Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

I am just setting out my thoughts and where I will be planning to write a more extensive article on this area. I have always been fascinated on the interaction of the statutory process of winding up and the contractual bargain of arbitration. Will one process always necessarily trump the other?

There are now several cases which try to deal with whether there can be a form of a stay of the Court winding up proceedings in favour of arbitration. The winding up itself can arise from either a creditor petitioning on the grounds of insolvency or a shareholder petitioning on the just and equitable grounds. In the former scenario, the petition may be grounded on a debt arising from a contract containing an arbitration clause. In the latter, the shareholder’s complaints may be arising from a shareholders’ agreement with the other shareholders. I now just record down some cases in the scenario of a petition being presented by a creditor on the grounds of insolvency.

There is a recent English Court of Appeal decision in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ  which held that the mandatory stay provisions in the English Arbitration Act would not apply to stay winding up proceedings. Instead, the Companies Court would exercise its usual discretion in whether to stay or dismiss a winding up petition, for example, if there was a bona fide dispute of the debt on substantial grounds.

This is a similar approach taken in Hong Kong, where its Arbitration Ordinance closely follows the Model Law (and therefore, may be more persuasive in Malaysia). The case of Jade Union Investment Limited [2004] HKCFI 21 also similarly held that the mere existence of an arbitration clause does not mean that the mandatory stay provisions under the Arbitration Ordinance would apply. The Court would still apply the test as to whether there was a bona fide dispute of debt when hearing the petition. Another case of Re Sinom (Hong Kong) Ltd [2009] HKCFI 2201 similarly followed Jade Union when deciding whether to grant an injunction to restrain the presentation of a petition.

It will be interesting to see how such a situation would play out in Malaysia. I am not aware of any such case involving a stay of a winding up petition or an injunction to restrain presentation based on the Arbitration Act 2005 (“AA”). I know of one or two cases under the old Arbitration Act 1952 where a stay of winding up proceedings was sometimes granted and sometimes not.

If there is an arbitration clause in a contract and a statutory demand is made for payment under the contract, would the other contracting party be able to apply under section 11 of the AA for an injunction to restrain the presentation of the petition? What would the test for such an injunction be? Would it still be the Tan Kok Tong Court of Appeal test of a bona fide dispute of debt on substantial grounds? Or would the mere existence of an arbitration clause be sufficient? Or would an application for an injunction have to be grounded outside of the AA and the Court would exercise its inherent jurisdiction to grant a Fortuna injunction to restrain the presentation?

If the Petition was filed, would a stay of those Court proceedings be allowed under section 10 of the AA? The test for a stay under section 10 of the AA will not require the Court to decide on whether there is a bona fide dispute (that original provision has been taken out) and it is almost mandatory for a stay unless the arbitration clause can be questioned (e.g. the clause is null and void or inoperative).

I will try to deal with these questions in my more extensive article and after I have done more research.


One thought on “Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

  1. Hi Leesh,

    Love your articles. This one got me really intrigued as well, and my thoughts are as the following:

    1. If the winding-up petition is premised upon a judgment, I think courts would be less likely to stay the winding-up proceedings pending arbitration because it can be argued that the Judgment Debtor (JD) had already submitted to the jurisdiction of the Courts (see the case of Sanwell Corporation [2002] 3 CLJ 213).

    2. Following from No.1 above, the question which then arises is, what if the judgment obtained by the Judgment Creditor (JC) was a default judgment?? The JD certainly had not submitted to the jurisdiction of the court and thus the principles of estoppel/submitting to the jurisdiction would not apply. Would the JD have to file a Fortuna Injunction and on the parallel an application to set aside the JID? Would that then be termed as submitting to the jurisdiction of the courts?

    3. If the winding-up petition/218 notice is not premised upon a judgment, then I would think a Fortuna Injunction should work. Courts are more likely to grant an injunction if it would be apparent that there are other appropriate avenues for a party to first attempt, before actually filing a winding-up petition (see the case of Seawealth Nautical [2011] 9 CLJ 577).

    4. Following from No.3 above, if not a Fortuna Injunction, then I would probably strike-out/oppose the petition on grounds of bad faith/abuse of process for going against mandatory provisions of the AA 2005 read together with the 2011 amendments (see the case of Siti Esah [2010] 5 CLJ 712).

    Can’t wait for your follow-up article.

    Dinesh Nandrajog

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s