The Court of Appeal said it was troubling that fraudsters are able to abuse court processes by applying for bankruptcy to insulate themselves from lawsuits arising from their own scams.
The three-judge court made these remarks in a written judgment in favour of an Indonesian businesswoman who was duped into giving four loans totalling $1 million to a stranger, who never repaid them and later declared himself bankrupt.
The borrower, former property agent Stanley Choong Kok Kee, claimed he had a US$7.2 million (S$9.3 million) inheritance in Britain but needed to pay large sums of money to free up the funds.
To cut her losses, Madam Lena Leowardi, 60, sued Mr Yeap Cheen Soo, who acted as guarantor for two loans amounting to $540,000.
She lost in the High Court, which found that she cannot recover the money because she effectively acted as an unlicensed moneylender by giving the loans for a higher return.
But the appeal court - comprising Chief Justice Sundaresh Menon, Judge of Appeal Andrew Phang and Justice Steven Chong - reversed the decision.
The court said that Mr Yeap failed to specifically plead that Madam Leowardi had lent money to Mr Choong in return for a larger sum being repaid.
As such, there was no moneylending element in the transactions because, on the face of the loan agreements between Madam Leowardi and Mr Choong, he was supposed to repay her the same amount she lent him.
In the judgment, delivered by Justice Chong, the court described the case as a "classic tale of two innocent victims of a scam leading to the legal conundrum as to which of two victims ought to bear the legal consequences" of a fraudster's actions.
The court also expressed concern about how Mr Choong voluntarily applied for bankruptcy in August 2011, two months after he received the fourth loan from Madam Leowardi.
The court also asked the Attorney-General's Chambers and the police to "look into" the facts of the current case, noting that a man was recently charged over a similar fake inheritance scam.
Madam Leowardi said she lent money to Mr Choong to help her friend - who had handed over about $700,000 - get back his money.
She was suspicious about Mr Choong's inheritance claim and even called the police in London to verify a document he provided.
She also insisted on some form of guarantee and an agreement prepared by a lawyer.
Mr Choong took her to the office of his lawyer Oliver Quek and introduced her to Mr Yeap, who agreed to sell his private apartment if Mr Choong cannot repay the loans.
Mr Choong also offered his Housing Board flat as collateral, but Madam Leowardi did not know at the time that flat owners cannot do so to borrow money.
Madam Leowardi's lawyer, Mr Justin Chan, said that aside from recovering part of her loans, she was happy to have had the label of "moneylender" removed from her name.
This article was first published on November 28, 2014. Get a copy of The Straits Times or go to straitstimes.com for more stories.