Services / Bankruptcy and rehabilitation
Secured creditors: four ways to prove a debt
A secured creditor has more options than an unsecured one, but the options come with time limits and a declaration requirement — and missing that requirement can render the security held worthless in one stroke.
The four options in section 96
Section 96 of the Bankruptcy Act B.E. 2483 (1940) allows a secured creditor to prove on four bases: having surrendered the security for the benefit of all creditors, it may prove for the full amount; having enforced against the security, it may prove for the shortfall; having asked the official receiver to sell the security by auction, it may prove for the shortfall; and having valued the security, it may prove for the shortfall.
The fourth option, and the power to redeem
The fourth option carries a mechanism with it. Where the creditor puts a value on the security, the official receiver may redeem it at that value. If the receiver considers the value unreasonable, it may sell by a method agreed with the creditor, or failing agreement by auction, but without prejudicing that creditor, and both the creditor and the receiver may bid. Whatever net sum the sale produces is then treated as the value the creditor stated in its proof.
The four months that run in the creditor's favour
The same paragraph sets a time limit that runs in the creditor's favour: if the official receiver does not notify the creditor in writing, within four months of the proof being filed, whether it will exercise the right of redemption or agree to a sale of the security, the receiver is taken to have consented to the property becoming the creditor's own at the value the creditor stated, and it loses the right to redeem or sell.
Section 97, and the slip that costs the security
Section 97 provides that where a secured creditor proves without declaring that it is secured, it must return the security to the official receiver and its rights over that property are extinguished, unless it can show the court that the omission happened through inadvertence, in which case the court may permit the proof to be amended. A consequence that severe makes completing the form a task worth checking twice.
In rehabilitation the position differs
Section 90/28 sets a different position in rehabilitation: subject to sections 90/12(6), 90/13 and 90/14, a secured creditor may enforce against the security without proving in the rehabilitation at all, provided it allows the official receiver or the planner to inspect the property. Knowing which process the debtor is in therefore changes the whole set of options.
PREPARE
What to bring
- The security documents and evidence of registration
- The secured property and its present condition
- The latest valuation and how it was arrived at
- The outstanding balance with interest to the filing date
- The date the absolute receivership order was advertised
QUESTIONS
Questions this raises
What follows from valuing the security too low or too high?
The stated value cuts both ways at once: it is the basis of the shortfall that may be proved for, and it is the price at which the official receiver may redeem. Valuing low increases the provable shortfall but invites a cheap redemption; valuing high does the reverse. The figure should therefore come from a valuation whose basis can be explained.
The proof went in without mentioning the security.
Section 97 makes the consequence a return of the security and extinction of the rights over it, but with an exception where the omission happened through inadvertence, which has to be shown to the court. What to do is assemble evidence of how the omission came about and move quickly, since the exception depends on the court's discretion to allow the proof to be amended.
LAW
The legislation
- Bankruptcy Act B.E. 2483 (1940), section 96
- Bankruptcy Act B.E. 2483 (1940), section 97
- Bankruptcy Act B.E. 2483 (1940), section 90/28
ENQUIRIES
