Singapore: High Court considers whether minority oppression claims are arbitrable

Silica Investors Limited v Tomolugen Holdings Limited [2014] SGHC 101 involved an application to stay court proceedings in favour of arbitration. In this case, the Singapore High Court elaborated on the test for determining whether a claim fell within the scope of an arbitration clause. The Court explained that the focus is on identifying the essential dispute between parties, and also clarified that a non-contractual claim can fall within the scope of an arbitration agreement if it has a sufficiently close connection to the contract incorporating the arbitration clause. The Court was also asked to determine, for the first time, if claims brought under Section 216 of the Companies Act (Cap. 50) (also referred to as minority oppression claims) were arbitrable. After a thorough analysis, the Court declined to lay down a general rule on the arbitrability of such claims.

Facts

Silica Investors Limited (“Silica“) became a minority shareholder in Auzminerals Resource Group Limited (“AMRG“) after purchasing the same from Lionsgate Holdings Pte Ltd (“Lionsgate“) under a Share Sale Agreement (“SSA“) and Supplemental Agreement. Tomolugen Holdings Limited (“THL“) was the sole shareholder of Lionsgate, and a 55% shareholder of AMRG. Together, THL and Lionsgate were the majority and controlling shareholder of AMRG.

Silica brought a minority oppression claim under section 216 Companies Act (Cap. 50) (“CA”) against THL, Lionsgate, AMRG, and several shareholders of AMRG and Solar Silicon Resources Group Pte Ltd (“SSRG“) (a wholly owned subsidiary of AMRG).

Briefly, Silica’s complaints related to: (1) issuance of AMRG shares to THL which had the effect of diluting Silica’s shares by more than 50% (“Share Issuance Issue“); (2) exclusion of Silica from the management of AMRG (“Management Participation Issue“); (3) execution of guarantees by the AMRG board for securing the obligations of an unrelated entity for the personal and/or commercial interests of THL and Lionsgate, at the expense of AMRG; and (4) exploitation of AMRG’s resources by Lionsgate and Roger May (a defendant, and an AMRG director) for their own benefit.

Clause 12.3 of the SSA, the dispute resolution clause, provided for arbitration and Lionsgate applied for a stay of the court proceedings in favour of arbitration under Section 6(1) of the International Arbitration Act (Cap. 143A) (“IAA”). Four of the remaining defendants also applied for a stay, albeit on a different basis, pursuant to the inherent jurisdiction of the Court.

The Assistant Registrar refused to stay the court proceedings, and the defendants appealed.

The High Court’s Decision

The High Court followed the three-step inquiry set down by the Singapore Court of Appeal in Larsen Oil and Gas Pte Ltd v Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 (“Larsen Oil“) to determine if Silica’s claim fell within the scope of Clause 12.3 of the SSA. The three steps are as follows:

• What is the proper characterisation of the Plaintiff’s claim;
• What is the scope of the arbitration clause; and
• Does the Plaintiff’s claim fall within the scope of the arbitration clause.

Overall dispute or individual issues?

Section 6(1) of the IAA entitles a party to apply for a stay if the other party’s claim is a “matter” which is the subject of the arbitration agreement. The Court explained that “matter” in Section 6(1) of the IAA (and also Section 6(2) of the Arbitration Act (Cap. 10)) is determined by the “essential dispute” between the parties, and not specific issues or allegations that will be decided in the course of the proceedings. In this case, the Court determined that the “essential dispute” is whether the affairs of AMRG were being conducted and managed in a manner oppressive to Silica’s interests as the minority shareholder. The “matter” is not the Share Issuance Issue or the Management Participation Issue, which were mere issues that will be decided in the course of the proceedings.

The “essential dispute” test has been adopted in the United Kingdom and Canada. The court analysed that this was also the test used by the Singapore Court of Appeal in Larsen Oil, even if it was not expressly articulated.

The claim must have a sufficiently close connection to the contract containing the arbitration clause

Having determined the “matter” and interpreted Clause 12.3 of the SSA widely to include statutory claims under Section 216 of the CA, the Court went on to the third step and considered if the “matter” fell within the scope of Clause 12.3 of the SSA.

The Singapore Court of Appeal in Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732 laid down some principles in this regard, and the Court in this case elaborated on it. The Court explained that the “matter” must have a sufficiently close connection to the SSA, and the question is whether the factual allegations underlying the claim fall within the scope of the arbitration clause, and not whether it is a contractual, statutory or tortious claim. In this case, the Court found that Silica’s claim fell within the scope of Clause 12.3 of the SSA. The Share Issuance Issue and the Management Participation Issue were clearly connected to the SSA, and the fact that there were allegations not wholly related to the SSA did not change anything. The Court said that if a sufficient part of the factual allegations were related to the SSA, the entire claim will be treated as falling within Clause 12.3 of the SSA.

Is a claim brought under Section 216 of the CA arbitrable?

Notwithstanding that Clause 12.3 of the SSA applied to Silica’s claim, Section 6(2) of the IAA provides that a court can refuse a stay if it involves a non-arbitrable claim. The Court had to consider, for the first time, if a Section 216 CA claim is arbitrable.

The Court analysed the nature of arbitration (consensual), the nature of statute-based reliefs (potential to affect third parties), and the limited powers of an arbitral tribunal (including a detailed analysis on section 12(5) IAA which provides that a tribunal may award any remedy or relief that could have been ordered by the High Court). The Court also analysed the differing positions taken in England, Australia and Canada on the arbitrability of claims based on similar statutory minority oppression provisions. The Court concluded that since it had broad remedial powers under Section 216 of the CA, and the remedy ordered under Section 216 of the CA depended on the nature and extent of the oppression, no general rule can be laid down on the arbitrability of a Section 216 CA claim, and much will depend on the facts and circumstances of each case.

In this case, the Court held that Silica’s Section 216 CA claim was non-arbitrable as there were shareholders who were not parties to the arbitration and Silica’s reliefs included the winding-up of AMRG, a remedy beyond the powers of an arbitral tribunal.

Recognising the potential for manipulation by litigants, for instance in the way litigants may frame their claims to evade their obligations to arbitrate, the Court emphasised that all the facts and circumstances have to be looked at, and no single factor or remedy should be of overriding importance.

Analysis

The approach taken by the Court in applying the Larsen Oil three-step inquiry is in line with Singapore’s pro-arbitration stance. The “essential dispute” test prevents parties from scrutinising court pleadings and handpicking issues, however minor they might be, to resist arbitration. The “sufficiently close connection” threshold furthers this as statutory or tortious claims can still be found to fall within the scope of the arbitration clause.

The Court’s conclusion on the arbitrability of Section 216 CA claims provides a useful framework for analysing the arbitrability of other statutory claims.

Lastly, the Defendants had argued that the Court should exercise its inherent powers of case management to stay the entire court proceedings if any part of the Plaintiff’s claim had been stayed in favour of arbitration. However since the Court had decided that Silica’s claim was not arbitrable to begin with and no stay was therefore granted, there was no need to decide this issue and the Court did not do so.

By Leng Sun Chan SC, Andy Leck and Celeste Ang.

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