A statutory demand against a company is usually a precursor to a winding up application from the creditor. However, there are a number of ways for the debtor company to stave off the making of the winding up order, such as the compounding of the debt to the reasonable satisfaction of the creditor under section 254(2)(a) of the Companies Act (Cap. 50) (the “Act”). In Bombay Talkies (S) Pte Ltd v United Overseas Bank Limited  SGCA 66, the Singapore Court of Appeal provided authoritative exposition on what constitutes the „compounding‟ of a debt within the meaning of section 254(2)(a) of the Act.
The creditor in this appeal managed to have the winding up order against the debtor upheld by the Court of Appeal, and was successfully represented by Rebecca Chew and Mitchell Yeo of Rajah & Tann Singapore LLP.
Compounding of a Debt
The process of the compulsory winding up of insolvent companies often begins with the service on the registered address of the debtor company, a statutory demand specifying the debt owed to the creditor. If the debtor is unable to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound it to the reasonable satisfaction of the creditor, the debtor company will then be deemed to be unable to pay its debts and the creditor may, in reliance of such, then make a winding up application.
To avoid this, the debtor has a number of options. The debtor may, in the period of 3 weeks after the service of the statutory demand:
- pay the sum demanded;
- secure the sum demanded to the reasonable satisfaction of the creditor; or
- compound the sum demanded to the reasonable satisfaction of the creditor.
Compounding a debt refers to the making of an agreement between the debtor and creditor, whereby an alternative obligation in incurred in lieu or in satisfaction of the debt. However, not all agreements to accept an alternative payment arrangement constitute the compounding of a debt.
The Court of Appeal clarified that, in order for a debt to be compounded, the original obligation must have been discharged. Essentially, the new arrangement must override the original arrangement, such that the creditor is no longer able to enforce the original obligation. If the new arrangement contemplates that the original debt is still valid and enforceable and an action can continue to be brought upon it, then the debt has not been compounded. Therefore, whether the debt has been compounded depends largely on the terms of the agreement.
In this case, the Creditor bank had issued a statutory demand against the Debtor company for a sum of money due and owing. Subsequently, the parties entered into a Repayment Agreement prepared by Rajah & Tann, whereby it was provided that the Debtor would, inter alia, make monthly repayments, which the Creditor bank could apply towards the amounts due and owing by the Debtor to the Creditor bank.
After entering into the Repayment Agreement, the Debtor failed to observe the repayment schedule, and the Creditor applied for and obtained a winding up order against the Debtor without serving a fresh statutory demand for winding up. The Debtor appealed against the winding up order, arguing that the debt specified in the statutory demand had been compounded by the Repayment Agreement.
The Court of Appeal disagreed with the Debtor, holding that the Repayment Agreement did not serve to compound the original debt. Applying the test for the compounding of a debt explained above, the Court found that:
- The repayment terms were expressed to be without prejudice to any of the Creditor‟s rights, showing that the original obligation owed by the Debtor was not discharged.
- The Repayment Agreement also provided that the Creditor would be entitled to enforce its rights against the Debtor in the event of any failure of the Debtor to comply with the terms of the Repayment Agreement.
- The Repayment Agreement thus only served to grant the Debtor an indulgence, and this was on the express terms that the Creditor‟s rights would not be compromised, and did not constitute the compounding of the debt.
The Court of Appeal therefore dismissed the Debtor‟s appeal against the winding up order.
Where a debt has gone unpaid, it is common for parties to seek to enter into alternative payment arrangements rather than head straight for insolvency proceedings, even if a statutory demand has already been issued. However, creditors should be aware that such alternative payment arrangements may serve to compound the debt and inadvertently hinder a subsequent winding up application.
In such a situation, creditors should ensure that their entitlement to enforce their rights is adequately preserved on the express terms of any alternative payment arrangement. These terms should include the necessary protective language. Such would allow the debtor the opportunity to repay in instalments, while also preserving the creditor‟s right to proceed with winding up proceedings if necessary. The Court of Appeal was of the view that the Repayment Agreement prepared by Rajah & Tann had sufficient protective language to preserve the creditors‟ rights.