10 January, 2016
A failure by a debtor to satisfy a statutory demand for payment is a ground for a meritorious creditor to commence bankruptcy proceedings against the debtor under the Bankruptcy Act (“the Act”). It is therefore critical for a creditor who intends to rely on a statutory demand to commence bankruptcy proceedings against a debtor to ensure that the form and contents comply with requirements set out in both the Act and the Bankruptcy Rules (“the Rules”). Failure to comply with the legislative requirements may result in the Court setting aside the statutory demand.
In Ramesh Mohandas Nagrani v United Overseas Bank Ltd [2015] SGHC 266, the High Court considered whether a statutory demand should be set aside because of, among other grounds, alleged defects in the form of the statutory demand as stipulated under r 94(1) of the Rules.
Facts and Decision
The creditor, United Overseas Bank Ltd (“the Bank”), issued a statutory demand (“the SD”) on the plaintiff (“the Debtor”), who had signed three guarantees for banking facilities (“the Guarantees”) obtained by three companies (“the Borrowers”). The Debtor was the sole director and shareholder of each of the Borrowers.
The Debtor sought to set aside the SD on three grounds, two of which concerned the form and contents of the SD as required under r 94 of the Rules.
1.Rule 94(1)
Rule 94(1) of the Rules mandates that a statutory demand must be in the prescribed form set out in Form 1. Form 1 requires the actual amount of debt as of the date of the demand to be stated and uses the expression “bankruptcy application”. Under r 98(2)(d) of the Rules, failure to comply with r 94(1) is a ground for setting aside a statutory demand.
The Debtor argued that r 94(1) was contravened because the quantum of the debt claimed in the SD was stated as of 20 February 2014, whereas the SD was dated 25 February 2014. The Bank had also used the phrase “bankruptcy petition” instead of “bankruptcy application”.
The High Court held that strict compliance with r 94(1) was required and the SD did not comply with the requirements of Form 1. However, the two defects in the SD were not fatal. Although r 98(2) uses the word “shall”, the High Court observed that it could not have been the intent behind rr 94(1) and 98(2) for any non-compliance with Form 1, “no matter how trivial or inconsequential”, to be a ground for setting aside a statutory demand. In this regard, the legislative intent of the Act and the Rules was to accord priority to substance rather than form.
Section 158(1) of the Act, which applies to situations of non-compliance with r 94 (1), also supported the Court’s view that pragmatism should prevail. A statutory demand should therefore not be set aside by reason of “any formal defect or by any irregularity”, unless “substantial injustice ha[d] been caused”. On the facts, the Court found that the Debtor had not suffered any injustice as a result of the two defects in the SD.
2. Rule 94(5)
Secondly, the Debtor also sought to set aside the SD on the basis that the Bank held property which belonged to him, namely a car that was financed under a hire-purchase agreement with the Bank (“the Agreement”), or his interest under the agreement. The Debtor argued that the details of such property should have been specified in the SD in accordance with r 94(5) of the Rules.
Where a creditor “holds any property of the debtor or any security for the debt”, r 94(5) of the Rules requires the statutory demand to state the full amount of the debt as well as the nature and value of the security or the assets. Under r 98(2)(c) of the Rules, a statutory demand must be set aside if r 94(5) is not complied with.
The High Court first considered whether the Debtor had any property under the Agreement that was held by the Bank. The High Court dismissed the Bank’s submission that a statutory demand cannot specify a property held as security for another debt which was not the subject of the statutory demand. But it held that the Debtor could not rely on a clause under the Agreement which entitled the Bank
to set off any sums due to the Debtor against any other liabilities of the Debtor, as there was no evidence that the Bank was holding any sums due or payable to the Debtor.
Although the High Court accepted that the Debtor’s option to purchase the car under the terms of the Agreement was “property” as defined in the Act, r 94(5) did not require the Bank to specify the Debtor’s option to purchase in the SD for two reasons. Firstly, the Bank did not “hold” the option to purchase, as the option was held by the Debtor.
Secondly, the option was not property that the Bank was entitled to apply towards payment of the debt claimed in the SD. The phrase “property of the debtor” in r 94 (5) referred to the property of the debtor that the creditor is entitled to apply towards payment of the debt, given that the debtor is required by r 94(6) of the Rules “to deduct the value of the property from the total amount of the debt and is only entitled to claim the balance”. The Court observed that “[r]equiring a creditor to specify property that he is not entitled to apply towards payment of the debt would serve no purpose”.
3. Rule 98(2)(b)
Finally, the Debtor, relying on r 98(2)(b) of the Rules, contended that the debt was disputed on other substantial grounds and the SD should therefore be set aside. The High Court rejected all of the Debtor’s submissions as follows:
- As the Debtor had signed other guarantees which could also apply to the same debts and the total amount under all the guaranteesexceeded the loans to the Borrowers, the Guarantees were not binding on the Debtor. The Court held that it was inconsequential that the Debtor had signed other guarantees and the Bank’s claim did not exceed the limit provided for under each Guarantee.
- It was illegal and against public policy for the Bank to enforce a clause in each of the Guarantees to make repayment under the Guarantees because the Debtor had entered into a settlement agreement under which the Borrowers and the Debtor were allowed to make monthly repayments to the Bank (“the Settlement Agreement”). The Court upheld the clause based on prior case law.
- The Settlement Agreement did not provide that the Bank could continue to enforce the Guarantees against the Debtor if there was a breach of the Settlement Agreement. The Court agreed with the Bank’s submission that based on the terms of the Settlement Agreement, the Bank was entitled to maintain the claim under the Guarantees against the Debtor once he defaulted under the Settlement Agreement.
- The Guarantees were not binding on the Debtor as his signatures on the Guarantees had not been witnessed by the Bank’s representatives personally.
The Court reasoned that s 6(b) of the Civil Law Act only required the guarantee to be in writing and signed by the guarantor. The Bank’s representatives were not required to be witnesses to the procedure
- The clauses in the Guarantees were not explained to the Debtor. The Court took the view that the Debtor was a savvy businessman and had understood the contents of the Guarantees.
- The Debtor had only initialled on the last page of the Guarantees and only the terms on the last page were binding on him. The Court found that this submission was made in desperation and was entirely devoid of merit. The High Court therefore held that the Debtor had failed to show any substantial grounds for disputing the debt and dismissed the Debtor’s application to set aside the SD. The Debtor has appealed against the Court’s decision.
Conclusion
Debtors will often dispute the statutory demand as a first line of defence to fend off bankruptcy proceedings. However, as can be seen in this case, the Court will take a pragmatic and robust approach towards such disputes and will not set aside a statutory demand based on mere irregularities in the form of, or non-material missing contents in, the statutory demand. Where the debtor disputes the
underlying debt, substantial grounds must be shown by the debtor.
Nevertheless, a meritorious creditor should take due care and diligence to ensure that the legislative requirements under the Act and the Rules are complied with to avoid any potential disputes over the statutory demand which may result in the Court setting aside the statutory demand.
