Guarding against Champerty: Litigation Funding in Insolvency

The Singapore High Court in its decision in Re Vanguard dated 9 June 2015 dealt with the interesting issue on whether to approve a litigation funding arrangement in insolvency.

Background

It is common in the winding up of a company, there may not be enough money left in the company for the liquidator to fund litigation. This litigation in turn could successfully lead to more assets being paid back to the company, for the benefit of the general pool of creditors. The liquidator may therefore need to obtain funding to fuel this litigation.

This may then sail dangerously close to breaching the common law doctrines of maintenance and champerty. Maintenance is the giving of assistance to a party in litigation by a party who has no interest in the litigation while champerty is the maintenance of an action in exchange of getting a share of the proceeds. These common law doctrines, still existing here in Malaysia, are meant to protect the purity of litigation.

2678453389_072413453d_o

Sale of Property: Assignment of Proceeds

The route allowed in this case, when dealing with the funder being paid out of the litigation proceeds, was to allow for an assignment of proceeds. This would be treated as the liquidator exercising his power of sale under the equivalent of section 236(2)(c) of the Companies Act 1965.

Three shareholders wanted to enter into a funding arrangement with the liquidator to fund litigation to be initiated on behalf of the wound up company. The shareholders’ funding would be secured with the agreement providing for an assignment of the litigation proceeds to cover the amount of funding. The liquidator obtained approval at the creditors’ meeting and sought the Court’s approval to enter the agreement.

The Court gave approval for the agreement. It was held that the assignment of the litigation proceeds (essentially a sale) would be a sale of “property” under the Singapore equivalent of our section 236(2)(c) of the Companies Act. The liquidator has the power to “sell the immovable and movable property and things in action of the company”.

This statutory power of sale would therefore allow both an assignment of the chose in action i.e. allowing other parties to bring the action, or an assignment of the proceeds arising from the litigation brought by the liquidator. Even if the funders were to be rewarded with more funds than they had put in, that should not prevent such an assignment since the funder would be taking on the risks of unsuccessful litigation.

The Court held that this statutory power is an exception to the common law doctrines of maintenance and champerty.

Of interest is that the original funding agreement ran into issues and was amended to become an assignment agreement. The original agreement provided for the company to use part of the litigation proceeds to repay the shareholders’ funding. That would essentially allow the shareholders’ funding to also be paid in priority to the other costs and expenses of the winding up.

The Court was of the view that this original funding agreement may have run foul of the Singapore equivalent of our priority provision in section 292(1)(a) and (2). Further, the original funding agreement could not be approved under the equivalent of section 292(9) since the Court has no power to make an order until actual assets have been recovered.

For those interested in reading more, there is a Singapore Law Reform Committee Report issued in 2014 setting out an analysis of the issues relating to litigation funding in insolvency.

Arbitration Trumps Insolvency , English High Court finds

In a follow up to my earlier article on Arbitration and Liquidation: Never the Twain Shall Meet?, there is now a recent English High Court decision that raises a few more questions on whether arbitration would trump liquidation.

Texas_Hold_'em_Hole_Cards

English High Court Decision

In Philpott & Orton v Lycee Francais Charles De Gaulle School [2015] EWHC 1065, the wound up company had earlier entered into a contract with a school. This contract contained an arbitration clause. The company subsequently went into creditors’ voluntary liquidation. The school filed a Proof of Debt with the liquidators. There was a dispute on the final account and a dispute whether a set-off based on mutual dealings could be applied. The liquidators’ position was that £615,000 is due to the company while the school claimed it was owed £270,000. The liquidators applied to the court for directions on how to resolve this issue.

The school objected to the liquidators’ application for directions on the ground that the arbitration clause was still binding between the wound up company and the school. The school successfully applied for a stay under the Arbitration Act 1996.

It was held in this case that arbitration would trump the insolvency procedure of the Court giving directions on the final account. There was a dispute as to whether the company could claim a set-off since the liquidators were asserting that the company was owed that substantial sum as well. Therefore, the Court held that if the company were to bring proceedings against the school, such proceedings would have to be initiated by the liquidators of the company through arbitration.

Further, the English High Court also examined the issue of the school having filed a proof of debt and held that this did not prejudice the school’s reliance on the arbitration clause. The Court found nothing inconsistent with filing the proof of debt and then still bringing an arbitration claim. In such a case, the liquidator and the winding up court could wait the outcome of the arbitration before dealing with the proof of debt.

Malaysian Position on Arbitration vs Winding Up Procedures

I briefly examine how these facts and issues may have played out in Malaysia.

(i) Statutory Stay and the Proof of Debt Process

As an introduction, in a compulsory winding up and a creditors voluntary winding up, the law provides for an automatic stay of legal proceedings against the wound up company, except if the Court grants leave to proceed against the company (see the statutory stay under section 226(3) of the Companies Act 1965 for a compulsory winding up and section 263(2) for a creditors voluntary winding up). As an aside, I have written about a Malaysian Court of Appeal decision that suggests that there is a statutory stay even in a members voluntary winding up.

The legislative intent of the statutory stay is that the liquidator of the wound up company should not be forced to incur unnecessary expenses through defending legal actions if the creditors can obtain their relief within the winding up process through the filing of a proof of debt. This preserves the pari passu distribution, allows the cheap summary process of determination of the proof of debt, and preserves the assets in liquidation from being spent on litigating multiple suits (see generally, the Supreme Court case of Mosbert Berhad (in liquidation) v Stella D’Cruz [1985] 2 MLJ 446). Therefore, in almost all cases, if a creditor merely wishes to pursue a monetary claim, the appropriate process is to comply with the statutory process and file a proof of debt.

On these principles, it should ordinarily be the case that the insolvency procedure of the proof of debt trumps arbitration. If a creditor intends to bring a claim in arbitration against a company in compulsory or creditor voluntary liquidation, then the creditor must apply for leave from Court to proceed. Ordinarily, a monetary claim, even subject to an arbitration clause, should then be dealt with through the proof of debt. The wound up company should not have to expend money, thereby depleting the asset pool for the other unsecured creditors, in defending a claim in arbitration.

Taking it further, even if the creditor were to succeed in its arbitration claim and were to obtain an arbitral award, that creditor cannot execute against any of the assets of the wound up company. The creditor would still need to file in a proof of debt. Of course, the quantum in the proof of debt becomes much more concrete and the liquidator would find it difficult to reject the proof of debt. The argument by such a creditor pursuing the arbitral claim (and this is also inherent in the English High Court decision) would be that the creditor wants to pursue the contractually-provided platform to determine the quantum of that claim. The creditor wants the agreed arbitral tribunal to determine the claim and not the liquidator to determine the claim in the proof of debt process.

(ii) Arbitration Stay of Seeking Directions in Winding Up

 In a winding up, it is possible for a liquidator to seek directions in any particular matter arising under the winding up (section 237(3) of the Companies Act). It is quite possible, just like in the English High Court decision, that the directions sought may impact on a claim which is subject to an arbitration clause. Section 10 of the Arbitration Act 2005, which allows for a stay of court proceedings pending arbitration, refers to any court proceedings which are “brought in respect of a matter which is the subject of an arbitration agreement” and that could be wide enough to even cover such directions sought in a winding up. It will be interesting to see how such objections or applications would be dealt with in Malaysia.

 

Strict Requirements for a Stay of a Winding Up Order

A recent High Court decision sets out the strict requirements to be met when applying for a stay of a winding up. In this case, despite there being no objections raised by the liquidator or the other parties, the Court would still scrutinise the evidence before deciding whether to grant the stay or not.

In the Grounds of Judgment dated 2 June 2015 for the case of Percetakan Warni Sdn Bhd, the Court dismissed an application by a shareholder under section 243 of the Companies Act 1965 for a permanent stay of a winding up. This is despite the Petitioner and the Liquidator (being the Official Receiver)) not objecting to the application and where the Respondent (through its shareholder) would be paying off the debts of the Respondent company.

Of interest was that there were uncommon features which the Court insisted should have been met for such a section 243 stay application. The Court took the step of carefully assessing whether all of these requirements were met:

  1. In addition to the established section 243 principles from the leading Federal Court case of Vijayalakshmi and other cases, the Court held that there must be evidence to demonstrate the company will be commercially solvent after the section 243 stay. It is not sufficient to show assets outweigh the liabilities. Commercial solvency can be shown through injection of funds from a “white knight”, evidence that the company will be gaining a lucrative contract, or an expert opinion from a restructuring expert or accountant on the likelihood of the company’s commercial solvency. There was no evidence of any of these.
  2. The company had earlier been granted an ad interim stay of the winding up, since the OR had no objections to that. However, there was no evidence that the Board had even carried on the business or operated the company throughout that ad interim stay.
  3. The Court also scrutinised the Statement of Affairs filed by the directors and compared it with the Liquidator’s report filed by the OR. There were inconsistencies in the directors’ Statement of Affairs and not sufficient disclosure. While no objections were raised by the other parties, the Court held that this showed that the applicant’s evidence was not credible.
  4. The application also did not exhibit the latest audited accounts of the company. The last audited accounts were in 2010 and no updated financial information was provided by the applicant.

As these requirements were not met, the stay application was dismissed. So be aware of the possibly stringent requirements when seeking for a section 243 stay of a winding up Order. These additional requirements would also provide good grounds to object to a section 243 stay application.

 

Ex Parte Leave for Committal: Some Tactical Considerations

In an earlier post, I had written about the opposed ex parte hearing and whether it was a contradiction in terms to have the opposing party present at an ex parte hearing.

As a continuation of my earlier article, I now want to deal with a particular type of ex parte hearing. This is an application for leave for committal. In summary, while leave for committal is expressed that it must be ex parte, the Court does have discretion in allowing the alleged contemnor’s Counsel to still appear at the leave hearing. Further, since it is ex parte, there are tactical considerations on the requirement to make full and frank disclosure.

Jail

Leave for Committal

In an application for leave for committal, Order 52 rule 3(2) of the Rules of Court 2012 provides that such an application “must be made ex parte to the Court.” Nonetheless, in the High Court case of Dato’ Oon Ah Baa & Ors v Eagle & Pagoda Brand Teck Aun Medical Factory Sdn Bhd & Ors [2003] 7 CLJ 81, VT Singham J allowed the defendants’ Counsel to address the Court at the ex parte leave stage.

The Court was of the view that although the application for leave was made ex parte, there was nothing irregular for the defendants’ counsel to be present in court where the defendants had become aware of the application and if necessary, to assist the Court if called upon even in an ex parte application. The ex parte application was not converted into an inter partes hearing when the defendants’ counsel was granted permission to address the Court. This was essentially an opposed ex parte hearing.

In this case, the defendants’ had also filed an affidavit to oppose the ex parte leave application. The Court noted that there was no direction by the court nor was there any permission obtained to file such an affidavit to oppose the leave application. The Court was of the view that if the alleged contemnor is allowed to reply or contest the application (presumably, through the filing of affidavits in reply), it would open the floodgates and defeat the whole exercise of an ex parte application.

Practical and Tactical Considerations

I do observe that in some cases, once the alleged contemnor is aware of the leave application, the alleged contemnor’s solicitors may still file the affidavit in reply to attempt to oppose the leave application on the merits. This is a tactical option to consider since the affidavit may then already be read by the Judge before the Judge decides on whether or not to admit that affidavit for the purposes of the leave application.

I have also been in the situation where I have become aware of the pending ex parte leave and I insist on wanting to be present. In this day and age of e-filing in the Courts system, one can easily conduct a file search to pre-empt any committal application and to have sight of the filed Court papers. I would normally then put the applicant’s solicitors on notice that I insist to be present at the ex parte hearing and that I will be requesting the Court to treat it as an opposed ex parte hearing.

To prepare for the possibility where I am not allowed to submit or oppose the leave hearing, I may also set out, briefly, my main arguments in that letter to the applicant’s solicitors as to why there is no prima facie case for committal. I then insist that my letter be disclosed to the Court at the ex parte hearing and that I reserve my rights to set aside any ex parte leave Order on the grounds of failure to make full and frank disclosure.

Full and Frank Disclosure at the Ex Parte Leave Stage

It is clear that the usual strict obligations at an ex parte hearing equally apply to an ex parte leave for committal hearing. In the Court of Appeal decision of Tan Sri G Darshan Singh v Tetuan Azam Lim & Pang [2013] 5 MLJ 541 (see the original Grounds of Judgment here), the Court of Appeal upheld the setting aside of the ex parte leave for failure to make full and frank disclosure. Abdul Wahab Patail JCA emphasised the importance of setting out all the facts fairly:

It must also be borne in mind that the application for leave to commence proceedings is made ex parte. To enable the court to make a fair and just decision, it must necessarily have all the relevant facts before it. In an ex parte application, it means the applicant must set out the facts fairly, including the facts that are likely to be raised by the proposed alleged contemner in objecting to the application if it were an interparte application. If any fact is likely disputed by the other party, the applicant must say so and give his reasons why such dispute is not sustainable, or is irrelevant or immaterial. There is no reason not to be able to do so for after all only the applicant has the opportunity to be heard upon it in the ex parte application. It certainly does not mean the applicant is entitled to merely state the facts favouring his application and the court must rely on that alone. Otherwise the leave procedure would cease to be a safeguard and instead easily becomes a tool exploited for oppression.
My view is that this obligation is even more important due to the quasi-criminal nature of committal proceedings. Courts should exercise its discretion to allow for an opposed ex parte hearing in order for the Court to be appraised of at least the prima facie facts in deciding whether leave is to be granted.

The Order granting leave for committal can be grave as it would be deemed that there is already a prima facie case for contempt. The alleged contemnor would need to then first purge his contempt and deal with the committal application, before the alleged contemnor can move his own Court applications (see the Federal Court decision of Shamala Sathiyaseelan v Dr Jeyaganesh C. Mogarajah & Anor [2011] 1 CLJ 568 and the Supreme Court decision of Wee Choo Keong v MBf Holdings Bhd & Anor and another appeal [1993] 2 MLJ 217).

In my next post in this series of ex parte applications, I will deal with the considerations of the ex parte leave for judicial review.

Arbitration and Liquidation: Never the Twain Shall Meet?

[This article was originally published in the Chartered Institute of Arbitrators, Malaysia branch newsletter Issue 1/2015].

Lee Shih analyses the tension between the contractual bargain to arbitrate and the statutory right to bring winding up proceedings based on a debt. Would an arbitration agreement trump the winding up process?

fighting

Introduction: Statutory Right vs Contractual Bargain

Liquidation, or winding up, is a statutory process which leads to the end of the life of a company. It allows for an equitable realisation and distribution of the assets of a company to discharge its debts. It is a procedure of an inherently collective nature, and each creditor forfeits its individual right to take action to enforce any debt owed and must depend on the result of the collective procedure.

By contrast, arbitration arises from the bargain that has been struck between the contracting parties. Disputes arising from the contract between the parties are to be resolved through the private dispute resolution mechanism of arbitration.

This article covers the possible conflict between the statutory right to wind up a company and the contractual bargain to arbitrate disputes with that company. For example, can a creditor, who alleges that a debt is due, bypass the arbitration clause and instead, bring a winding up action? This article will set out how different jurisdictions have attempted to resolve this tension.

Singapore: Larsen Oil

The Singapore Court of Appeal decision 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”) dealt with limits of the arbitrability of disputes relating to an insolvent company.

The respondent, Petropod Ltd (“Petropod”), entered into an agreement with the appellant, Larsen Oil and Gas Ltd (“Larsen Oil”). Certain payments were made by Petropod and its subsidiaries to Larsen Oil, which Larsen Oil claimed were payments due under the agreement.

Petropod was subsequently placed under liquidation. Petropod’s liquidators commenced proceedings for the avoidance of a number of the payments made to Larsen Oil on, among others, the ground that these payments were unfair preferences or transactions at an undervalue under the relevant winding up provisions. Larsen Oil applied for a stay of these proceedings in favour of arbitration, relying on an arbitration clause in the agreement.

The Court of Appeal set out the difference in approach for two situations relating to an insolvent company and when these disputes may be non-arbitrable.

Firstly, there may be a dispute involving an insolvent company due to the operation of the insolvency regime. This insolvency regime would trigger statutory provisions to recoup assets for the benefit of the company’s creditors caused by the misfeasance and/or malfeasance of its former management. This is especially true of the avoidance and wrongful/fraudulent trading provisions. A further consideration is that some of these remedies may include claims against former management who would not be parties to any arbitration agreement. Therefore, the insolvency regime’s objective of facilitating claims by a company’s creditors against the company and its former management overrides the freedom of the company’s former management to choose the forum where such disputes are to be heard. Disputes arising from the operation of the statutory provisions of the insolvency regime per se are non-arbitrable.

Secondly, there may be a dispute involving an insolvent company that stem from its pre-insolvency rights and obligations. In instances where the agreement was only to resolve the prior private inter se disputes between the company and another party, the Court would usually observe the terms of the arbitration agreement. The proof of debt process was merely a substituted means of enforcing debts against the company, and did not create new rights in the creditors or destroy old ones. Allowing a creditor to arbitrate his claim against a wound up company in such circumstances would not undermine the insolvency regime’s underlying policy aims.

Based on the above principles, the Singapore Court of Appeal affirmed the Singapore High Court’s decision to dismiss the stay of proceedings since the subject matter of the claim, being inter alia claims of unfair preference, was non-arbitrable.

However, if there was merely a dispute of a debt between the company and an alleged creditor, this may fall within the Larsen Oil formulation of a prior private inter se dispute between the company and alleged creditor. Such a dispute may be allowed to go for arbitration instead of being resolved within the winding up proof of debt process.

Hong Kong: Jade Union

In the Hong Kong Court of First Instance case of Re Jade Union Investment Limited [2004] HKCFI 21 (“Jade Union”), the petitioner presented a winding up petition against the company, Jade Union, based on a debt arising from four interim payment certificates. There was an arbitration clause in the underlying contract. Shortly after the presentation of the petition, the petitioner also commenced arbitration proceedings against Jade Union for outstanding payments under the contract, including the claims under those interim payment certificates. Jade Union applied to stay the winding up petition and one of the grounds was based on the arbitration clause.

The Court dismissed the stay application. It was held that a winding up petition is different from an action between the parties, in which the parties seek the court’s determination as to their respective rights and liabilities. In a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in the Ordinance. In doing so, the creditor exercises a class right available to all of the company’s creditors.

Even if a winding up order is made, the creditor is still obliged to submit a proof of debt, along with other creditors of the company, and the liquidator will then decide how much the creditor is entitled to receive from the assets of the company. It follows that by making a winding up order the court does not thereby adjudicate the petitioner’s rights to recover any particular amount from the company.

Therefore, the existence of an arbitration agreement did not affect the Court’s jurisdiction under the Companies Ordinance and it appeared that the winding up regime took precedence over the arbitration agreement.

England: Salford Estates

The legal position in England on this area has been evolving and now it appears that a Court would not automatically apply the stay provision in the arbitration legislation to stay a winding up petition.

Initially, the English High Court decision of Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Ch) (“Rusant”) held that if a petition is based on a disputed debt identified in a statutory demand and that dispute is the subject of an arbitration agreement, it must be referred to arbitration first. The High Court therefore granted an injunction to restrain the presentation of the winding up petition.

However, the English Court of Appeal in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ (“Salford Estates”) has now disagreed with the decision in Rusant. In Salford Estates, a winding up petition was presented against the company based on the ground of its inability to pay its debts. The company applied under the English Arbitration Act 1996 for a stay of the winding up petition as the debt on which the petition was based arose out of a contract containing an arbitration agreement.

The English Court of Appeal held that the stay provision under the English Arbitration Act 1996 would have no application to the winding up petition. Firstly, if the petition proceeded, there could be no reference to arbitration of any of the debts because the making of the winding up order bring into effect the statutory scheme for proof of debts which supersedes any arbitration agreement. Secondly, it would be highly improbable that Parliament, without any express provision to that effect, intended the stay provision to confer on a debtor such a right to a non-discretionary order. That would strike at the heart of the jurisdiction and discretionary power of the Court to wind up companies in the public interest where companies are not able to pay their debts.

However, the Court proceeded to consider the winding up provision under the English Insolvency Act 1986 which confers a discretionary power to wind up a company. It was held that this discretion should be exercised in a manner consistent with the legislative policy embodied in the English Arbitration Act 1996. Therefore, the Court exercised its discretion under the Insolvency Act 1986 to stay the petition so as to compel the parties to resolve the dispute on the debt through arbitration.

So while the English position is that the statutory jurisdiction for winding up is unaffected by the statutory stay provision under the arbitration framework, the English Courts can still exercise its discretion as to whether to compel parties to adhere to their contractual bargain to arbitrate.

One Approach in Malaysia: Company Court would not adjudicate on the disputes subject to arbitration

In Malaysia, a winding up petition may be presented on the ground of the company’s inability to pay its debts (section 218(1)(e) of the Companies Act 1965 (“CA 1965”)). A creditor may issue a statutory demand under section 218(2)(a) of the CA 1965 to seek payment of any debt of more than RM500 and thereafter, present a winding up petition. The underlying debt may however be disputed by the company and the company may want to rely on the arbitration agreement in the contract.

The Malaysian Courts have addressed the issue on whether to proceed with a winding up petition where the underlying dispute between the parties is subject to arbitration.

In both the High Court decisions of Syarikat Lian Ping Enterprise Sdn Bhd v Cygal Bhd [2000] 2 CLJ 814 (“Syarikat Lian Ping”) and Liew Yin Yin Construction Sdn Bhd v Yata Enterprise Sdn Bhd [1989] 3 MLJ 249 (“Liew Yin Yin”), a winding up petition was presented against the respondent companies based on a debt due to the petitioner. The debt arose from a contract which contained an arbitration agreement. The High Court in both cases ordered that the petitions be struck out. The underlying reasoning was that the Court, sitting as a Companies Court, would not be used to resolve the disputes between the parties and that the disputes should be resolved by arbitration. The Court would not inquire into the disputes as that would have amounted to the Court adjudicating on the disputes, thereby frustrating the arbitration agreement with a Court should normally act on.

In both the cases, the respondent did not rely on the stay provision under the old Arbitration Act 1952 to attempt to stay the winding up petition. Nonetheless, the decisions appeared to foreshadow the English approach in Salford Estates in demonstrating the Court’s exercise of discretion to effectively put a stop to the winding up petition in order to uphold the parties’ bargain to arbitrate.

Another Approach: Party to an arbitration can still present a winding up petition

A winding up petition may also be founded on another ground to establish a company’s inability to pay its debts. Under section 218(2)(c) of the CA 1965, the Court can take into account the contingent and prospective liabilities of the company.

This was the route taken by the petitioning creditor in the High Court case of KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd [2014] 8 MLJ 434 (“KNM Process Systems”). The petitioning creditor had claims against the respondent for outstanding payments arising from a construction project. The petitioner’s initial suits against the respondent for these payments were stayed pending arbitration.

Despite the ongoing arbitration, the petitioner presented a winding up petition against the respondent based on section 218(2)(c) of the CA 1965.

The respondent applied to strike out the petition and the Court ordered that the striking out be heard together with the petition. The Court found that the petitioner had the locus standi to present the petition. The petitioner was held to be a contingent creditor of the respondent due to the possibility of succeeding in its arbitration against the respondent. The Court then proceeded to determine whether the respondent was unable to pay its debts. After examining the respondent’s financial reports, the Court found that there was insufficient evidence to justify a finding that the respondent was insolvent. Therefore, the Court dismissed the petition.

Although not raised in KNM Process Systems, it may have been open to the respondent to apply for a stay of the winding up petition based on section 10 of the Arbitration Act 2005 (“AA 2005”). What would have been the competing arguments in such an application?

On the one hand, the respondent could have argued that it is mandatory to stay the petition under section 10 of the AA 2005 unless the Court finds that the arbitration agreement was null and void, inoperative or incapable of being performed. The argument would be that the petitioner’s status as a creditor hinged on the ongoing arbitration between the parties. In echoing the Singapore Court of Appeal decision of Larsen Oil, it may be argued that the disputes on the debts were essentially private inter se disputes between the petitioner and the respondent. The legislative policy embodied in the AA 2005 should mandate the staying of Court proceedings in support of arbitration.

On the other side of the divide, the petitioner would have several strong arguments to resist such a stay application. In applying both the Hong Kong decision of Jade Union and the English decision of Salford Estates, the petitioner may argue that the presentation of the winding up petition is essentially a class right available to all the company’s creditors. More so in the case of KNM Process Systems where the winding up petition was not based on any particular debt but based on a company’s overall liabilities. It may have been argued that a stay under the AA 2005 cannot oust the jurisdiction and the discretionary power of the Court, as a Companies Court, to wind up in the public interest when a company is unable to pay its debts.

Conclusion

Arbitration practitioners would generally welcome the approach set out in Syarikat Lian Ping and Liew Yin Yin in that a Companies Court should not be called on to adjudicate on disputes where parties had agreed to arbitrate. A Court, whether exercising its powers under section 10 of the AA 2005 or its discretion under the winding up provisions, may put a stop to the winding up petition.

However, the approach in KNM Process Systems would effectively allow a party to an arbitration agreement to bypass the arbitral process by filing a winding up petition. This is particularly in a case where the petition is based on section 218(2)(c) of the CA 1965. This route would not require any statutory demand giving the 21-day notice and where the respondent company would have no notice until the petition was served. Even if the winding up petition is eventually dismissed, the company may have still suffered from the prejudicial effects of the presentation of the petition, through the advertisement and the possible freezing of its bank accounts.

The Court may also find it more difficult to stay or strike out any winding up petition in favour of arbitration if other parties are involved in the petition. For instance, creditors and contributories can file a Notice of Intention to Appear and are effectively treated as parties to the winding up proceedings, or the Court may have appointed a Provisional Liquidator pending the hearing of the petition.

This tension between the private dispute resolution process of arbitration and the public statutory winding up process is not easy to resolve. The Court would have to carefully examine the different considerations in play to balance these two different processes.

Contractually Limit an Injunction on Call on Performance Bond

A recent Singapore Court of Appeal decision in CKR Contract Services [2015] SGCA 24 can now make it harder for contractors to apply for an injunction to restrain the call on unconditional performance bonds. The Court of Appeal upheld a clause in a contract which excluded unconscionability as a ground to restrain a call on a performance bond. Only a fraudulent call on the bond would entitle the contractor to seek such an injunction to restrain the call.

Under Singapore law, just like Malaysian law, a Court can grant injunctive relief to restrain a call on an on-demand performance bond in two situations. The first is where the call is made fraudulently and the second is where the call is made unconscionably.

The contract in this case contained a clause that the contractor was not (except for a case of fraud) entitled to restrain a call on the performance bond on any ground, including the ground of unconscionability. Therefore, the issue is whether parties can agree to exclude the unconscionability exception as a ground for restraining a call on a performance bond.

The High Court originally ruled that this clause was void as it ousted the jurisdiction of the Court. The Court of Appeal overruled this decision and held that the clause does not oust the jurisdiction of the Court. The clause merely restricted an equitable remedy in a particular situation. Hence, the clause was more in the nature of an exclusion or exception clause as oppose to one seeking to oust the Court’s jurisdiction.

Of interest, the Singapore Court of Appeal also referred to the Federal Court decision in AV Asia Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd [2014] 3 MLJ 61 and distinguished it. I have written on this Federal Court decision earlier.

In summary, the Federal Court decision involved a clause forcing the hand of the Court to grant an injunction where one would not ordinarily have issued. There, the parties agreed that damages would not be a sufficient remedy and that injunctive relief would be appropriate. The Federal Court held that the clause did not fetter the discretion of the Court in deciding whether an injunction was appropriate or not.

The Singapore Court of Appeal agreed that the Court cannot be obliged to exercise its discretion in a manner that is contrary to principles it would ordinarily apply to the grant of injunctive relief. That however does not preclude parties from agreeing to limit their right to seek certain remedies or reliefs from the court.

Successfully Obtained Indemnity Costs: Stay under Arbitration Act

I had written before on the approach by other jurisdictions to grant indemnity costs if Court proceedings were initiated in breach of an arbitration agreement.

Yesterday afternoon, I successfully obtained an order for costs on an indemnity basis as I had succeeded in applying for a stay of the Court proceedings pending arbitral proceedings. This was for four stay applications we had filed and all four was allowed with costs on an indemnity basis. I am not aware of any reported Malaysian decision on this point.

The argument was that the suit had been filed in breach of the arbitration agreement. Therefore, the successful applicant should be entitled to be compensated dollar-for-dollar for the legal costs incurred in applying for a stay.

Such an approach by the Malaysian Courts would throw support for arbitration and ensure that parties largely follow their contractual bargain to arbitrate.

A summary of the legal authorities from England, Australia and Singapore is set out below.

England

In A v B (No 2) [2007] EWHC 54, Court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

The English High Court held that where a party has successfully obtained an anti-suit injunction or a stay of court proceedings as a remedy for a breach of an arbitration agreement, and provided that that party demonstrates that the breach caused it to reasonably incur legal costs, such costs should normally be recoverable on an indemnity basis. The alternative, if those costs were assessed on a standard basis, would mean that the successful party would be unable to recover part of the losses resulting from the breach. That unrecoverable portion of costs would either be lost or would have to be recovered through separate proceedings, a situation which the court considered would give rise to a fundamentally unjust situation:

(At pages 636-637)
“[9]    … (I)f a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases be confined to costs on the standard basis, there would necessarily be a part of the successful applicant’s costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs would then be loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement, if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry’s case, supra, referred to in the Union Discount case, supra, will be to prevent separate proceedings for damages by reference to unrecovered costs, notwithstanding the breach of the arbitration or jurisdiction agreement.

[10]    This would give rise to a fundamentally unjust situation. There can be no question but that the procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs.”

Australia

The approach in A v B was recently adopted in the Supreme Court of Western Australia decision of Pipelines Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10. The Court ordered Pipeline to pay costs on an indemnity basis to ATCO when ATCO had successfully applied for a stay of proceedings under section 8 of the Commercial Arbitration Act 2012.

In making the order, the Court confirmed the application of the principle in A v B that indemnity costs will generally be awarded where a party commences legal proceedings in breach of a contractual obligation to refer a dispute to arbitration; see pages 44-47 of the Austlii report.

Singapore

The English Court’s approach has also been adopted by the courts in Singapore. In the case of Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] 4 SLR (R) 732 (CA Sing), the Singapore Court of Appeal heard an appeal against an order granting a stay of proceedings arising out of a share purchase agreement containing an arbitration clause. The lower court had endorsed the English court’s decision in A v B and granted the stay with indemnity costs to be paid to the successful party. The Court of Appeal upheld that decision, found the appeal to be entirely unmeritorious and dismissed it, again with indemnity costs; see pages 741 and 768 of the report.