Singapore CA Considers Arbitration and Insolvency Proceedings Interplay

The interplay between arbitration and winding up proceedings continues to attract judicial attention.

The issue has been the subject of various decisions from the Hong Kong courts since Harris J’s 2018 decision in the Lasmos Case. See our previous Posts:

The latest decision to weigh in on the debate arose in March 2020, in Dayang (HK) Marine Shipping co Limited v Asia Master Logistics Limited [2020] HKCFI 311, where DHCJ Wong SC provided a detailed analysis of the issue and took the view that the present state of law can (and should) be stated in the following terms:

  • Where a debtor-company intends to dispute the existence of a debt, he must show that there is a bona fide dispute on substantial grounds. It should not suffice for the debtor-company to merely deny the debt. This test would apply in all cases whether or not the debt had arisen from a contract incorporating an arbitration clause.
  • The existence of an arbitration agreement should be regarded as irrelevant to the exercise of discretion.
  • The fact that arbitration proceedings have commenced or would be commenced may be relevant evidence that there is a bona fide dispute. However, this alone would not be sufficient to prove the existence of a bona fide dispute on substantial grounds.
  • Where the creditor-petitioner petitions in circumstances where it knows there to be a bona fide dispute over the debt on substantial grounds, it runs the risk of being liable to pay the debtor-petitioner’s costs on an indemnity basis. It would also be at risk of liability under the tort of malicious prosecution.

Lavesh Kirpalani, Counsel at Prince’s Chambers, who appeared for the successful petitioner in Dayang, provided a summary of the case (see here).

More recently, Singapore’s highest court has considered the issue, adopting the Salford-Lasmos approach.

In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 the Singapore CA held that, in respect of winding-up applications where the debt arises from an agreement which contains an arbitration agreement, the prima facie standard of review applies, meaning that a debtor need only show that there is a dispute concerning a debt which is subject to an arbitration agreement, akin to the test held in Hong Kong (Lasmos) and the United Kingdom (Salford Estates (No 2)).

Lavesh Kirpalani has provided the following summary of the Singapore CA’s decision.

Case Summary – Court’s Legal Analysis

The Court of Appeal firstly noted that this particular issue of winding-up applications where the debt arises in the context of an agreement containing an arbitration clause had never been raised or dealt with by the Court of Appeal.

The Court of Appeal began by reviewing the authorities in various jurisdictions. In particular, the Court examined authorities from, England, Hong Kong, Eastern Caribbean, Malaysia and Singapore, noting that the Salford approach had received mixed reception across the Commonwealth – it had been doubted recently in Hong Kong in Re Asia Master Logistics Ltd and But Ka Chon, but had been adopted in Malaysia and by two earlier decisions of the Singapore High Court.

Having surveyed the approach of the various jurisdictions, the Court was of the view that when a court is faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement, the prima facie standard should apply, such that winding-up proceedings will be stayed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process.

The CA held that the prima facie standard should be applied for the following reasons:

  • Firstly, adopting the prima facie standard would promote coherence in the law concerning stay applications. Further, by adopting the prima facie standard for winding-up proceedings, creditors would thereby be discouraged from abusing the court’s winding-up jurisdiction as a means to avoid the parties’ agreed method of dispute resolution, being arbitration.
  • Secondly, replacing the triable issue standard with the prima facie standard would give effect to the principle of party autonomy, which is the cornerstone underlying judicial non-intervention in arbitration.
  • Thirdly, the Court observed that the triable issue standard presents uncertainty, as alleged debtors would have to convince the court on the merits that there was a substantial bona fide dispute before the winding-up petition could be struck out in favour of arbitration. This would cause parties to incur significant courts before the court, even though the dispute should have been referred to arbitration.

In deciding the appropriate order to be made, the CA was of the view that, once it was satisfied that there was a prima facie dispute governed by an arbitration agreement, and provided that the dispute is not raised by the debtor in abuse of the court’s process, the court will ordinarily dismiss the winding-up application. At {55-57], the CA stated:

“Our survey of the developments reveals that, in the short period since Salford ([30] supra) was decided, the interfacing issue of a dispute that is subject to an arbitration agreement has been raised in the insolvency context on several occasions across a multitude of jurisdictions. Locally, the same issue has spawned three recent decisions from the High Court. This appeal thus affords an opportunity for this court to pronounce on the appropriate standard of review to be adopted.

In our judgment, when a court is faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement, the prima facie standard should apply, such that the winding-up proceedings will be stayed or dismissed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process.

For reasons which we shall elaborate in the following section, we are of the view that the reduced standard of review promotes coherence in the law, gives effect to the principle of party autonomy and helps to achieve cost savings and certainty in the law.”

However, the Court went on to note that in rare situations a debtor-company can strategically rely on the prima facie standard to forestall winding-up proceedings and, in such cases, the courts could adopt a middle ground where a creditor was able to demonstrate legitimate concerns about the solvency of the company as a going concern, and that the debtor-company raises no triable issues, the court could grant a stay as opposed to a dismissal of the winding-up proceedings, for which a creditor could then be at liberty to apply to wind-up the debtor-company if it could be demonstrated that the company had no genuine intention of arbitrating the dispute or if it could be shown that the debtor-company was subject to numerous creditor claims.

However, the CA was of the view that such difficulties, although not insignificant, did not displace their opinion to adopt the prima facie standard in winding-up proceedings where the debt is subject to an arbitration agreement.

In the present case, the CA noted that:

  • No evidence had been tendered to show that there were legitimate concerns relating to the solvency of AnAn;
  • Apart from VTB’s winding-up application, the Court had not been referred to any other winding-up application or claim that was pending against AnAn;
  • There was no evidence that AnAn was balance sheet insolvent, independent of VTB’s claim.

Accordingly, the Court allowed AnAn’s appeal against the Judge’s winding-up order, and the winding-up application was dismissed in its entirety.

Conclusion

The CA’s decision highlights Singapore’s pro-arbitration stance and that the Salford-Lasmos approach is now firmly entrenched as part of Singapore’s insolvency law. The prima facie standard is all that is required to satisfy a Singaporean Court that a debt is disputed unless it can be shown that the debtor-company is insolvent.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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