Landmark Court of Appeal Decisions on Resolving Conflict between Winding-up and Arbitration

Introduction

Commercial contracts are sometimes drafted with dispute resolution clauses that require parties to resolve the dispute by way of arbitration (“arbitration clause“). Despite agreeing to an arbitration clause, a creditor company may attempt to proceed with litigation instead. In such cases, the debtor company will generally apply to court to stay the court proceedings and require the dispute to be arbitrated in accordance with the arbitration clause. The Court in Singapore will generally apply the prima facie standard of review, pursuant to which the debtor need simply show that there is a dispute; the merits of the debtor’s case will not be considered.

However, there is an added layer of complexity when the creditor seeks to wind up the debtor instead of commencing litigation. As mentioned above, the Court would ordinarily apply the prima facie standard of review if a party claims the existence of an arbitration agreement between the parties. However, in the context of staying or dismissing winding-up proceedings, the Court would ordinarily apply the triable issue standard. This is a higher standard pursuant to which the debtor must additionally demonstrate that the dispute is substantial and bona fide.

Where a matter involves both an arbitration clause and winding-up proceedings, which standard should be applied? What must a debtor establish before it can successfully stay or dismiss the winding-up proceedings?

This issue was argued before the Singapore High Court and the Singapore Court of Appeal in three recent cases. Rajah & Tann Singapore’s dispute resolution team delivered wins for their respective clients in all three cases:

1. BW Umuroa Pte Ltd v Tamarind Resources Pte Ltd [2020] SGHC 71, in which the Plaintiff was successfully represented by Sim Kwan Kiat and Ho Zi Wei;
2. AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“AnAn v VTB“), in which the Appellant was successfully represented by Lee Eng Beng SC, Chew Xiang and Torsten Cheong; and
3. BWG v BWF [2020] SGCA 36, in which the Respondent was successfully represented by Kendall Tan, Ting Yong Hong, Aleksandar Georgiev and Darren Lim.

High Court in BW Umuroa Pte Ltd v Tamarind Resource Pte Ltd [2020] SGHC 71 – Open Question on Applicable Standard

In this High Court case, the creditor company (“BW Umuroa“) filed a winding-up application against the debtor company (“Tamarind“). Tamarind then issued a notice of arbitration against BW Umuroa pursuant to an arbitration clause in the contract between the parties, and submitted that the winding-up application should be stayed or dismissed in favour of arbitration.

As BW Umuroa’s position was that Tamarind could not meet even the lower prima facie standard, the Court proceeded on the assumption that the prima facie standard was applicable. It ruled in favour of BW Umuroa, agreeing that Tamarind had failed to meet that standard.

The High Court was not required to conclusively determine the issue of which standard should be applied. One day later, the Court of Appeal published its judgment on this very issue in a separate case, marking the first time that this question was heard before the Court of Appeal.

Court of Appeal in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 – Confirming the Applicable Standard

AnAn v VTB involved broadly similar facts. VTB, as the creditor company, had filed to wind up AnAn as the debtor company. AnAn then applied to stay or dismiss the winding-up proceedings in favour of arbitration.

Prima facie standard of review will apply

The Court of Appeal held 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 the winding-up proceedings will be stayed or dismissed as long as:

1. there is a valid arbitration agreement between the parties;
2. the dispute falls within the scope of the arbitration agreement; and
3. the dispute is not being raised by the debtor in abuse of the court’s process.

The Court further noted that there should be no difference in the standard applied for the same disputed debt, regardless of whether the creditor company was seeking to proceed with litigation or winding-up proceedings.

Whether the winding-up application should be stayed or dismissed

The Court ruled that it would ordinarily dismiss the winding-up application once the prima facie standard is met and there is no abuse of process by the debtor. However, where the creditor is able to demonstrate legitimate concerns about the debtor’s solvency, and that there are no triable issues raised by the debtor, the court may grant a stay instead.

If successful in obtaining a stay, the creditor will be able to apply to the Court to proceed with the winding-up if, for example, it can be shown that the debtor has no genuine desire to arbitrate the dispute and is taking active steps to stifle the arbitration.

Court of Appeal in BWG v BWF [2020] SGCA 36 – Expansion on Abuse of Process

Handed down just nine days after AnAn v VTB, the decision in the case of BWG v BWF [2020] SGCA 36 helpfully elucidates what might constitute abuse of the court’s process, particularly where it is alleged that the debtor may have advanced inconsistent positions in different proceedings.

By way of background, a string of contracts involved three parties: the Appellant, the Respondent, and a company referred to as X by the Court. X entered into a contract to sell a cargo of crude oil valued in excess of US$30 million (“Cargo“) to the Appellant (“X-A Contract“). The Appellant contracted to sell the Cargo to the Respondent (“A-R Contract“). The Respondent then contracted to sell the Cargo to X (“R-X Contract“) – without knowing that X was the original seller of the Cargo.

While the Appellant paid X for the Cargo under the X-A Contract, no other payments were made pursuant to the string of contracts. The Respondent successfully sued X for failing to meet its payment obligations.

In turn, the Appellant commenced winding-up proceedings against the Respondent for the Respondent’s failure to make payment. In support of its application to dismiss or stay the winding-up proceedings in favour of arbitration, the Respondent disputed that its payment obligations had been triggered on the basis that, inter alia:

1. the Appellant had never passed title or delivered the Cargo to the Respondent; and
2. the entire string of transactions was a sham or tainted by illegality, rendering it unenforceable.

However the Appellant argued that the Respondent’s defences contradicted the positions it had taken in the Respondent’s proceedings against X.

Legal principles established by the Court of Appeal

1. The adoption of inconsistent positions may, in the absence of a clear and convincing reason for the inconsistency, result in the Court denying a debtor relief as such conduct may amount to an abuse of process, even if the alleged inconsistent positions were adopted in different proceedings.
2. Where the debtor has raised multiple defences, the Court is required to consider each defence separately to determine whether there was any abuse of process.
3. Where inconsistent conduct is established, the Court stated that “by reason of policy considerations and in exceptional circumstances, the court may decline to hold that a party is in abuse of process despite the party’s inconsistent conduct if there is a risk of even greater injustice in barring that party from taking such an inconsistent position.” [emphasis in original]

Under the circumstances, the Court of Appeal held that the Respondent’s inconsistencies were either bona fide or would create a risk of even greater injustice if they formed the basis for a finding that the Respondent had acted in abuse of process.

Concluding Remarks

As arbitration agreements become more common, the applicable standard of review for the stay or dismissal of winding-up proceedings is a crucial question that will determine the actions a creditor company might take against a debtor company, and how a debtor company can defend itself in a winding-up application and hold the creditor company to the arbitration clause.

The three decisions have established the following key points:

1. The courts in Singapore continue to be robust in holding parties to their agreed method of dispute resolution, as the AnAn v VTB decision shows.
2. A measured approach is taken in protecting the rights of creditors, by way of providing that a stay of proceedings may be awarded (instead of a dismissal) where there are legitimate concerns about the solvency of the alleged debtor.
3. The BWG v BWF decision usefully provides further principles on when the abuse of process principle will come into play to bar the debtor from obtaining a stay or dismissal.

For any queries on the issues discussed above, please contact our team below.

This article was authored by Lee Eng Beng SC, Sim Kwan Kiat, Kendall Tan, Ting Yong Hong, and Chew Xiang. A PDF version is available here.