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Can a creditor seek to wind up if there is an arbitration clause (Part 2) – the last word in Singapore. AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33

14 Apr 2020

The Court’s approach when dealing with a winding-up petition based on a debt arising out of a contract containing an arbitration clause has generated a lot of debate in the common law world. Since the publication of our commentary on Re Asia Master Logistics Limited [2020] HKCFI 311 (“Asia Master”), the Singaporean Court of Appeal has handed down its decision in AnAnGroup (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“AnAn Group”) which sets out the Singaporean answer to this important question.

The debate

A debtor company normally needs to raise a bona fide dispute in order to obtain a stay or dismissal of the winding-up petition.

However, in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 (“Salford”), the English Court of Appeal held that, if the dispute in relation to the debt is subject to an arbitration agreement and the debt is disputed, the English courts ought to dismiss or stay the winding-up application, save in “wholly exceptional circumstances”.

Following the decision in Salford, there have been conflicting decisions in common law jurisdictions in relation to the applicable standard of review in cases where a dispute which is the subject of an arbitration agreement is raised in the context of winding-up proceedings.

While some decisions have followed or modified Salford and favoured the prima facie standard of review, other decisions favoured the retention of the traditional test, notwithstanding the presence of an arbitration clause which governs the dispute.

As noted in our commentary on Asia Master, this conflict between the traditional approach and the Salford approach can also be seen in Hong Kong – with the Salford approach being adopted by the Court in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”) and being doubted in the obiter remarks of the Hong Kong Court of Appeal in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 and Asia Master.

The facts and decision in AnAn Group

Pursuant to an agreement, AnAn Group (Singapore) Pte Ltd (“AnAn”) agreed to sell and  VTB Bank (Public Joint Stock Company) (“VTB”) agreed to purchase global depository receipts (“GDRs”) in a company known as EN+. AnAn was then obliged to repurchase the GDRs from VTB at a later date at a pre-agreed rate. In substance, the agreement was a loan from VTB to AnAn, and the EN+ GDRs acted as collateral for the loan.

Under the agreement, AnAn was obliged to maintain sufficient collateral, which would be affected based on the prevailing value of the EN+ GDRs which it had sold to VTB. The agreement further provided that any dispute arising out of or in connection with it was referable to arbitration.

A few months after VTB’s purchase of the EN+ GDRs from AnAn, the prices of the GDRs plummeted.  As such, VTB issued a notice to AnAn, requiring the latter to top up a cash margin to meet the shortfall in collateral. After AnAn failed to do so, VTB sent a calculation notice to AnAn, stating that approximately US$170m was owed to it by AnAn. This figure was calculated by subtracting the Net Value of the EN+ GDRs from the purchase price of the GDRs.

Later, VTB served a statutory demand for the sum of approximately US$170m, which AnAn failed to repay within three weeks. On the basis of the unsatisfied statutory demand, VTB initiated winding-up proceedings against AnAn.

The Judge rejected the disputes raised by AnAn in relation to the debt, finding that they were not raised bona fide. Accordingly, the Judge ordered the winding up of AnAn. AnAn appealed against the Judge’s decision.

The Singaporean Court of Appeal allowed AnAn’s appeal. The Court held that the prima facie standard of review is to be adopted. As such, the winding-up proceedings would be stayed or dismissed if the debtor could show that there was an arbitration clause and that the dispute relating to the debt is caught by that clause, provided that the dispute is not being raised in abuse of the court’s process.

The Court’s reasoning in AnAn Group

First, the Court reasoned that by adopting the prima facie standard of review would promote coherence in the law concerning stay applications.

If a creditor claimed for a debt simpliciter before the court, the debtor would only have to demonstrate that there was an arbitration clause and that the dispute relating to the debt is caught by that clause. If the same debt was relied on as the basis for presenting a winding-up application, the debtor would be required to demonstrate a substantial and bona fide dispute. There was no principled basis to apply differing standards to what was really the same disputed debt. If the applicable standard of review would depend solely on the creditor’s tactical choice, creditors could abuse the court’s winding-up jurisdiction in order to avoid arbitration.

Secondly, the Court opined that by replacing the triable issue standard with the prima facie standard would give effect to the principle of party autonomy.

Under the triable issue standard, the court would have to critically consider the merits of the debtor’s defences, in spite of the parties’ agreement that such disputes ought to be determined by an arbitrator, who might well arrive at a different conclusion on the merits from the court. A party did not lose his genuine desire for recourse to arbitration just because his case appeared weak, and arbitration may have been preferred for the procedural advantages which may not be available were the matter to be determined by the courts.

Thirdly, the Court stated that the triable issue standard presented uncertainty. The alleged debtors would have to show that there was a bona fide dispute. This may lead to significant costs being incurred by the parities before the courts, even though the substantive dispute was properly referable to arbitration. By contrast, the prima facie standard exhorts limited judicial intervention, viz. the court is merely required to determine whether it appears on a prima facie basis that there is an arbitration clause and that the dispute is caught by the clause.

To check against the abuse of this lower standard of review, the Court held that a stay would not be granted notwithstanding that the prima facie standard has been met if the application for a stay amounts to an abuse of process. The Court also observed that the abuse of the court’s process can manifest itself in a multitude of scenarios, and that the threshold for abusive conduct is very high. An example of an abuse of process would be where the debt had been admitted as regards both liability and quantum.

Concluding remarks

The position in Hong Kong remains unsettled and it is doubtful whether the Hong Kong Court of Appeal will follow the decision in AnAn Group.

What is clear is that AnAn Group offers some support to the Salford/Lasmos line of authorities and will no doubt be relied upon by debtor companies seeking to oppose winding-up petitions on the basis that there is an arbitration clause in the relevant agreement giving rise to the debt in question.

José-Antonio Maurellet SC and Terrence Tai authored this Article