WINDING UP PETITIONS AND ARBITRATION OF DISPUTED DEBT
This article examines some of the developments in Singapore and Hong Kong on whether a different test is applicable when a winding up petition is sought to be stayed/dismissed when the disputed debt is subject of an arbitration agreement.
Introduction. Winding up petitions are often made based on a statutory demand for a debt due. Ordinarily, such a winding up petition can be stayed or dismissed if there is a bona fide and substantial dispute over the debt by showing that there are triable issues.
However, does a different test apply if a dispute over the debt falls within the scope of an arbitration agreement between the parties?
Not a novel issue. This issue is not novel. Cases have come before the Singapore Courts where the winding up petition was sought to be stayed, dismissed, or restrained, in order for the “underlying” dispute over the debt or cross-claim to be settled by arbitration.
For instance, in the 1989 decision of Re Sanpete Builders (S) Pte Ltd [1989] 1 SLR(R) 5 (“Re Sanpete”), Chao Hick Tin JC (as he then was), when dealing with a petition by Nakano Singapore (Pte) Ltd (“Nakano)” to wind up Sanpete Builders (S) Pte Ltd (“Sanpete”), had to address a submission that there was a dispute between Nakano and Sanpete which should be submitted to arbitration in accordance with an arbitration clause found in the subcontract ([36] Re Sanpete).
This argument was rejected as the High Court held that the petition did not come within the scope of the arbitration clause ([38] Re Sanpete), and in the alternative, found that the arbitration clause was relied upon too late by Sanpete ([40] Re Sanpete).
As another example, in the 2007 Court of Appeal decision of Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] 2 SLR(R) 268 (“Metalform (CA)”), there was a disputed cross-claim which may exceed the undisputed debt. In allowing the winding-up petition to be restrained, the Court of Appeal upheld the lower court’s finding of a genuine cross-claim based on substantial grounds. See [89] Metalform (CA) for a quick summary.
BDG v BDH. Then, in the High Court decision of BDG v BDH [2016] 5 SLR 977 (“BDG”), the Singapore High Court specifically addressed the issue of the approach to determining the existence of a bona fide dispute where an application is made to enjoin the presentation of winding-up petition on the basis that there is a dispute between the parties subject to an arbitration clause.
The plaintiff in BDG sought to restrain the presentation of a winding-up application presented by the defendant. In this regard, the plaintiff submitted thus (as recorded in [21] BDG):
“21 The Plaintiff argues that a different standard applies where an application to enjoin the presentation of winding-up is made on the basis that there is a dispute between the parties, which is subject to an arbitration clause, citing Salford Estates ([9] supra). In that case, the English Court of Appeal found that while s 9 of the Arbitration Act 1996 (c 23) (UK) did not apply on the facts so justify a mandatory stay in favour of arbitration, the court had the discretion under s 122 of the Insolvency Act 1986 (c 45) (UK) to decline to order a winding up if it was satisfied that there was a dispute which was subject to an arbitration agreement. If there was such a dispute, the court would generally dismiss the petition, and leave the parties to go to arbitration. The Plaintiff asks the court to adopt the same approach, pointing out that s 254 of the Companies Act (Cap 50, 2006 Rev Ed) is in pari materia with s 122 of the Insolvency Act 1986. It is further argued that, applying cases on stay of proceedings in favour of domestic arbitration, what needed to be shown was a prima facie case of dispute: … Four Pillars Enterprises Co Ltd v Beiersdorf Aktiengesellschaft [1999] 1 SLR(R) 382 is also authority for the proposition that winding up could be stayed in favour arbitration in some circumstances. As noted above, the Defendant contends that the prima facie standard sets the bar too low; winding up can be staved off too readily.”
The Singapore High Court accepted that the broad approach taken in Salford Estates should be followed ([22] BDG). In particular, on the issue of whether the lower standard in Salford Estates would “stymie the winding-up regime by opening the door to gaming of the system”, the Singapore High Court stated at [23] BDG that “… There are two responses to this. Firstly, if indications are that issues are not raised bona fide, that would be a reason to find that there is no dispute prima facie, or that the court’s powers should not be exercised in the applicant’s favour. Secondly, … Arbitration would have been contemplated as being part of the process from the moment the parties signed off on the agreement. Nothing inequitable or unfair would result from the parties being made to go through arbitration before they invoke the winding-up process. If an arbitration clause was included, there is no real injustice: pacta sunt servanda.”
While an appeal was filed against the decision in BDG, the appeal did not reach the Singapore Court of Appeal, as the defendant creditor itself was subsequently put into creditor’s voluntary liquidation (see [40] VTB Bank).
VTB Bank v Anan. But BDG was not followed in the subsequent Singapore High Court case of VTB Bank (Public Joint Stock Co) v Anan Group (Singapore) Pte Ltd [2018] SGHC 250 (“VTB Bank”).
In declining to follow the approach taken in BDG, the High Court considered itself bound by Metalform (CA) that “… the standard of proof that a debtor-company is required to meet in a disputed case is that of triable issues, regardless of whether that dispute is governed by an arbitration agreement” ([61] VTB Bank).
While the Court recognised that there is force in adopting the pro-arbitration approach of Salford Estates and BDG ([62] – [64] VTB Bank), the Court also considered Salford Estates to be “… too extreme insofar as it emphasis the absolute primacy of the arbitration agreement… [it] represents an unprecedented fettering of the court’s broad discretion to order a winding up… ” ([65] VTB Bank).
In this regard, it is noteworthy that the Court in VTB Bank characterized BDG as having “… provided a helpful gloss to the Salford approach…”, as elaborated in [69] VTB Bank. As such, the Court in VTB Bank opined that the Court in BDG had provided a “middle ground”. In this regard, the Court in VTB Bank summarized the three different approaches in [71] VTB Bank, which we excerpt below for ease of reference:
“(a) Under the orthodox approach (per Pacific Recreation and Metalform, among others), the debtor-company needs to establish the existence of a substantial and bona fide dispute over the debt. If the debtor-company is able to show triable issues, the winding up court will grant an injunction to restrain the applicant-creditor from commencing winding up proceedings or stay or dismiss a winding up application, as the case may be.
(b) Under the Salford approach, the debtor-company need only show that there is a dispute over the debt which is governed by an arbitration agreement. This does not require the winding up court to investigate into whether the debt is bona fide disputed on substantial grounds. Save in wholly exceptional circumstances, the court should dismiss or stay the winding up petition.
(c) Under the BDG approach, the debtor-company needs to establish a prima facie case that there is a dispute between the parties which falls within the scope of the arbitration agreement, and that the debt is bona fide (or genuinely) disputed.”
The Court in VTB Bank then stated that but for being bound by Metalform (CA), the Court would have been “… amenable to applying the BDG approach in the present case…” ([72] VTB Bank).
Nonetheless, as stated in [73] VTB Bank, the Court found that the company could not establish a disputed debt regardless of the approach taken, and ordered the company to be wound up.
As of the date of this blog, to the authors’ best knowledge, the appeal in VTB Bank is still pending before the Singapore Court of Appeal, as in Anan Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2019] SGCA 41, which was decided on 23 July 2019, the Court of Appeal allowed an application to adduce fresh evidence in the appeal.
BWF v BWG. However, the twists and turns do not end with BDG, as on 26 March 2019, the Singapore High Court delivered its judgment in BWF v BWG [2019] SGHC 81 (“BWF”).
The Court in BWF was faced with the varying approaches in BDG and VTB Bank, and came down in favour of the former. In this regard, it was held that “… [t]he principle in focus where an arbitration clause is engaged is that of party autonomy, and it extends into the insolvency context. To hold otherwise… would encourage parties to bypass the arbitration agreement as a standard tactic by presenting a winding up petition, thereby pressuring the alleged debtor with the draconian threat of liquidation.” ([35] BWF).
Support was drawn from the Singapore Court of Appeal case of Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd [2018] 2 SLR 1271, which concerned the upholding of exclusive jurisdiction clauses. There, the Court of Appeal held that the merits of the parties’ cases would be disregarded when considering if there was a strong cause to refuse a stay, which was a departure from a long line of decisions. The Court of Appeal had also alluded to the desirability of coherence in the law by aligning the law governing exclusive jurisdiction clauses, forum non convenience and International Arbitration Act applications, so that the merits of the defence would be irrelevant on the issue of a stay (see [33] – [34] BWF).
What, then, of Metalform (CA), which the Court in VTB Bank considered itself bound by? The Court in BWF distinguished Metalform (CA) on the basis that it was not necessary for the Court of Appeal in Metalform (CA) to deal with the arbitration clause in the cross-claim: in other words, the observations in Metalform (CA) were obiter dicta ([36] – [37] BWF).
On the facts, the Court in BWF found that there was a bona fide prima facie dispute, and restrained the winding up petition. In any case, the Court in BWF was satisfied that the company would also meet the triable issues standard.
At the present, BWF is also pending appeal to the Singapore Court of Appeal.
Developments in Hong Kong. In this regard, the Hong Kong courts have also been grappling with whether to adopt the approach in Salford Estates.
In the Hong Kong Court of First Instance (the “HKCFI”) decision of Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (“Lasmos”), the HKCFI departed from the triable issues standard adopted in earlier Hong Kong decisions, and adopted the Salford approach. Notably, Lasmos also considered the Singapore decision of BDG. The HKCFI held at [31] that a winding up petition should generally be dismissed:
“(1) if a company disputes the debt relied on by the petitioner;
(2) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
(3) the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules, Cap 32H, demonstrating this.”
On 2 August 2019, the Hong Kong Court of Appeal (the “HKCA”) in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 (“But Ka Chon”) expressed in obiter reservations on the approach taken by Lasmos. The HKCA observed that “… Even though the Lasmos approach may not be regarded as totally precluding a creditor from invoking the insolvency jurisdiction of the court, it is a substantial curtailment of his statutory right” ([63] But Ka Chon). However, the HKCA also recognized at [70] But Ka Chon that the arbitration factor may have been given insufficient weight prior to Lasmos.
Yet more recently, on 6 September 2019, the HKCFI delivered its judgment in Re Golden Oasis Health Ltd [2019] HKCFI 2173 (“Re Golden Oasis”), where the HKCFI referred to both Lasmos and But Ka Chon.
However, the HKCFI held that it was unnecessary to deal with the reservations in But Ka Chon on the approach in Lasmos, as the HKCFI held that the Lasmos approach would not apply ([27] Re Golden Oasis). This is because the HKCFI found that there was simply no relevant arbitration clause before the HKCFI ([44] Re Golden Oasis).
Nonetheless, at [43] Re Golden Oasis, the following was stated in the judgment:
“43. Mr Chan submitted that the failure to take any step to commence the arbitration could be explained as a matter of practicality in that any such step might not be taken very far due to the dispute over the relevance of the Arbitration Clause. I am unable to accept this submission the effect of which would be to render Requirement (3) redundant. For my part, I agree with respect the view expressed in But Ka Chon cited above.”
Conclusion. It therefore appears that the law on the issue of the standard to be applied to stay a winding-up petition where the disputed debt is governed by an arbitration clause is still in flux. A firm decision from the appellate courts on this interesting issue is awaited, especially when it appears that the position on this issue across three important common law jurisdictions (England and Wales, Hong Kong, and Singapore) may be different.
Tags: Winding up; Stay of winding up petition; Disputed debt; Arbitration Agreement; Salford Estates
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.