SGCA sets a limit on debtors invoking arbitration clauses to resist winding up applications
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In Founder Group (Hong Kong) Ltd v Singapore JHC Co Pte Ltd (2023), the Court of Appeal set limits on a debtor’s ability to resist a winding up application by pointing to an arbitration clause in the underlying agreement. While such a debtor would ordinarily be entitled to require the dispute to be first arbitrated, it could not do so while simultaneously attacking the entire existence of the underlying agreement containing the arbitration clause. This update looks at this decision.
Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd  SGCA 40 (Founder Group CA) is an appeal from the High Court’s decision in Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd (2023) (Founder Group HC). In our earlier update on Founder Group HC (read the update here), we highlighted that it was more difficult for a creditor to commence winding up proceedings against a debtor if the underlying debt was governed by an arbitration clause or if the debtor had a cross-claim governed by an arbitration clause.
This was because of the test set by the Court of Appeal in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co)  1 SLR 1158 (AnAn) where a winding up application would ordinarily be dismissed if the debtor is able to satisfy the Court that:
- first, there is an arbitration agreement between the parties that appears on its face to be valid,
- secondly, the dispute which the debtor raises appears on its face to fall within the scope of the arbitration agreement, and
- thirdly, based on a consideration of factors which do not relate to the merits of the dispute in respect of the debt, the court is satisfied that the debtor is not abusing the court’s process by raising the dispute.
The Court of Appeal’s decision in Founder Group CA should therefore come as a welcome relief for creditors. In that case, the Court of Appeal held that a threshold question which had to be addressed before the AnAn test is applied is whether the debtor could invoke the arbitration clause at all. In this case, the debtor disputed the debt on the basis that the underlying contract was not intended to be valid or binding (a sham) whilst also relying on and invoking the arbitration clause contained in that very underlying contract to resist a winding up application was found to be an abuse of process.
The Court’s willingness to carefully scrutinise and ultimately reject the debtor’s argument is encouraging for creditors, as it sets limits on a debtor’s ability to stave off winding up proceedings by the simple expedient of pointing to an arbitration clause.
We discuss the decision in greater detail below and consider the lessons to be drawn from it.
The decision of the Court of Appeal in Founder Group CA usefully makes the following key points:
- The principle that an arbitration agreement is separate from the agreement governing the primary transaction does not mean that where a party impugns the validity of the main agreement, the arbitration agreement will invariably survive. Instead, where a challenge to the validity of the contract is raised, it will be crucial to determine if this is also an attack on the arbitration agreement.
- Where a debtor-company seeks to resist a winding up application on the basis that the debt relied upon by the applicant to bring the application is disputed and that the dispute is governed by an arbitration agreement, it would be an abuse of process if the debtor-company simultaneously alleged that the main agreement is wholly void while maintaining that the arbitration agreement contained in the same document as the main agreement continued to be enforceable.
- The concept of abuse of process is not confined to the third limb of the AnAn test and is also relevant in the Court’s preliminary assessment of whether a debtor can invoke and rely on an arbitration clause.
- Where a debtor disputes the existence of a debt, that does not mean that the creditor is a contingent creditor for the purposes of bringing a winding up application. A contingent creditor is one who has a present liability for the debt, which liability is not in dispute.
The applicant (Applicant) was Founder Group (Hong Kong) Ltd, a company in liquidation in Hong Kong. It had entered into three contracts to supply copper cathodes to the defendant, Singapore JHC Co Pte Ltd (Company). It claimed that the Company owed it USD43 million and that as a creditor it was therefore entitled to apply to have the Company wound up. It therefore made an application under section 124 of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA) for an order that the Applicant be wound up.
However, the Company disputed the existence of the debt. It claimed that the supply contracts were never fulfilled, and in fact were sham transactions. Accordingly, even though it had made an audit confirmation statement (which it withdrew before the application) as to the existence of the debt, it had no payment obligation to the Applicant. Furthermore, because the contracts had each contained an arbitration clause, applying the AnAn test, the Applicant was required to refer the dispute to arbitration. Accordingly, as the liability for the debt fell to be determined in arbitration, the Applicant was not a "creditor" for the purposes of section 124 of the IRDA, and therefore not entitled to take out the winding up application.
Applying the AnAn test, the High Court had agreed with the Company and held that the dispute should first be arbitrated, and if the arbitration tribunal found in favour of the Applicant, the Applicant could subsequently reapply under section 124 for the Company to be wound up. (For more on the High Court decision, see our earlier update.)
The Applicant appealed and the Court of Appeal upheld the appeal.
The principle of separability and the AnAn requirements
The Court of Appeal considered whether the Company was entitled to rely on the requirements established by it in AnAn, which applied where a debtor is able to point to a dispute in relation to the debt and a valid and enforceable arbitration agreement which governed the underlying debt or had a cross-claim against the creditor which was subject to an arbitration agreement. If so, and unless the creditor succeeded in showing that the debtor is not abusing the process of the court with reference to material unrelated to the dispute of the underlying debt, the court would dismiss the winding up petition.
The Court of Appeal noted that the High Court had relied on the principle of separability (i.e., that an arbitration agreement is separate from the agreement governing the main transaction) to justify that the arbitration clause survived and the Applicant was therefore required to refer the dispute to arbitration in accordance with the AnAn test.
However, the Court of Appeal disagreed. The Court of Appeal explained that the principle of separability cannot guarantee the survival of the arbitration clause in all circumstances. Instead, where a challenge to the validity of the underlying contract is raised, it will be crucial to determine if this is also an attack on the arbitration agreement. This will necessarily be a fact-sensitive exercise, and much will depend on the nature of the challenge mounted against the underlying contract. It noted that, for example, a claim that the entire agreement was not binding as it had been entered into without authority would strike at both the main agreement and the arbitration clause contained in it.
In this case, the Company’s position was that the main contracts were void as parties had never intended that they would be legally enforceable. This struck at the validity of both the main contracts as well as the arbitration clauses contained in them. No evidence had been brought to show that parties intended for the arbitration clauses to continue to be enforceable even though the main contracts were not. It was therefore inconsistent and an abuse of process for the Company to maintain the unenforceability of the main contracts while also maintaining the enforceability of the arbitration clauses in the main contracts. The Court therefore ruled that the Company could not invoke the arbitration agreement and the test laid out in AnAn did not apply.
It then noted that the sole evidence which the Company had provided to claim that the contracts were not intended to be enforced was that the debt had sat on the books of the Applicant for several years with no steps taken to enforce it. The onus was on the Company to establish that it had raised a dispute in good faith and on substantial grounds, and this evidence was wholly insufficient.
Accordingly, as the Company had not made out its case, the Court granted the Applicant’s appeal and ordered the Company to be wound up.
An additional issue that had been considered by the Court of Appeal in this appeal was the question of whether the Applicant was a contingent creditor of the Company. Under section 124 of the IRDA, an application may be brought by, among others, a creditor or a contingent creditor. The Applicant argued that even it were not a creditor it was a contingent creditor. Its basis for this argument was that its debt was contingent on a ruling that the main contracts were valid.
The Court of Appeal held that this was not what the term “contingent creditor” referred to. For the purposes of the IRDA, a contingent creditor was a person towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date. The liability for the debt was not in dispute; only whether the debt had already arisen or accrued.
In this case, the Company’s position was that the payment obligation was never meant to be enforced and that the main contracts were null and void. The very existence of a payment obligation was in dispute. There was nothing contingent about the obligation in this case. It either existed, as the Applicant contended, or it did not, as the Company contended. It was a disputed liability and not a present obligation that was contingent upon the happening of a stipulated event.
The Court further explained that a contingent creditor, properly understood, may have standing in principle to present a winding-up application; but even so, it will not be able to establish grounds for winding up if it relies on a debt that is disputed by the defendant in good faith and on substantial grounds.
This decision of the Court of Appeal usefully clarifies further the interaction between the question of the existence of an arbitration agreement and the application of the AnAn requirements. In particular, it makes clear how the principle of separability applies in the context of a disputed debt governed by an arbitration clause, and reinforces the approach of the Singapore courts in ensuring consistency of application of the principles of both insolvency and arbitration law.