Insolvency Law
| Author | LEE ENG BENG LLB (NUS), BCL (Oxon), Advocate & Solicitor (Singapore) |
| Date | 01 December 2002 |
| Published date | 01 December 2002 |
14.1 Like in recent past years, 2002 yielded many interesting decisions on all major aspects of insolvency law, some of which addressed hitherto unresolved or unaddressed issues. Highlights include the Court of Appeal”s decision in Show Theatres Pte Ltd v Shaw Theatres Pte Ltd[2002] 4 SLR 145 dealing with the issue of associates and connected persons in the context of the unfair preference provisions of the Bankruptcy Act (Cap 20, 2000 Ed), the decision of Belinda Ang JC (as she then was) in Re Dayang Construction and Engineering Pte Ltd[2002] 3 SLR 379 on the form of winding up demands, Lai Siu Chiu J”s decision in Deutsche Bank AG v Asia Pulp & Paper Co Ltd (Originating Petition 2/2002, HC, unreported judgment dated 31.10.2002) dealing with the grant of judicial management orders, S Rajendran J”s decision in Wong Kwei Cheong v ABN AMRO Bank NV[2002] 3 SLR 594 on the service and setting aside of bankruptcy statutory demands, and Lai Kew Chai J”s decision in Roberto Building Material Pte Ltd v Oversea-Chinese Banking Corp Ltd[2003] 2 SLR 237 on the duties of debenture holders with regard to the appointment of receivers and managers. Likely to be of especial academic interest is Lee Seiu Kin JC”s decision in Re Pinkroccade Educational Services Pte Ltd[2002] 4 SLR 867.
14.2 It is to be noted that some of the insolvency law cases reported in 2002 were in fact decided in 2001 and were discussed in last year”s review: Sia Leng Yuen v HKR Properties Ltd[2002] 1 SLR 83; Tong Tien See Construction Pte Ltd v Tong Tien See[2002] 3 SLR 76. These cases will accordingly not be reviewed here. The law reports have also, commendably, sought to make up for past omissions: see the belated report of the 2000 decision of Re Boonann Construction Pte Ltd[2002] 3 SLR 338 (this decision had been noted in the Annual Review 2000). For completeness, this reviewer would also record that the High Court”s decision in Tong Tien See Construction Pte Ltd v Tong Tien See (reviewed last year on issues relating to the meaning of insolvency and fraudulent trading) gave rise to two appeals by, respectively, the company in liquidation and two of the respondents against whom orders had been made by the High Court. Both appeals were allowed in part: Caltong (Australia) Pty Ltd v Tong Tien See Construction Pte Ltd[2002] 3 SLR 241. However, the key issues in the appeals on the law relate to breach of fiduciary duties and tracing orders, and the Court of Appeal”s decision will therefore not be reviewed here
(save for one point in relation to the obtaining of leave to commence an action against a bankrupt).
14.3 Section 254(2)(a) of the Companies Act (Cap 50, 1994 Ed) states that:
“A company shall be deemed to be unable to pay its debts if a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding $10,000 then due has served on the company by leaving at the registered office a demand … requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.”
This provision facilitates and expedites the proof of the insolvency of companies where the demanded debt, of more than the sum fixed by Parliament, is unpaid (FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd(1988) 14 NSWLR 643 at 653).
14.4 Unlike a bankruptcy statutory demand, however, the precise form and contents of a winding up statutory demand are not statutorily prescribed, and have been left to be defined by case law. Following a line of Australian authority, the Court of Appeal has held that, since the consequences of failure to comply with the notice are serious, in order to attract the deemed insolvency advantages there must be strict compliance with s 254(2)(a) (Pac Asian Services Pte Ltd v European Asian Bank AG[1987] SLR 1 at 7). However, that case dealt with the issue of the proper service of a demand, which rightly should attract a strict approach. It is submitted that, in relation to the form and contents of the demand, the touchstone should be whether any substantive prejudice has been caused to the debtor. Section 254(2)(a) must be given business operation, and the requirement of strict compliance should be enforced only to ensure that the statutory purpose is not frustrated and the company is not deprived of a right or opportunity to exercise a right, not to enforce discipline among lawyers (Pro-Image Productions (Vic) Pty Ltd v Catalyst Television Productions Pty Ltd(1988) 14 ACLR 303 at 305).
14.5 The decision in Re Dayang Construction and Engineering Pte Ltd[2002] 3 SLR 379 fully endorses this latter principle. Belinda Ang JC (as she then was) held that it is not necessary for a demand to refer to the period of three weeks within which the debtor company is to make payment, and that such a demand would be valid even if it stipulated some shorter period for payment. The three-week period is relevant only for determining whether the
company”s non-compliance with the demand has given rise to the presumption of insolvency, and is not required to be stated in the demand itself. Ang JC also held that it is not necessary for a demand to contain a warning that the company may be wound up if it fails to comply with the demand, or state that the company has, apart from payment, the options of securing or compounding the debt to the reasonable satisfaction of the creditor.
14.6 The learned judicial commissioner further indicated that, in considering the form in which a demand was expressed, one ought to bear in mind that ultimately the court had the discretion whether to wind up the company. In this regard, the learned judicial commissioner noted that, in the instant case, it was not suggested that the company had been misled by the statutory demand.
14.7 Presumably, this means that a more flexible and practical approach should be adopted in determining whether a statutory demand is valid, that is, the court will focus more on the substantive question of whether the company ought to be wound up rather than the procedural issue of whether the demand has complied strictly with the statutory requirements. It is submitted that this is the correct approach. The fundamental question is whether the company has been unfairly prejudiced by a demand, and this is certainly more appropriately addressed at the stage of exercising of the court”s discretion rather than by asking whether the demand is in compliance with technical requirements.
14.8 Re Management Recruiters International (Asia) Pte Ltd [2002] 4 SLR 561 concerned the application of the well-established rule that the court will dismiss a winding up petition if it is founded upon a debt which is bona fide disputed by the company. In this case, the creditor had presented a winding up petition against a company on the basis that the company owed a debt of £62,366.32 arising out of the company”s purported breaches of franchise agreements with the creditor. Choo Han Teck JC (as he then was) dismissed the petition.
14.9 On the facts, the only evidence of the alleged debt was the contents of certain “without prejudice” correspondence between the parties. An additional affidavit filed on behalf of the petitioner contained evidence which traversed beyond the facts stated in the winding up petition, and was to be given little weight, if any. Accordingly, the learned judicial commissioner was of the view that there was no admissible evidence to support the petition, and the petition had to be dismissed.
14.10 The learned judicial commissioner proceeded to reiterate the oft-echoed judicial sentiment that a judge sitting in a companies” winding up court is not well-placed to adjudicate on the merits of a commercial dispute, and that the debt upon which the petition is founded must be unambiguous and obviously above the statutory sum of $10,000. One minor comment which this reviewer would like to make in this regard is in relation to the suggestion in the judgment that a minimum statutory sum of $10,000 must be owed by a company to a petitioning creditor before the winding up petition will be allowed. Such a proposition is doubtful. The statutory threshold of $10,000 is a requirement of a 21-day winding up demand served on the company under s 254(2)(a) of the Companies Act, the failure to comply with which will give rise to an inference that the company is unable to pay its debts under the general ground for winding up in s 254(1)(e) of the Companies Act. However, the service of and the company”s non-compliance with a statutory demand is not the only way to show the insolvency of a company. Independent of a statutory demand, if a company fails to pay an undisputed debt which is less than the minimum sum of $10,000, the court may still make a winding up order under the general ground of insolvency under s 254(1)(e) of the Companies Act. Early English cases holding that the court will not bother with winding up petitions founded upon such small debts (Re Herbert Standring & Co[1895] WN 99; Re Fancy Dress Balls Company[1899] WN 109) have not been followed by more recent authorities (see FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (supra)).
14.11 Choo JC also appeared to throw some doubt on the well-established line of authority (starting from Re Tweeds Garages Ltd[1962] Ch 406) that a dispute on the quantum of the debt is not sufficient to persuade the court to dismiss a winding up petition. Choo JC interpreted this line of authority to simply mean that the court should not accept a mere suggestion that the debt is disputed, and that the dispute must be genuine and plausible. With respect, this analysis is probably incorrect. If the company does not dispute part of the debt claimed by the petitioner but simply refuses to pay it, it is...
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