Fish-eye view of Singapore city skyline at sunset.

The Singapore Court of Appeal has clarified the standard of review that applies to winding-up applications where the underlying relationship between the debtor and creditor is subject to an arbitration agreement.

Background

Under Section 254(2)(a) of the Singapore Companies Act, a company can be wound-up by the court upon the application of a creditor who has served a statutory demand on the company for a debt of SGD 10,000 or more and the debt continues to remain unpaid for three weeks thereafter.

In the case of AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, the principal legal issue before the Court of Appeal was the question of which standard of review should be applied when a winding-up application is contested on the basis that the underlying debt is disputed and the parties have previously agreed to resolve their disputes by way of arbitration.

The creditor argued that a “triable issue” standard applied; namely, the debtor must show that it has a good arguable case to dispute the validity of the debt.  This standard requires the court to engage with the merits of the defences pleaded by the debtor.  In contrast, the debtor argued that a lower “prima facie” threshold applied; namely, the debtor merely has to show that the debt is disputed and that there is a valid arbitration agreement.  It is then up to the arbitral tribunal to determine the merits of the dispute.

The Court of Appeal considered the position in England, Hong Kong, the Eastern Caribbean and Malaysia, as well as the divergent positions previously taken in the Singapore High Court.  The Court of Appeal ultimately determined that it was appropriate to adopt the prima facie test in order to uphold the principle of party autonomy and to ensure coherence with the standards applicable in the context of exclusive jurisdiction clauses, forum non conveniens cases and stay applications under the Singapore International Arbitration Act.

In particular, the Court saw no reason to apply a different test where a creditor had pursued a simple debt claim versus where the creditor brought a winding-up application. In the former case, the prima facie test would apply and a stay would be granted, pending the outcome of the arbitration proceedings.  Similarly, it saw no reason to apply a different test to circumstances where the debtor simply disputes the debt on the one hand or raises a cross-claim on the other.

While the Court recognised the potential for debtors to abuse this relatively low threshold, it weighed this against the corresponding potential for creditors to abuse the winding-up process to pressure debtors into paying, even where there is a genuine dispute as to the validity of the debt.  The three-limb test set out by the Court sought to find a suitable balance between these competing concerns.

The Prima Facie Test

The Court of Appeal held that the winding-up proceedings will be stayed or dismissed provided the debtor prima facie shows that:

(a) there is a valid arbitration agreement between the parties;

(b) the debt is disputed and such dispute falls within the scope of the arbitration agreement; and

(c) the dispute is not being raised by the debtor purely as an abuse of process.

Importantly, the Court of Appeal chose to adopt a slightly nuanced test compared to the position in England, where the prima facie standard requires the courts to dismiss or stay the winding-up application save in “wholly exceptional circumstances”,[1] and compared to the position previously suggested by the Singapore High Court, where it required the debtor to show that the dispute was raised bona fide.[2]  Instead, the third-limb of the prima facie test combined these into a single “abuse of process” exception.

In terms of the actual order to be granted if the prima facie test was satisfied, the Court held that it would ordinarily be appropriate to dismiss the application, since a mere stay could lead to uncertainty and have potentially severe consequences for the debtor, in terms of reputation and ongoing operations.  However, the Court also recognised that, in rare circumstances, it may be more appropriate to grant a stay, such as where the creditor is able to demonstrate legitimate concerns about the solvency of the debtor and the debtor has no intention to arbitrate the dispute.  In such circumstances, the application could be stayed and the creditor would be given liberty to apply to the court to proceed with the winding-up if the debtor takes active steps to stifle the arbitration.

Key Takeaways

This judgment is likely to have particular significance in the wake of the economic downturn brought about by the COVID-19 pandemic:

  • We are already seeing an uptick in the number of debts that are falling overdue as a result of COVID-19 related disruptions and we anticipate a corresponding increase in creditors issuing statutory demands and pursuing winding-up applications as a pressure tactic. This judgment may make such tactics less attractive.
  • In addition to its findings on the applicable standard of review, the Court of Appeal also considered what amounts to an “abuse of process”, for the purposes of the third-limb of the test. It held this to be a high threshold and gave a non-exhaustive list of examples, such as where the debtor –
    • belatedly disputes the debt, having previously admitted both liability and quantum;
    • has previously waived (or is otherwise estopped from asserting) its right to insist upon arbitration; and/or
    • is seeking to avoid or delay the application of the insolvency regime, despite the creditor having valid concerns regarding the debtor’s conduct, such as the dissipation of assets or fraudulent preferences.
  • The Court of Appeal also considered the bona fides (good faith) of the debtor, in claiming that the debt is disputed, to be a relevant factor in determining whether there has been an abuse of process. Importantly, the Court held that the mere fact a debtor’s legal arguments were misconceived or legally unsustainable did not necessarily mean that they were put forth in bad faith. This could have potentially significant consequences in the current climate, where many debtors have sought to rely upon somewhat speculative force majeure and frustration arguments in order to avoid payment obligations.

 

[1] Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589

[2] BDG v BDH [2016] 5 SLR 977

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