CORPORATE ARBITRATION V INSOLVENCY The interplay between arbitration and insolvency The Singapore Court of Appeal considers the treatment of a winding-up application where the parties have agreed to refer disputes to arbitration

n AnAn (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, the Singapore Court of Appeal (the Singapore Court) recently grappled with an issue of paramount importance where a creditor seeks to recover a debt arising under Ia contract containing a clause which provided that disputes would be determined through arbitration (arbitration agreement). The court will stay court proceedings concerning a disputed debt if the debt is shown to arise under a contract containing an arbitration agreement. With this in mind, the Singapore Court in AnAn considered whether it would be appropriate to stay or dismiss court proceedings in connection with the same disputed debt which are commenced upon the presentation of a winding-up application. The Singapore Court concluded that the answer is, in essence, ‘yes’. This is highly significant because the mere presentation of a winding-up application, which a creditor may use for strategic purposes, can have very serious ramifications for the commercial viability of a debtor’s business. AnAn recognises that where parties have agreed to resolve disputes by arbitration, one party should not ordinarily be able to side-step that agreement by winding up the other for non-payment of a disputed debt. If the party threatened with a winding-up application (i.e. an alleged debtor) disputes the debt in good faith and/or has its own claim under the contract, then it will be appropriate for the court to stay or dismiss the winding-up application in favour of arbitration. Indeed, the Singapore Court held that the alleged debtor need only identify, on a prima facie basis, the existence of a bona fide dispute or cross-claim. There will be no examination of the merits of the parties’ arguments, which will await an arbitration. This contrasts with the so-called triable issues standard of review. Where this approach applies, the court examines the

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The mere presentation of a winding-up and, more recently, in the first instance decision in Dayang (HK) Marine Shipping application…can have very serious Co., Limited v Asia Master Logistics Limited [2020] HKCFI 311 (Dayang), which ramifications for the commercial viability surfaced a few weeks before the Singapore Court’s decision in AnAn . The Hong Kong of a debtor’s business SAR therefore appears to be headed back towards the triable issues standard. available evidence to verify that the dispute or Shortly after the parties entered into the Singapore, on the other hand, now joins cross-claim raised by the alleged debtor has GMRA and the GDRs changed hands, US the prima facie club, thus reinforcing the substantial grounds. Only then will a court sanctions were imposed on major jurisdictional divide on this issue. In arriving stay or dismiss a winding-up application. The shareholders of EN+, causing the value of there, the Singapore Court rooted its practical consequence is to make it more the GDRs to plummet. VTB issued a decision on the threefold imperatives of difficult, time-consuming and expensive for margin call, which AnAn failed to satisfy. A promoting (i) coherence in the law, (ii) the an alleged debtor to resist a winding-up default notice and close-out payment principle of party autonomy, and (iii) application in favour of arbitration. demand followed. When AnAn failed to certainty and savings. Each aspect touches pay, VTB issued a statutory demand and on important practical and policy points. Significance of AnAn then a winding-up application against Some jurisdictions, including England and AnAn. Coherence in the law Wales, and now Singapore, adopt a version AnAn resisted the winding-up by The Singapore Court decided that of the (arguably more debtor friendly) prima disputing the debt on various legal and coherence in the law is necessary to prevent facie standard of review. Other jurisdictions, factual grounds. However, the court applied abuse of winding-up applications by such as Hong Kong SAR, apply (or appear the triable issues standard to the defences creditors. to be leaning towards) a version of the raised by AnAn and rejected them. The This is because an alleged debtor can (arguably more creditor friendly) triable winding-up application was thus allowed seek a stay or dismissal of litigation in issues standard. and AnAn appealed. relation to a disputed debt in a fairly Since there is no uniform approach straightforward manner, simply by across the common law world, it is even Applicable standard of review identifying, to a basic prima facie standard, more critical for a commercial party, as a that the dispute is within the scope of an potential future creditor or debtor, to No international consensus arbitration agreement. However, to achieve understand at the time of entering into a The Singapore Court began by surveying the same outcome in the context of a contract which approach may apply if later the way in which the applicable standard of winding-up application, the alleged debtor forced to advance or resist a winding-up review is addressed in other common law would need to marshal evidence and application. This could be a critical factor jurisdictions, including England and Wales demonstrate one or more meritorious underpinning a party’s preferred method of and Malaysia, where something defences on the basis of the triable issues dispute resolution for a contract. approximating the prima facie standard has standard of review. This dichotomy of Furthermore, the applicable standard of been adopted, and the Eastern Caribbean approaches thus promotes arbitrary or review is something which creditors and Court, which favours the triable issues tactical use of the winding-up jurisdiction. debtors will then wish to keep in mind when standard. Indeed, the Singapore Court noted that assessing how best to address any later dispute. As for Hong Kong SAR, it was correctly retaining the triable issues standard would The decision in AnAn will help parties noted that the law is in a state of flux. While make “ the winding-up regime vulnerable to navigate these issues in Singapore and may prove to be persuasive as and when further judicial attention is given to this important AnAn rejects an approach which may well issue in other jurisdictions. make it more difficult, time-consuming The underlying facts and expensive for an alleged debtor to AnAn (Singapore) Ptd Ltd. (AnAn), a Singapore holding company, and VTB Bank resist a winding-up application in favour PJSC (VTB), a state-owned Russian Bank, entered into a global master repurchase of arbitration agreement (GMRA). Under the GMRA, AnAn agreed to sell to VTB global the prima facie standard was adopted by the abuse by creditors, who may utilise the depository receipts (GDR) of shares in EN+ Hong Kong Companies Court in the well- draconian threat of liquidation to pressurise the Group PLC (EN +), before repurchasing known 2018 decision in Re Southwest Pacific alleged debtor into payment. This would them later at pre-agreed rates. Bauxite (HK) [2018] HKLRD 449, undercut the parties’ pre-agreed method of The parties agreed that disputes arising significant doubt has subsequently crept in. dispute resolution, being arbitration .” out of, or connected with, the GMRA were Most notably, this approach was questioned The conclusion reached was that there is to be referred to arbitration. by the Hong Kong Court of Appeal in 2019 no basis to apply different standards to what

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is essentially the same disputed debt. There not be a back door for parties to run should be a coherent, consistent approach. A creditor should arguments on the merits of the dispute. If the prima facie standard applies for The threshold for finding that a debtor ordinary claims which are subject to think carefully has been abusive will be high, but abuse arbitration, it should likewise apply to could manifest in a number of different winding-up applications, which carry far about the wisdom scenarios. Some examples were highlighted more severe consequences for a company. by the Singapore Court, including where the In Hong Kong SAR, the court in of applying to wind debt is admitted both as to liability and Dayang similarly referred to the risk of quantum, where the debtor has waived its winding-up being used by a creditor as a up a counterparty right to insist on arbitration and, pressure tactic to strong-arm an alleged importantly, where a debtor-company seeks debtor into paying, but took the view that rather than to stave off substantiated concerns which this could be policed by the court’s inherent justify the invocation of the insolvency powers to address such abuse, through proceeding directly regime. appropriate cost orders for example. to arbitration This might be where assets have gone From a public policy perspective, the missing or other pressing circumstances Singapore Court found a way to square the indicate a need to engage insolvency possible tension between the arbitration and contemplated, a liquidator were legislation protections. insolvency regimes by holding that until a subsequently to reject a debt relied on by a Once satisfied that there is a prima facie debt is established through arbitration, the creditor in support of a winding-up dispute which falls within the scope of an insolvency regime does not come into play. application. A winding-up order is arbitration agreement, the appropriate This is because the question whether a party irreversible (only a permanent stay is outcome would usually be the dismissal of is in fact a debtor, is precisely the question possible), so the result would be irreparable the winding-up application, rather than a the parties agreed to refer to arbitration. harm to the debtor company’s stakeholders. stay, given the ongoing damage a lingering winding-up application is likely to inflict on Party autonomy Certainty and savings the company. However, with respect to Another problem the Singapore Court Finally, the Singapore Court recognised the possible abuse, the court recognised that identified is that the triable issues standard importance of certainty that a dispute will there would be rare situations where a offends against the principle of party be resolved in the manner agreed between debtor-company could strategically autonomy where parties have explicitly the parties. The triable issues standard would manipulate the lower review standard with agreed to refer any disputes under the require an alleged debtor to convince the a view to staving off a winding-up relevant contract to arbitration. court that defences to an alleged debt have application, thereby leaving the debtor It would be contrary to such an merit in order to obtain a stay or dismissal unrestrained to continue trading, deplete agreement for the court to take the place of of a winding-up application in favour of assets and/or pay off smaller creditors who an arbitral tribunal by examining and arbitration. This would likely involve are not bound to arbitrate to the detriment passing judgment on the alleged debtor’s material time and expense, and the of other creditors who are and could then be defences, thereby eroding any of the arguments would later need to be rehashed left worse off in a later winding up after an advantages which the parties sought to before a tribunal. arbitration had run its course. obtain by agreeing to refer disputes to The Singapore Court foresaw some ways arbitration in the first place. Scope and application of the to mitigate these problems, including a The Hong Kong SAR court in Dayang prima facie standard ‘middle ground’ safeguard of requiring the explored this issue but arrived at a different Singapore has thus opted, as the Singapore prompt resolution of a dispute through conclusion. It held that the triable issues Court put it, for limited judicial arbitration. The court also confirmed that standard does not cut across the principle of intervention. Unless exceptional where there are legitimate concerns about party autonomy because the presentation of circumstances apply or there is an abuse of the solvency of a company as a going a winding-up application falls outside of the process, or the debt is not genuinely concern and that no triable issues are raised scope of an arbitration agreement. This is disputed, a winding-up application will be by the debtor, the court might impose the because the court does not substantively dismissed or stayed if the debt arises under control mechanism of ordering a stay (rather determine the alleged dispute in the context a contract containing an arbitration than dismissal) of a winding-up application of hearing a winding-up application. This is agreement. so that it could be proceeded with if, for left to the liquidator later in the proof of But what about possible abuses of the example, it could be shown that the debtor debt process. lower review standard by debtors who seek company had no genuine desire to arbitrate The Singapore Court dismissed this to buy time and delay an inevitable the dispute or if it was paying other creditors notion, since even if the decision-making insolvency, and the corresponding prejudice to stave off a winding-up to the detriment function is offloaded to a liquidator, this some creditors will undoubtedly experience? of the applicant creditor. would still undercut the agreed method of The Singapore Court said there was no In any event, said the court, “any possible dispute resolution. question of an automatic stay. The bona misuse of the prima facie standard must be Moreover, there could be dire fides of the debtor in raising a dispute would contrasted with the real possibility of abuse consequences if, as the judge in Dayang remain a relevant factor, although this would by creditors unilaterally choosing the

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insolvency route to bypass their obligation In Singapore (and other places where the applying to wind up a counterparty rather to refer the dispute to arbitration.” prima facie standard has been adopted) we than proceeding directly to arbitration, and now know that it will be difficult for a a debtor should be cognizant of its ability to Impact on commercial creditor to leapfrog an arbitration to a insist on arbitration when faced with a practice winding-up. Where they have agreed one, winding-up application. The Singapore Court recognised in AnAn parties can expect to be held firmly to an that applying the prima facie standard may arbitration agreement, even in a potential well mean that commercial practice would insolvency setting. This is in contrast to a Daniel Cohen have to be adjusted if the standard of review stronger emphasis on not fettering a Partner is lowered, but that such an adjustment creditor’s ability to invoke the statutory Akin Gump Strauss Hauer & Feld LLP Hong Kong SAR would be in the right direction as parties insolvency regime in other jurisdictions. would be discouraged from bypassing an It is therefore all the more important to Naomi Moore arbitration agreement. pay attention to the fine print of an arbitration Partner Whether or not an adjustment is agreement and possibly to consider suitable Akin Gump Strauss Hauer & Feld required, the decision certainly flags the carveouts for insolvency proceedings if a party Hong Kong SAR commercial importance for parties to wishes to preserve the ability to wind up a understand from the outset the counterparty which cannot or refuses to pay. Hannah Wright Registered foreign lawyer consequences of including an arbitration If problems do later emerge, a creditor Akin Gump Strauss Hauer & Feld agreement in their contracts. should think carefully about the wisdom of Hong Kong SAR

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