, where she comes to know about a transaction which is against the company’s interest, believes that it is so, but does nothing to try to prevent the transaction or reverse it. The available evidence was insufficient to show that Ms Chan failed to cause TGPL to pursue the receivables, and the reasons for her acts and omissions. Causation was also an issue i.e., whether TGPL could have recovered the full sum even if it had pursued repayment from TL. Further evidence from Ms Chan, TL’s director and possibly staff from TL who handled their finances would be needed to determine this question.

Key Takeaways

23. The practical reality is that parties generally try to avoid litigation when it comes to recovering debts in an insolvency scenario, since it may be cheaper and more expedient to file and adjudicate a proof of debt. This judgement is a timely reminder that the regime’s policy of efficiency is a double-edged sword, which renders it unsuitable for resolving complex factual disputes. This is especially so where the claim entails serious allegations of misconduct that cannot be proved on documentary evidence alone.

24. Ultimately, both creditors and insolvency practitioners have to make a judgement call about what is the best way to resolve such claims. Appealing the adjudication decision may be low-cost in the short term, but could end up increasing costs in the long run, if the Court directs parties to head to a full trial. It may in some cases turn out to be more cost effective to refer the matter to Court and obtain an order for cross-examination of certain key witnesses, once the main issues have been distilled. As part of the recovery/adjudication strategy, the parties may consider whether incorporating alternative dispute resolution (such as mediation) could yield better outcomes.

If you would like to discuss the implications of this decision on your insolvency matters, we would be happy to advise.