Key takeaways

We are frequently consulted by clients with regard to debt collection options. Service of an SD is often considered and used in appropriate cases. We always emphasize to our clients the need to exercise care in preparing an SD and the importance of setting out the correct amount on the SD. The CA Decision reminds creditors of the undesirable consequences of defects in an SD.

The CA Decision clarifies and confirms the principle that an overstatement of the indebtedness in an SD will not automatically entitle the debtor to have the demand set aside ("Principle"). The CA disagreed with the judge who held that the Principle would only apply in circumstances when the court considers whether a bankruptcy order should be made against the debtors at the hearing of the petition, where the debtor had not applied to set aside the demand.

When considering whether to set aside an SD containing an overstated debt, it is paramount for the court to consider whether injustice would be caused to the debtor by allowing that particular SD to stand.

There are several noteworthy points from the CA Decision:

• Care should be taken in populating the prescribed form of the SD and calculating the amount of the outstanding debt.
• While defects in an SD would not automatically entitle debtors to set the demand aside, defects that result in injustice to the debtors may allow the SD to be set aside.
• On the other hand, when considering applying to set aside an SD, a debtor should seek proper legal advice, in particular when the proposed ground is overstatement of the debt.

CFI Decision to set aside the SDs

In 2008, the Debtors (who were husband and wife), through their company, took out loan facilities from the Creditor pursuant to a loan agreement. The Debtors also executed a joint and several guarantee in favor of the Creditor.

Subsequently, the parties entered into a restructuring agreement in 2016 and further agreed on an accelerated repayment schedule in 2017. Notwithstanding the above, the Debtors only made partial repayments up to August 2017 and defaulted on the rest. In June 2018, the Creditor served SDs on the Debtors.

The amount of the debt in the SDs was overstated by HKD 688,200.62. The Creditor acknowledged that the overstatement was caused by a clerical mistake in calculating the accrued interest. In July 2018, one of the Debtors applied to set aside the SDs.

The judge was of the view that the Principle was not applicable as it was not concerned with an application to set aside an SD. Having considered that the overstatement was of a significant amount and no attempt had been made by the Creditor to correct it, the Judge ordered to set aside the SDs.

CA Decision to allow the appeal

The Creditor appealed against the CFI Decision. In allowing the appeal, the CA considered the following:

• The CA disagreed with the CFI's distinction that the Principle was only applicable in circumstances when the court considers whether a bankruptcy order should be made against the debtors at the hearing of the petition, where the debtor had not applied to set aside the demand. The Principle, as stated and applied in Re Ip Pui Man Nina [2011] 3 HKLRD 299 and Re Kwok Chok Yee [2000] 2 HKC 543, was applicable to the present case.
• The CA considered that in exercising the discretion to set aside the SDs, the judge failed to consider whether injustice would be caused to the Debtors if the SDs were allowed to stand.
• A proper exercise of the discretion would have at least required the judge to consider, among others, whether there was any evidence that the Debtors could and would have repaid the indebtedness even if it were correctly stated in the SDs, especially since the Creditor subsequently clarified the correct amount of the debt due.
• The overstatement of the debt in the SDs was clarified by way of a letter in August 2018 and again in an affirmation filed on behalf of the Creditor in January 2019.
• There was no evidence to suggest that the Debtors would have been in a position or would have been prepared to pay or settle the correct amount of doubt if it had been correctly stated in the SDs.

Conclusion

The CA Decision is a good reminder to creditors who consider issuing an SD. SDs are often used to prove a debtor's insolvency for the purpose of petitioning to the court for bankruptcy (for individuals) or winding up (for companies) of a debtor. Should the debtor fail to satisfy the demand within three weeks of service of the SD, the creditor may present a bankruptcy/winding-up petition.

Care should be taken in preparing the SD. Misstatements should be avoided as they may create uncertainties as to whether the SD shall be set aside, causing delay and costs. For instance, in the CA Decision, the SDs were served in June 2018, i.e., nearly four years before the CA Decision. In some cases, if a corrected SD has to be served on the debtor again, it may be difficult to effect service (as the debtor may try to evade service) and the three-week period will start all over again.

From the perspective of a debtor, in considering whether to apply to set aside an SD, a debtor should consider whether there is injustice caused by the defects in the SD.

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