WHERE WINDING-UP PROCEEDINGS MEET ARBITRATION AGREEMENTS
In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 ("AnAn v VTB Bank"), the Singapore Court of Appeal issued a landmark decision, holding that the prima facie standard of review – rather than the triable issue standard – applies in a situation where a party brings a winding-up application against a company based on a claim under a contract which contains an arbitration clause.
Adopting the prima facie standard of review means that in general, a winding-up application will be dismissed or stayed if the company in such a situation can show on the face of it that (1) both the company and the applicant are parties to an arbitration agreement; and (2) there is a dispute falling within that arbitration agreement, unless the company raises the dispute in abuse of the court process (AnAn v VTB Bank at [56]).
In contrast, following the triable issue standard, the court would have to determine whether there exists a substantial and bona fide dispute. As compared to the triable issue standard, the prima facie standard is a lower threshold which the company has to satisfy in order for the application to be dismissed or stayed.
Background. AnAn Group (Singapore) Pte Ltd (the "Appellant") and VTB Bank (the "Respondent") entered into what was effectively a loan contract. Under that contract, the Appellant would sell global depository receipts of shares ("GDRs") in EN+ Group PLC (“EN+”) to the Respondent, and later repurchase the same at a later date at essentially the same price (AnAn v VTB Bank at [4]).
The Appellant also had the obligation to maintain sufficient collateral, as measured by an indicator known as the Repo Ratio which would rise if the value of the GDRs fell. Failure to maintain sufficient collateral was a stipulated event of default (AnAn v VTB Bank at [5]).
The contract between the parties contained an arbitration agreement in Clause 15(a) of Annex 1, under which any dispute arising out of or in connection to the contract would be referred to arbitration (AnAn v VTB Bank at [7]).
After the Appellant sold the EN+ GDRs to the Respondent, sanctions imposed by the United States Treasury’s Office of Foreign Assets Control caused the price of the EN+ shares to plummet, and in turn caused the Repo Ratio to rise (AnAn v VTB Bank at [8] – [9]).
The Respondent, having determined that an event of default had occurred, decided to exercise its right to terminate the contract early and to bring forward the repurchase date to the early termination date. It issued a calculation notice to the Appellant stating that the Appellant owed it a sum of approximately US$170m, which it calculated to be the difference between the Net Value of the GDRs and their purchase price (plus interest and costs) (AnAn v VTB Bank at [11]).
Some three months after issuing the calculation notice to the Appellant, the Respondent served the Appellant a statutory demand for the same amount, and the Appellant failed to repay within the three-week period (at [12]).
The Respondent then applied to wind up the Appellant (at [13]), and the High Court granted the winding-up application (at [18]).
Parties' arguments. The Appellant's case on appeal to the Court of Appeal rested on two bases:
Firstly, contrary to the High Court's decision, the prima facie standard of review should apply instead of the triable issue standard; and
Secondly, the Appellant had met the prima facie standard since the Respondent had itself breached the contract by failing to obtain bids from the appropriate market and failing to reasonably arrive at the standard of valuation used in calculating the figure of approximately US$170m (at [21]).
On the other hand, the Respondent argued that (1) the triable issue standard should apply; and (2) regardless of which standard of review applied, the Appellant had not raised a bona fide dispute (at [23]).
The applicable standard. After a thorough examination of the positions taken by courts in various jurisdictions such as England, Hong Kong and Malaysia, the Court of Appeal held that the prima facie standard of review will apply in a situation similar to that in the case before it. However, this is subject to the "overarching restriction" that the company must not have raised the dispute in abuse of the court process; in such a case, the winding-up application will be allowed even if a prima facie case is made out (AnAn v VTB Bank at [56] and [97]).
The Court of Appeal held that the prima facie standard of review applies equally to (i) situations where the company disputes its liability to pay the debt; and (ii) situations where the company raises a cross-claim against the applicant (AnAn v VTB Bank at [56]).
This is because disputed debts and cross-claims both can potentially operate as a legal set-off against the debt claimed by the applicant, and so the tests for both of the situations must "necessarily mirror each other" (AnAn v VTB Bank at [59], citing Pacific Recreation Pte Ltd v S Y Technology Inc and another appeal [2008] 2 SLR(R) 491 at [25]).
Reasons for adopting the prima facie standard: The Court of Appeal gave three reasons for adopting the prima facie standard.
Firstly, doing so promotes coherence in the law. In such a situation, a creditor has two options: either (1) claim for the debt owed by the company to it in court proceedings, or (2) make a winding-up application against the company based on an unsatisfied statutory demand for that debt. If the creditor chooses the first option, the company may respond by applying to stay the court proceedings under s. 6 of the Arbitration Act or the International Arbitration Act, and the prima facie standard is used in such a case.
Adopting the prima facie standard in the second case would ensure that the same standard is used regardless of which option the creditor uses. As the Court of Appeal held, "there is no principled basis to apply differing standards to what is essentially the same disputed debt" (AnAn v VTB Bank at [63]).
Secondly, adopting the prima facie standard gives effect to the principle of party autonomy. If a court were to adopt the triable issues standard, it would essentially be deciding on the merits of the parties' arguments in deciding whether to wind up the company. This would be contrary to the parties' agreement that all disputes arising out of or in connection with their contract would be referred to arbitration (AnAn v VTB Bank at [77]).
Thirdly, adopting the prima facie standard leads to greater certainty as well as cost savings. As the Court of Appeal held, the triable issues standard presents uncertainty "as alleged debtors must convince the court on the merits that there is a substantial and bona fide dispute before they can stay or strike out the winding-up application in favour of arbitration" (AnAn v VTB Bank at [84]). The prima facie standard would also lead to costs savings since parties would not have to contest the merits of their respective cases both in court and before the arbitral tribunal (AnAn v VTB Bank at [85]).
Appropriate order to be made if prima facie case is made out and there is no abuse of process: The Court of Appeal held that if a court hearing such an application finds that the company has made out a prima facie case, the court should ordinarily dismiss the entire winding-up application (AnAn v VTB Bank at [103]).
However, the Court of Appeal also noted that a stay of the winding-up proceedings would be granted instead if two conditions were met: (1) the applicant has raised legitimate concerns about the solvency of the company as a going concern; and (2) the company has not raised any triable issues (AnAn v VTB Bank at [111]).
As regards the first requirement, the Court of Appeal noted that legitimate concerns may be raised if:
- the company's balance sheet indicates that the company may be insolvent;
- other independent creditors have also made winding-up applications; or
- it appears that the company is attempting to rely on the arbitration agreement to delay the payment of its legitimate debts owed to the applicant (AnAn v VTB Bank at [112]).
Decision. On the facts of the case, the Court of Appeal held that the Appellant had raised triable issues as regards the two areas of dispute that it pleaded, and this more than satisfied the prima facie standard required of the Appellant (AnAn v VTB Bank at [115]).
Thus, the Court of Appeal reversed the order made by the High Court below that the Appellant be wound up (AnAn v VTB Bank at [119]).
Significance: The Court of Appeal's decision has resolved much controversy over the matter created by conflicting court decisions in Singapore and abroad, some of which have previously adopted the triable issue standard of review instead.
This decision is greatly welcomed: it ensures that creditors cannot use winding-up proceedings as a tactical move to bypass parties' valid arbitration agreements and have their dispute resolved through court proceedings instead.
For the parties, it brings certainty in the law regarding the applicable standard of review in similar cases.
Finally, it is also hoped that this decision goes some way towards promoting the use of arbitration in Singapore and bolstering Singapore's standing as an arbitration hub.
Tags: Winding-Up Proceedings; Arbitration Agreements; Court's standard of review
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