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Winding up petitions and arbitration agreements: a comparison of the Singapore and HK approaches

News / / Hong Kong, Singapore

Recent decisions of the Hong Kong and Singapore courts show different approaches to the issue of when a winding-up petition will be allowed to proceed in circumstances where there is an arbitration agreement.

In the Singapore cases of VTB Bank and BWF, the Singapore Court of Appeal applied the relatively low threshold of a prima facie case: if the debtor can meet that standard (and absent any abuse of process), a winding-up petition will be dismissed where an arbitration agreement applies between debtor and creditor. This is a lower threshold than the triable issue standard which would apply in the absence of an arbitration agreement.

The Singapore cases may be contrasted with the recent Hong Kong decision in Dayang, in which the Court of First Instance declined to dismiss a winding-up petition as the debtor-company failed to illustrate the existence of a bona fide dispute on substantial grounds, notwithstanding an arbitration clause in the underlying contract – a more creditor-friendly outcome, in which the triable issue standard of review was applied. Safeguards against undue pressure being exerted on alleged debtor-companies – where there is a bona fide dispute over the debt underpinning the winding-up petition – take the form of adverse cost orders against creditors.

Whilst this may initially appear to be a minor difference in approach as between the two jurisdictions, it could have important implications in certain cases. That is particularly so given that the economic effects of the Covid-19 outbreak seem likely to be felt for years to come and, ultimately, to result in an increase in winding-up petitions being brought. On this issue at least, Hong Kong seems clearly to be the more creditor-friendly of the two jurisdictions and, by contrast, Singapore the more debtor-friendly.

The position in Singapore

In AnAn Group (Singapore) Pte Ltd v. VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“VTB Bank”)and BWG v. BWF [2020] SGCA 36 (“BWF”), the Singapore Court of Appeal considered the appropriate standard of review, when a dispute subject to an arbitration agreement arises, in relation to a debt which forms the basis of a winding-up petition. It held that this should be the prima facie standard.

Where that prima facie threshold is met, winding-up proceedings against alleged debtor-companies would be stayed or dismissed so long as:

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

Accordingly, having found that the respective debtor company in each of the above cases had satisfied the threshold requirements, the Court of Appeal:

  1. overturned a winding up order against a debtor company and dismissed the winding-up proceedings commenced by a creditor on the basis of sums alleged owed under a share sale agreement (in VTB Bank); and
     
  2. upheld the decision of the High Court to grant an injunction restraining the appellant creditor from taking out winding-up proceedings against the respondent debtor company premised on sums owed under a string of contracts for the sale and purchase of crude oil (in BWF).

Singaporean law

The general approach

The classic objection to a winding-up petition is that the petition is founded on a bona fide disputed debt. The general approach in determining the existence of a bona fide dispute in Singapore is to consider whether a triable issue has been made out (i.e.the triable issue standard of review). Whether a dispute exists would require the Court to examine the substantive evidence and consider, based on such evidence, whether an arguable case could be made meriting the holding of a trial to determine the dispute (i.e. a bona fide dispute on substantial grounds).

Where the disputed debt is subject to an arbitration agreement

  • The BDG Approach

In BDG v. BDH [2016] 5 SLR 977 (“BDG”), the Singapore High Court held that where a debtor company seeks to stave off a winding-up petition on the basis of a disputed debt subject to an arbitration agreement, the general approach is departed from. Instead, the debtor company would only need to meet the lower standard of establishing a prima facie case that the dispute falls within the scope of the arbitration agreement, and that the debt is bona fide disputed.

  • Further clarification in VTB Bank and BWF

In VTB Bank, the Court of Appeal further clarified the approach adopted in BDG, emphasising that the prima facie standard is the applicable standard. The Court of Appeal expressed the view that applying the triable issue standard in such cases makes the winding-up regime vulnerable to abuse by creditors, who may “utilise the draconian threat of liquidation to pressurise the alleged debtor into payment” and “undercut the parties’ pre-agreed method of dispute resolution, being arbitration”. In other words, the courts should not engage in an assessment of the merits of the parties’ dispute as the arbitral tribunal is the proper forum to adjudicate the dispute between the parties.

Despite the adoption of the lower threshold, the Court of Appeal highlighted that safeguards are in place to prevent abuse of process where debtors seek to delay proceedings and recovery of legitimate debts.

  1. In cases where the applicant creditor is able to demonstrate: (a) “legitimate concerns about the solvency of the company as a going concern”; and (b) no triable issues are raised by the debtor, the Court will grant a stay (instead of a dismissal) of the proceedings pending arbitration, with the creditor given liberty to apply to the Court to proceed with the winding-up – even where the defendant company has met a prima facie standard, and irrespective of the arbitration proceedings.
     
  2. In cases where the debtor company had acted inconsistently without a “clear and convincing “reason for the change of position, for example by previously admitting that a due is owed but thereafter disputing it, the courts will generally refuse an application to stave off the winding-up proceedings.

Further guidance on the Court’s considerations as to whether there has been an abuse of process was given in BWF:

  1. in considering whether a debtor has taken inconsistent positions in disputing an underlying debt, the Court is required to take a “granular approach and consider each defence separately” not on their merits but to determine whether there was any abuse of process;
     
  2. the Court has significant discretion and may take into account public policy considerations in deciding whether there has been an abuse of process ; and
     
  3. the Court may decline to hold that a party is in abuse of process despite that party’s inconsistent conduct if there is a risk of even greater injustice in barring that party from taking such an inconsistent position.

Comment

The decisions in VTB Bank and BWF underscore the Singaporean judicial policy of facilitating arbitration. The clear message is that parties should not be allowed to circumvent an arbitration agreement by seeking to argue the merits of the dispute in winding-up proceedings.

The outcome is debtor-friendly, as it significantly reduces the potency of a winding-up petition as a weapon in the arsenal of a creditor seeking to assert commercial pressure on alleged debtor companies, at least where the debt is within the scope of an arbitration agreement between the debtor and the creditor.

A balance has been struck, however, as the Singaporean courts continue to be vigilant and wary of attempts on the part of debtors to delay proceedings and recovery of legitimate debts. A significant discretion is retained to allow the continuance of winding-up proceedings even where the prima facie threshold is met by a debtor company.

It is envisaged that more clarity on how this judicial discretion is to be applied will follow as the Singapore courts preside over forthcoming winding-up petitions precipitated by the economic difficulties presented by COVID-19.

The position in Hong Kong

In Dayang (HK) Marine Shipping Co, Ltd v. Asia Master Logistics Ltd [2020] HKCFI 311, the Hong Kong Court of First Instance declined to dismiss a winding-up petition where a debtor was unable to show the existence of a bona fide dispute on substantial grounds, notwithstanding the presence of an arbitration clause in the underlying contract.

The background facts

Dayang (HK) Marine Shipping Co., Limited (the “Shipowner”), and Asia Master Logistics Limited (the “Charterer”), entered into a charterparty whereby the Shipowner chartered its vessel, MV Aoli 5 (the “Vessel”) to the Charterer for a period of 40 days +/- 10 days.  The Charterparty was on the NYPE 93 form.

The Charterparty provided for disputes to be resolved by arbitration in Hong Kong under English law.

The Charterer failed to pay a number of hire instalments due under the Charterparty.  The Shipowner served a statutory demand in respect of the sums due and, when the demand went unsatisfied after the required period of 21 days, presented a winding-up petition.

The Charterer did not deny the existence of the debt, but did raise an alleged counterclaim.  The counterclaim had several aspects, relating both to the physical state of the Vessel and the conduct of the Master and crew.

The Charterer was not able to quantify its counterclaim nor, therefore, to say whether it would be of such a size as to extinguish the debt due to the Shipowner. Nonetheless, the Charterer submitted that the dispute should be dealt with in arbitration, pursuant to the arbitration clause contained in the Charterparty. The Charterer accordingly asked the Court to dismiss the winding-up petition in order to allow that to happen.

The law

The interaction between winding-up petitions and arbitration agreements in underlying contracts has been the subject of several decisions in recent years, both in Hong Kong and in other common law jurisdictions. It is clear that a winding-up petition should be dismissed where the debt is disputed in good faith and on substantial grounds. There have, however, been differing views as to how this should be applied where the contract underlying the debt contains an arbitration clause.

The two schools of thought on this issue are referred to in this decision as the “Traditional Approach” and the “Lasmos Approach”.

The Lasmos Approach

The decision in Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 (“Lasmos”) stated that a winding-up petition should generally be dismissed where:

  • The contract underlying the debt contains an arbitration clause which covers any dispute relating to the debt;
     
  • The debtor takes steps to commence arbitration accordingly; and
     
  • The debtor files an affirmation demonstrating this.

The Traditional Approach

The Traditional Approach differs from the Lasmos Approach in that it maintains the requirement for the debtor to show a bona fide dispute on substantial grounds.  If the petitioner is clearly right, then there is no bona fide dispute and a winding-up order will be made, regardless of any arbitration clause in the underlying contract.

The Court decision

In this case, the Court followed the Traditional Approach.

The judgment sets out that whilst the parties’ freedom of contract must be protected, the extent to which contractual rights ought to be protected by the Court depends on the scope of those rights and obligations. In particular, an arbitration clause imposes an obligation to have disputes that fall within its scope determined, or resolved, by arbitration.

However, the Court has discretion to make a winding-up order, and this discretion would be fettered under the Lasmos approach.

The Court, therefore, made a winding-up order against the Charterer, finding as follows:

  • To dispute the existence of a debt, the debtor cannot simply deny the debt, but must show there is a bona fide dispute on substantial grounds.
     
  • The Court maintains its discretion regardless of whether or not there is an arbitration agreement.
     
  • Commencing arbitration proceedings is not sufficient proof of a bona fide dispute, but may constitute relevant evidence.
     
  • Where a creditor petitions for a winding-up order on a debt where there is a bona fide dispute based on substantial grounds, it risks being liable to pay the debtor's costs on an indemnity basis (and potential liability for the tort of malicious prosecution).

With the above in mind, the Court undertook a substantive review of the Charterer’s alleged counterclaim in this case, quickly reaching the view that “…on any analysis, the Debt is not being disputed in good faith on substantial grounds.” Accordingly, the Court made the Winding-up Order sought in relation to the Charterer.

Comment

This decision is a clear victory for the Traditional Approach over the Lasmos Approach and is thus very much a creditor-friendly decision. It remains to be seen whether this will mark the end of the Lasmos Approach, but it certainly seems to be losing favour, at least in Hong Kong.

This significantly strengthens a creditor’s hand, making the statutory demand and winding-up petition route attractive, even where the underlying contract contains an arbitration clause.  Debtors can no longer be confident that they will be able to defeat such a petition simply by pointing at the arbitration clause and taking some very basic steps to commence arbitration and show that they have done so.

Notwithstanding the above, creditors should also be mindful that a winding-up petition should not be used as a means to apply improper pressure on a counterparty where there is a genuine dispute. The Courts remain highly critical of such tactics and have emphasised their willingness to penalise them in costs.

Hong Kong Team

Max Cross
Ruaridh Guy
Sophie Forsyth

Singapore Team

Kimarie Cheang
Adrian Koh

Max Cross

Max Cross Partner

Ruaridh Guy

Ruaridh Guy Partner

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In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“VTB Bank”) and BWG v BWF [2020] SGCA 36 (“BWF”), the Singapore Court of Appeal examined the issue of what is the appropriate standard of review, when a dispute subject to an arbitration agreement arises, in relation to a debt which forms the basis of a winding-up petition.

Winding up petitions & arbitration agreements