This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.
The coronavirus pandemic has left companies increasingly concerned about the possibility of winding-up as a result of a failure to pay debts. In a situation where a party’s disputed debt is subject to an arbitration clause, the debtor may wish to seek a stay or dismissal of any winding-up applications commenced against it before the court in favour of arbitration.
This issue came to the fore in the decision by the Singapore Court of Appeal (the “CA”) in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company)  SGCA 33. In particular, the CA examined the applicable standard of review that a debtor needs to satisfy in order for the court to order a stay or dismissal of winding-up proceedings.
Decided by a coram of five Court of Appeal judges, the CA resolved an apparent inconsistency in the applicable standard of review, concluding that in the situation where the debt was subject to an arbitration clause, the debtor only needs to meet the lower prima facie standard as opposed to the triable issue standard.
The appellant, AnAn Group (Singapore) Pte Ltd (“AnAn”), entered into a global master repurchase agreement (the “Agreement”) with the respondent, VTB Bank (Public Joint Stock Company) (“VTB”). Under the Agreement, AnAn was required to maintain sufficient collateral for VTB. The Agreement also contained an arbitration clause to the effect that any dispute arising out of or in connection with the Agreement would be referred to arbitration.
AnAn failed to meet its obligations under the Agreement and VTB initiated winding-up proceedings against AnAn on the basis of a statutory demand for a debt of approximately USD 170 million.
In the High Court, AnAn argued that the winding-up proceedings should be stayed in favour of arbitration in accordance with the parties’ arbitration agreement. AnAn also argued that there was an event of frustration or force majeure and that the amount claimed was overstated.
Holding himself bound by the CA’s decision in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd  2 SLR(R) 268 (albeit reluctantly), the High Court Judge ruled in favour of VTB and ordered the winding-up of AnAn.
AnAn appealed against the High Court’s decision on the basis that:
- the appropriate standard of review where a dispute is governed by an arbitration agreement is the prima facie standard of review; and
- the threshold had been crossed in the current case.
The applicable standard
It is well established that a debtor “need only raise triable issues in order to obtain a stay or dismissal of [a] winding-up application” in litigation proceedings. The CA was faced with the issue of whether this same standard, i.e. the “triable issue” standard, would apply where the debt in question was subject to an arbitration agreement. After conducting a comprehensive survey of developments across a multitude of jurisdictions including England, Hong Kong and Malaysia, the CA clarified the applicable standard in Singapore.
In holding that the applicable standard of review was the prima facie standard, the CA pronounced that winding-up proceedings will ordinarily be stayed or dismissed as long as:
- there is a valid arbitration agreement between the parties, and
- 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 reasoned as follows:
- Coherence in law
The CA concluded that adopting the prima facie standard, which is a “lower standard of review” in a situation where the dispute or the debt is subject to arbitration would promote coherence in the law.
In particular, the CA shared the view expressed by the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2)  Ch 589 (“Salford”) that parties to an arbitration agreement should not be encouraged to present a winding-up application as a tactic to pressure the alleged debtor to make payment on a debt that is disputed or which may be extinguished by a legitimate cross-claim.
Therefore, in resisting a winding-up application, the debtor would simply have to demonstrate on a prima facie basis that there is an arbitration clause, and that the dispute is caught in that clause. If the higher triable issue standard was to be applied, this would encourage the abuse of the winding-up jurisdiction of the court, which would not be the appropriate forum to adjudicate on disputed claims that are subject to arbitration.
- Party autonomy
The CA also opined that the triable issue standard when applied in the context of arbitrable disputes would offend against the principle of party autonomy, which is the “cornerstone underlying judicial non-intervention in arbitration”.
This was because the triable issue standard is one that requires a thorough examination of evidence, which would require the court to consider the merits of the defences. This would inevitably lead to displacement of the decision-making capacity of the arbitral tribunal in respect of the dispute. Hence, substantive prejudice may be caused to the parties if their choice of dispute resolution is not strictly adhered to.
The CA also noted that a party does not lose his genuine desire for recourse to arbitration just because his case may appear weak, and the courts should not undercut the bargain of the parties by examining the merits of the debtor’s defences irrespective of whether the debt is pursued by way of a court action or a winding-up application.
Exception to the prima facie standard
The CA observed that the prima facie standard would be subject to an overarching restriction – namely, that the court will not grant a stay of the winding-up proceedings notwithstanding that the prima facie standard has been met if the application for a stay amounts to an abuse of process.
The CA emphasised that the threshold for abusive conduct is “very high” and provided the following non-exhaustive examples:
- Where the debt is admitted as regards both liability and quantum;
- Where the debtor has waived or may be estopped from asserting his rights to insist on arbitration, such as where the parties have agreed subsequently that disputes may be resolved by litigation; and
- Where the debtor company is seeking to stave off substantiated concerns which justify the invocation of the insolvency regime. Examples include instances when assets have gone missing and there is an urgent need to appoint independent persons to investigate with a view of recovering the company’s assets, or when there is a proper basis to conclude that there had been fraudulent preferences or the need to engage the avoidance provisions in the Bankruptcy Act.
The CA also added that in cases where the applicant creditor can demonstrate legitimate concerns about the solvency of the debtor company as a going concern, and no triable issues are raised by the debtor-company, the court would be prepared to grant a stay of the winding-up proceedings. The creditor will then be given liberty to apply to the court to proceed with the winding up if, for example, it can be shown that the debtor company has no genuine desire to arbitrate the dispute and is taking active steps to stifle the arbitration.
Having determined the applicable standard of review, the CA held that there was clearly a prima facie dispute in this case. It was uncontroversial that AnAn had disputed the debt amount that was due and owing, and that this dispute was governed by the arbitration clause in the Agreement.
The CA was also satisfied that there was no abuse of process on AnAn’s part. While AnAn’s arguments on frustration and force majeure (which were not pursued in the CA proceedings) were “misconceived or legally unsustainable”, that did not mean that AnAn made such arguments in bad faith. Further, while AnAn could have raised its objections earlier in the proceedings and could have fleshed out its case on the quantification of the debt amount in greater detail before the High Court Judge, this delay was not sufficient to show an abuse of process. The CA also considered it crucial that AnAn did not at any time expressly admit to its liability for the debt amount.
Accordingly, the CA reversed the High Court’s decision and dismissed the winding-up application. The CA considered ordering a stay inadequate, as a stay of the winding-up application would in itself carry severe consequences for AnAn (e.g. stifling critical capital injections into the company).
Following the CA’s decision, debtor companies (faced with a default on debts due to a force majeure event or otherwise) now have greater clarity on their rights in seeking a stay or dismissal of winding-up proceedings commenced against them based on a disputed debt that is subject to an arbitration clause. Conversely, creditors are now likely to be more circumspect in commencing winding-up proceedings in the face of an arbitration clause so as to avoid having their application stayed or dismissed.
The CA had to exercise a fine balance between any misuse by debtors of the prima facie standard to stay or dismiss winding-up proceedings on the one hand, and the possibility of abuse by creditors unliterally choosing the insolvency route to bypass their obligation to refer the dispute to arbitration on the other.
In deciding that the prima facie standard was the applicable standard of review, the CA took an arbitration-friendly approach in holding that any potential misuse by the debtor of the prima facie standard can be addressed by the abuse of process control mechanism. This would ensure that party autonomy is respected and preserved, and that the courts do not run the risk of displacing the arbitral tribunal’s role in adjudicating disputes that should have been subject to arbitration.
The CA decision is likely to have major implications for many companies in the face of the coronavirus pandemic, which has had a debilitating effect on the global economy. The decision safeguards against “trigger-happy” creditors who may attempt to use the commencement of winding-up proceedings to pressure debtor companies into unfavourable settlement agreements. At the same time, creditors pursuing legitimate debts have the assurance that debtor companies without a bona fide case would be caught by the abuse of process mechanism.