SOPA takes a backseat: The role of cross-demands in setting aside statutory demands issued pursuant to judgments made in terms of SOPA adjudication - A case study of Lim Poh Yeoh v TS Ong Construction Pte Ltd [2016] SGHC 179

Dentons

[co-author: Carol Wong]

Introduction

The High Court has ruled that a statutory demand based on a judgment pursuant to an adjudication determination made under the Building and Construction Industry Security of Payment Act (SOPA) can be set aside on the ground that the debtor had a cross-demand which it was pursuing in a separate suit. In the course of its judgment, the court also distinguished between genuine cross-demands to the adjudication determination and defences to the claim in the original adjudication application.

Lim Poh Yeoh v TS Ong Construction Pte Ltd [2016] SGHC 179 (Lim Poh Yeoh) is significant as it clarified that a respondent who has an adjudication determination issued against him can successfully fend off bankruptcy proceedings against him based on the adjudication determination if he has valid cross claims against the claimant. Essentially, the provisions of bankruptcy laws were not subject to the oft-referred to principle in SOPA of “pay first, argue later”.

This development would be of interest to construction professionals and stakeholders in the building and construction industry since it poses an exception to the “pay first, argue later” principle.

Background

Ms Lim Poh Yeoh (LPY) engaged TS Ong Construction Pte Ltd (TSO) for construction work under an agreement dated 3 May 2011 (the Contract). LPY failed to make payment in respect of progress payments and TSO submitted the matter for adjudication under the SOPA. LPY failed to submit an adjudication response and TSO obtained an adjudication determination in its favour for S$138,660.16.

Following LPY’s failure to make payment under the adjudication determination to TSO, TSO entered judgment in the terms of the adjudication determination, but was largely unsuccessful in enforcing it. Separately, LPY commenced a suit against TSO claiming approximately S$400,000 in damages arising out of alleged breaches of the Contract (S 92/2015). LPY also applied for a stay of execution of the judgment made in terms of the adjudication determination, but her application was dismissed and her appeal was also unsuccessful.

Eventually, TSO initiated bankruptcy proceedings against LPY by issuing a bankruptcy statutory demand based on the judgment entered against LPY following the adjudication determination.

LPY then brought an application (OSB 66/2015) to set the statutory demand aside under r 98(2) of the Bankruptcy Rules (BR) on the grounds that she had a valid cross demand against TSO by virtue of the claims brought in S 92/2016. The Assistant Registrar (AR) dismissed the summons, holding that the claims in S 92/2016 were not genuine cross demands but instead defences to the original action, so that r 98(2) of the BR did not apply. LPY appealed.

The Judgment

Judicial Commissioner Edmund Leow (Leow JC) examined three issues that arose in the appeal, namely:

  1. whether the statutory demand had been validly served;
  2. whether LPY was precluded from bringing the OSB 66/2015 by virtue of the doctrine of res judicata; and
  3. whether LPY had a valid cross demand within the meaning of r 98(2)(a) of the BR.

While Leow JC dealt with (i) and (ii) with little difficulty, the significance of the case lies in his discussion of the substantive issue in (iii).

Leow JC took several steps in considering the issue:

  1. the significance of the debtor having a genuine cross-demand in setting aside an statutory demand issued pursuant to a judgment entered in terms of a statutory demand;
  2. whether LPY’s claims under S 92/2015 were triable issues and constituted a valid cross-demand within the meaning of r 98(2)(a) of the BR;
  3. whether LPY’s claims under S 92/2015 were not genuine cross-demands but defences to the adjudication determination such that the statutory demand could not be set aside; and
  4. whether the fact that the statutory demand was issued pursuant to an adjudication determination made under the SOPA meant that the statutory demand would not be set aside.

The critical points are summarised below:

  1. The reliability of the statutory presumption of insolvency attached to the debtor’s failure to pay the statutory demand debt is undermined if the debtor shows he has a cross-demand that equals or exceeds the value of the statutory demand debt.
  2. The function of the bankruptcy court, on the hearing of an application brought under r 98(2)(a) of the BR, is not to conduct a full hearing of the putative claim. Rather, it is simply to determine whether the claim in question, after having regard to “all the circumstances”, raises a “genuine triable issue”.
  3. Defences to a judgment debt would constitute denial of the judgment debt itself, which is not a ground for setting aside the statutory demand. However, an appellant who does not deny the judgment debt but instead asserts that there is a countervailing liability arising from the respondent’s other breaches of the Contract, the sum of which exceeds the statutory demand debt, would be deemed as having a genuine cross-demand within the meaning of r 98(2)(a) of the BR.
  4. A statutory demand issued pursuant to an adjudication determination made under the SOPA can be set aside:
    (a) It is open to the courts to enforce an adjudication determination under the SOPA in the same manner as any judgment of the court, including by way of the insolvency/bankruptcy process.
    (b) In principle, to the extent that there is normative conflict between the SOPA’s legislative purpose in facilitating cash flow in the construction industry and the “higher justice” of abiding by insolvency rules, the former must give way to the latter.

Significance of a debtor’s genuine cross-demand

A statutory demand is an important element of the creditors’ bankruptcy petition as it is essentially a test of solvency: if a debtor does not comply with the statutory demand within a stipulated time, he is deemed to be unable to meet his debts and a bankruptcy application may be brought.

However, a debtor passes this test of solvency if he proves that he has a genuine cross-demand with a value equal to or greater than that of the value of the statutory demand debt. This rationale is concretised in r 98(2)(a) of the BR:

“98(2) The court shall set aside the statutory demand if---

(a) the debtor appears to have a valid counterclaim, set-off or cross demand which is equivalent to or exceeds the amount of the debt or debts specified in the statutory demand”

Hence, a statutory demand debt could not stand if there was a cross-demand with a value equal to or exceeding it.

What constitutes triable issues and a valid cross-demand within the meaning of r 98(2)(a)

When a debtor claims to have a cross-demand within the meaning r 98(2)(a), the court will normally set aside the statutory demand if, in its opinion, on the evidence there is a genuine triable issue.

It is settled law that the function of the bankruptcy court, on the hearing of an application brought under r 98(2)(a) of the BR, is not to conduct a full hearing of the putative claim. Rather, it is simply to determine whether the claim in question, after having regard to “all the circumstances”, raises a “genuine triable issue”.

In the present case, LPY’s claims under S 92/2015 constituted triable issues such as determining the reasons for the delay in the completion of works or the nature of the defects. These matters could not be determined based purely on affidavit evidence, without the benefit of either the discovery process or the cross-examination.

Furthermore, the S 92/2015 claims constituted a valid cross-demand within the meaning of r 98(2)(a).

Differentiating between genuine cross-demands and defences to the judgment debt

The AR had relied on Tan Hup Yuan Patrick v The Griffin Coal Mining Co [2014] SLR 221 (Patrick Tan) in his decision that the S 92/2015 claims could have been raised as defences in the adjudication and thus could not be considered a cross-demand within the meaning of r 98(2)(a) of the BR.

In Patrick Tan, creditors issued a statutory demand to a debtor who had failed to make payment under a consent judgment. The debtor applied for the statutory demand to be set aside, claiming that he had a valid cross-claim arising from the creditor’s alleged breach of a separate agreement. Justice Woo Bih Li dismissed the application, the main reason being that the debtor was objecting to the debt in the consent judgment itself. He stated that the courts would not inquire into the validity of a judgment debt.

Leow JC readily distinguished Patrick Tan. Unlike the debtor in Patrick Tan, LPY had made it clear that while she admitted to the judgment debt, she was asserting that there was a countervailing liability in the form of TSO’s other breaches of the Contract, the sum of which exceeded the statutory demand debt. While the debtor in Patrick Tan was raising defences to the judgment debt, LPY was asserting a genuine cross-demand.

Leow JC also noted that Patrick Tan involved a consent judgment whereas the present case concerned an adjudication determination, which would not give rise to any issues of res judicata in later civil proceedings since the fundamental premise of the SOPA was that adjudication was not the final word.

Prioritising the policy objective of the insolvency proceedings over that of the SOPA

Firstly, under r 27(1) of the SOPA, the courts have the discretion to enforce an adjudication determination under the SOPA in the same manner as any judgment of the court, including by way of the insolvency/bankruptcy process.

Secondly, a consideration of foreign authorities showed that the Singapore courts would not be out of place in adopting the position of setting aside a statutory demand issued pursuant to a judgment made in terms of an adjudication debt. The Australian cases of Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91 and Douglas Aerospace Pty Ltd v Indistri Engineering Albury Pty Ltd [2015] NSWSC 167 both held that “offsetting claims” arising from transactions separate from the adjudication in question could give grounds on which a debtor could seek to set aside a statutory demand. They also held that, in contrast, claims that disputed the validity of the judgment debt itself could not do the same. While adjudication determinations had interim finality, legislative policy stipulated that they nevertheless gave rise to debts which were due and payable.

The position in the UK was that priority should not be accorded to the policy of the Housing Grants, Construction and Regeneration Act 1996 to facilitate cash flow in the construction industry, so that debtors would be allowed to pursue their claims unencumbered by the prospect of having to contend with bankruptcy proceedings.

In contrast, the New Zealand Court of Appeal in Laywood v Holmes Construction Wellington Ltd [2009] 2 NZLR 243 interpreted legislation as absolutely precluding debtors from applying to set aside a statutory demand based on judgment debts arising out of adjudication determinations on the ground that they had cross claims. The reason they indicated was that while it “may produce hardship” to such debtors, it was preferable to frustrating the purpose of the New Zealand legislation which sought to enforce adjudication determinations under it. In essence, the specific wording in the New Zealand legislation dictated that decision of the Court.

Hence, the position adopted by Leow JC found support in the Australian and English cases, but not in the New Zealand cases which had specific provisions in its legislation which required a different approach.

Finally, Leow JC considered the courts’ discretion to set aside a statutory demand premised on judgment debts arising out of adjudication determinations according to first principles.

  • Although adjudication determinations are provisional in nature, having “temporal finality”, they are binding on the parties in the adjudication until their differences are ultimately and conclusively resolved. Hence, disputes to the judgment debt itself do not constitute grounds for setting aside such statutory demands.
  • Where the SOPA gives claimants a right over and above that which exists under common law, it would be specifically provided as such in the statute.
  • While the SOPA’s policy of facilitating cash flow in the construction industry is vital, the Parliament did not intend the policy to be achieved at all costs. The SOPA does not contain provisions similar to that in New Zealand legislation precluding debtors from applying to set aside a statutory demand based on judgment debts arising out of adjudication determinations on the ground that they have cross claims. This is particularly important in relation to insolvency proceedings, where the rules are geared towards maximising recovery for the general body of creditors. If the Parliament had intended the SOPA to take precedence over the usual insolvency/bankruptcy rules, it would have said so explicitly. Instead, then Minister Cedric Foo Chee Keng clarified during the second reading of the Building and Construction Industry Security of Payment Bill (Bill 54/2004) that the SOPA regime would not upset the existing system of creditor priorities under the insolvency regime, the priority of creditor interests being a “higher justice” than the injustice of payment woes in the construction industry.

Conclusion

Lim Poh Yeoh demonstrates that a statutory demand would be set aside where the debtor has a genuine cross-demand equal to or exceeding the value of the statutory demand debt, notwithstanding the statutory demand having been issued pursuant to a judgment based in terms of an adjudication decision made under the SOPA. Hence, the argument that the policy objective of the SOPA is to improve cash flow in the construction industry will not override the provisions in insolvency/bankruptcy rules.

The case has also demonstrated that construction professionals and stakeholders in the building and construction industry should consider whether a debtor would have any genuine cross-demands which it can raise as grounds on which to set aside a statutory demand, taking care to differentiate between such cross-demands and defences to the adjudication itself.

Where construction works are still ongoing, construction professionals and stakeholders in the building and construction industry would still have recourse to other means of enforcing the payment of an adjudicated amount (e.g. issuance of notice to suspend work or service under the Building and Construction Industry Security of Payment Act. Nonetheless, given the potency of statutory demands in enforcement, the likely exercise of discretion by the courts to set aside a statutory demand issued pursuant to a judgment made in terms of an adjudication determination where cross claims exist now poses a significant obstacle to pursuing debtors for payment.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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