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.

 

 

With Absolute Assignment, No Need for Remedies under NLC

The Federal Court in its decision dated 7 April 2015 in Damai Freight (M) Sdn Bhd v Affin Bank Berhad clarified an important issue of law, especially for banks and secured lenders.

The question of law posed to the Federal Court was:

“Whether a lender having an absolute assignment of rights to land may realise his security under the terms of the assignment, where the document of title to the land was issued subsequently, without the need to resort to the remedies under the National Land Code (NLC).”

The answer to this is yes.

In summary, the Federal Court’s findings were:

  1. There was an absolute assignment and not one by way of charge only. The Bank should have all the rights, title and interest of the assignor.
  2. When the title was issued to the Land, the Bank did not lose its security or its power of sale under the Loan Agreement Cum Assignment (LACA). The absolute assignment under the LACA survives.
  3. The Bank is thus empowered to realise its security for the loans by way of private sale of the Land.
  4. There is no necessity for the Bank to first create a charge or to resort to foreclosure under the NLC to realise its security. The Bank’s recovery action stands independently.
  5. Section 206(3) of the NLC allows such a transaction relating to any alienated land to give effect to the contractual obligations and rights of the parties as they had determined in the LACA.

Conflict of Laws: Quantification of Damages Governed by Law of the Court

This Federal Court decision dated  16 March 2015 involved the USD25 million judgment obtained by the Singapore company, Scandinavian Bunker, against MISC.

An interesting conflict of laws issue arose in this case. The governing law of the contract was English law while the suit was filed in the Malaysian Courts (there was an exclusive jurisdiction of Malaysian Courts clause). The question was which law should govern the quantification of damages? Would it be the governing law of the contract (English law) or the lex fori (i.e. the law of the court) (Malaysian law)?

Instinctively, one might think that the law governing the quantification of damages would follow the governing law of the contract.

However, the Federal Court, looking at the English position, held that the lex fori would be the law governing the quantification of damages. Nonetheless, in this case, whether it was English law on Sale of Goods or Malaysian law on Sale of Goods did not make a significant difference.

This Federal Court decision may have a significant impact when a party attempts to rely on a liquidated damages clause in a contract. If the contract has a foreign governing law but the legal proceedings are brought in the Malaysian Courts, then the damages sought under the liquidated damages clause may be subject to Malaysian law. The cases like Selva Kumar and Johor Coastal would apply and where actual loss may still have to be proven.

Some Procedural Points for the Statutory Derivative Action

In the recent unreported High Court decision of Abdul Rahim bin Suleiman and another v Faridah binti Md Lazim & 7 Others dated 3 April 2015, Justice Wong Kian Kheong considered an application for leave under section 181A of the Companies Act 1965 to bring a statutory derivative action. I have written a commentary on the statutory derivative action provisions over here before.

The decision is useful in setting out some of the procedural guidelines that must be met in bringing such an action. Some of the significant points are:

  1. A complainant only apply under 181A to bring a new action, to act for the company when the company intervenes in an action, and to defend a pending action against the company.
  2. A complainant cannot seek to apply to act for the company where the suit is already concluded or where the suit is pending (as that suit would be under the control of the present management of the company).
  3. Notice under section 181B must be given to each of the directors. It is not sufficient just to address it to the Board of Directors.
  4.  This decision gave some guidance on what should be in the contents of the section 181B notice and the decision referred to several Canadian cases.
  5.  The application for leave is filed by way of Originating Summons (OS). In the OS, the applicant need only cite the Company itself as the sole Defendant. There is no need to cite the other alleged wrongdoers as parties to the OS. Nonetheless, citing the other alleged wrongdoers was not fatal in this case.

A Singularis Approach to Cross-Border Insolvencies

[Originally published in Skrine Legal Insights Issue 1/2015]

The Privy Council in Singularis Holdings Ltd v Pricewaterhouse Coopers [2014] UKPC 36 (“Singularis”) has clarified the extent to which courts can render common law assistance for cross-border insolvencies.

In summary, there is a limited common law power to assist a liquidator appointed by a foreign court by ordering the production of information. Such information must be necessary for the administration of the foreign winding up and this power is only exercisable if the foreign court could have made such an equivalent order.

BACKGROUND: MODIFIED UNIVERSALISM

In a cross-border insolvency, courts may be faced with difficult questions. Should a domestic court apply its domestic laws as if the case had no international aspects or should a domestic court defer to the foreign laws of the main jurisdiction of incorporation of the wound up company?

In other words, should a ‘territorialist’ approach be applied where the domestic court only applies its domestic laws? Alternatively, should a ‘universalist’ approach prevail in allowing a single set of the foreign laws of the main winding up jurisdiction to govern all of the global winding up proceedings?

A middle ground between these two concepts is that of ‘modified universalism.’ The courts of all countries should cooperate, as far as possible, with the laws of the main jurisdiction, except where the domestic jurisdiction has a compelling reason to apply its domestic laws.

It is against this backdrop of the increasing recognition of modified universalism that the facts of Singularis are set out below.

BRIEF FACTS OF SINGULARIS

Singularis Holdings Limited (“Singularis”) had been wound up in its place of incorporation, the Cayman Islands. The liquidators of Singularis (“Liquidators”) obtained court orders in the Cayman Islands against the company’s former auditors, PricewaterhouseCoopers (“PwC”) in Bermuda, to deliver up to the Liquidators certain documents. This was in order to facilitate the Liquidators’ investigations to trace certain assets. However, the law of the Cayman Islands only provided for documents “belonging to” a company to be delivered up to a liquidator. There was no dispute that this would not include material belonging to PwC itself, principally their audit working papers.

Subsequently, in Bermuda, while there was no ancillary liquidation of Singularis, the Liquidators obtained an order from the Bermudan court recognising their status as liquidators. Where a company is wound up in Bermuda, Bermudan law had a wider provision where documents “relating to” a company are to be delivered up to the liquidator of the wound up company. Relying on this Bermudan provision, the Liquidators applied for a Bermudan court order for PwC to deliver up its audit working papers.

At first instance, the Bermudan court allowed the Liquidators’ application and relied on the principle of modified universalism. The Bermudan court exercised a common law power to order PwC to produce the same documents which they could have been ordered to produce under the relevant Bermudan provision.

PwC appealed the decision and on appeal, the Bermudan Court of Appeal set aside the first instance decision. The Liquidators appealed to the Privy Council.

PRIVY COUNCIL DECISION

The Privy Council, by a three to two majority decision,  dismissed the appeal on grounds that the Liquidators would not have had the power to require PwC to produce the documentation under the laws of the Liquidators’ main winding up jurisdiction i.e. Cayman Islands law. While the Privy Council was deciding on Bermuda law, the common law of Bermuda is the same as that of England.

The Privy Council had to consider two issues:

(1)    Whether a common law power existed to assist foreign liquidators by ordering parties to provide information in circumstances where the equivalent statutory power did not apply to foreign liquidators; and

(2)    Whether, if such a power existed, it should be exercised where an equivalent order could not have been made by the court in the main winding up proceedings.

Firstly, the Privy Council upheld the general principle of modified universalism as set out in the Privy Council case of Cambridge Gas Transport Corp v Navigator Holdings plc Creditors’ Committee [2006] UKPC 26 (“Cambridge Gas”). At common law, the Court has power to recognise and grant assistance to foreign insolvency proceedings. However, the Privy Council overruled some of the other wider principles set out in Cambridge Gas and held that a domestic court does not have the common law power to assist the foreign court by doing whatever it could have done in a domestic insolvency.

In dealing with the issues in the appeal, the majority decision held that there is a common law power to assist a foreign insolvency court by ordering the production of information, whether oral or documentary, which is necessary for the administration of a foreign winding up.

However, this common law power is subject to the following five limitations:

(i)    It is only available to assist the officers of a foreign insolvency court. It would not be available, for example, to assist a voluntary winding up, which is essentially a private arrangement and is not conducted by or on behalf of an officer of the court.

(ii)    It is a power of assistance and exists to enable courts to surmount the problems posed for a world-wide winding up of the company’s affairs. It is therefore not available to enable foreign liquidators to do something which they could not do under the law by which they were appointed.

(iii)    It is available only when it is necessary for the performance of the office-holder’s functions.

(iv)    Such an order must be consistent with the substantive law and public policy of the assisting domestic court, in this case that of Bermuda. Following from this, it is not available to exercise such a common law power to obtain material for use in actual or anticipated litigation. Further, in some jurisdictions, it may be contrary to domestic public policy to make an order which there would be no power to make in a domestic insolvency.

(v)    The exercise of this power is conditional on the applicant being prepared to pay the third party’s reasonable costs of compliance.

Therefore, the Bermuda court had both the right and the duty to assist the Cayman court in so far as it properly could within the limits of its own inherent powers. This was to enable the officers of the Cayman court to do in Bermuda that which they could do in the Cayman Islands.

However, the Bermuda court could not exercise a common law power which was not exercisable by the Cayman court and could not apply the legislation applicable to its domestic winding up by analogy ‘as if’ the Cayman winding up was a domestic (i.e. Bermudan) winding up. It was not a proper use of the Bermuda court’s common law power of assistance for it to purport to use a power analogous to the Bermudan statutory provision to compel disclosure and production of information which belonged to PwC rather than the company.

LOCAL APPLICATION

In Malaysia, the Privy Council decision would not be binding but would be persuasive. Where a foreign company is wound up by the court of its main jurisdiction, and there is no ancillary winding up in Malaysia, the foreign liquidator would likely be able to obtain a Malaysian order recognising its status as a liquidator and possibly obtain an order for the production of information which is necessary for the administration of the foreign winding up.

Similarly, a local court-appointed liquidator of a Malaysian company with worldwide links may also apply for such orders for production of information in other common law jurisdictions.

It appears that this broad principle of allowing a production of information, both oral and documentary, would allow a foreign liquidator to also apply for orders allowing for private or public examination of persons in connection with the affairs of the company in winding up (assuming that there are such equivalent provisions in the foreign liquidator’s main jurisdiction).

Decades ago, the Singapore High Court in Re China Underwriters Life and General Insurance Co Ltd [1988] 1 MLJ 409 held that the court had no inherent jurisdiction or power to order the private or public examination of persons and dismissed the Hong Kong liquidator’s application. It was recognised in that case that such a power of examination was an extraordinary one which invoked images of the Inquisition and of the Court of Star Chamber. This decision was upheld by the Singapore Court of Appeal in Official Receiver of Hongkong v Kao Wei Tseng & Ors [1990] 2 MLJ 321. At that time, it was held that it was only a statutory power available in a domestic winding up.

As a result of Singularis, we may now have a broadening of the courts’ power in Malaysia to assist foreign court-appointed liquidators.