The Singapore High Court has dismissed a winding-up application by a prospective creditor where the basis of the alleged outstanding debt was subject to a contract containing arbitration clauses (Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] SGHC 159).
In doing so, the High Court sounded multiple notes of caution to creditors seeking to apply to wind up a company in such situations.
- First, it is paramount to satisfy the Court on the issue of standing of the applicant. In other words, the Court must be satisfied that the applicant is in fact a creditor of the company.
- Where contracts are governed by arbitration clauses, and the arbitration process is not exhausted, the applicant runs the risk of the Court refusing to substitute its substantive judgment which the parties had agreed to reserve to the arbitral tribunal.
- The safer approach for prospective creditors is to secure a monetary judgment or arbitral award which conclusively establishes the plaintiff’s standing to bring a winding up application under Singapore’s insolvency regime.
The circumstances under which the alleged debt arose
The claimant (“Founder Group“) is a company in liquidation in Hong Kong. Following their appointment, the liquidators believed that the defendant (“Singapore JHC“) owed the liquidation estate USD 47.3m (“Claim Sum“).
Founder Group and Singapore JHC were formerly related companies, under a company known as Peking University Founder Group Company Limited (“PUFG“). Singapore JHC was subsequently acquired by a consortium on or around 2021 following PUFG’s reorganisation.
This belief was founded on several pieces of contemporaneous evidence. The liquidators first argued that an audit confirmation issued by Singapore JHC’s auditors showed that the Singapore JHC was indebted to Founder Group as at 31 December 2018 for the Claim Sum.
The liquidators also pointed to various contracts covering the sale and purchase of copper cathodes and invoices issued under each of these contracts, for a total claim amount of USD 47.43m. Each of the contracts contained arbitration agreements requiring parties to submit all disputes to CIETAC for arbitration in Beijing.
The arbitration agreements required both parties to “submit all disputes in connection with the contract or the performance of the contract” to arbitration, should negotiations fail. The contracts were governed by PRC law.
Finally, the liquidators also highlighted that Singapore JHC’s audited financial statements for the years 2016 to 2020 showed related company liabilities and claimed that the Claim Sum was consistently reflected in the audited financial statements throughout the cited years.
Singapore JHC disputed the debt. Their case was broadly that (i) the liquidators had never proven that copper cathodes were ever delivered by Founder Group to Singapore JHC; (ii) in fact, copper cathodes were never delivered, the contracts were never intended to be enforced, and were null and void under PRC law; and (iii) an audit confirmation does not establish a debtor’s liability to a creditor under PRC law.
The importance of arbitration first, winding up petition second
Under Singapore law, the insolvency court cannot determine the substantive merits of disputed debts arising from contracts containing arbitration agreements – AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR (our blog post with a detailed analysis of the first instance decision, can be found here). The test is not whether the defendant disputes a debt or asserts a cross claim, but whether (i) there is a valid arbitration agreement between the parties; (ii) the dispute or cross claim falls within the scope of the arbitration agreement; and (iii) on a consideration of relevant factors, the defendant is abusing the court’s process by raising the dispute or cross-claim through the insolvency regime instead of through arbitration.
The AnAn approach is a defendant-friendly approach. As long as a defendant can satisfy these three criteria, the insolvency court cannot make a winding up order. Instead, it will either stay or dismiss the application.
The High Court found in this case that the arbitration agreements were valid. It also found that the disputed debt falls within the scope of the arbitration agreements. Finally, the High Court also found that the defendant’s decision to dispute the debt at the winding-up stage was not an abuse of process.
Hence, under the AnAn approach, the insolvency court could not decide on the validity of the underlying debt. It was required to direct the question to arbitration so that a duly constituted tribunal could decide the issue.
Founder Group’s lack of standing
The insolvency court’s starting point is to determine whether the applicant has standing – i.e. does it fall within one of the categories of persons (including a creditor) who may bring a winding up petition under section 124(1) of the Insolvency, Restructuring and Dissolution Act 2018. If an applicant cannot satisfy the standing test, the application must be dismissed.
Since the High Court was unable to determine the question of whether a valid debt existed, Founder Group could not establish that it was a creditor of Singapore JHC. It could only do so following a determination through arbitration under the arbitration agreements.
Hence, because Founder Group could not establish standing, there was no basis to even stay the application and so the High Court dismissed the application in full with costs fixed at SGD 25,000 including disbursements.
The safer approach
In a telling series of paragraphs, the High Court highlighted that Founder Group could have avoided this result by taking the safer approach of securing and relying on a binding award that Singapore JHC owes it a debt.
Instead, what Founder Group should have done was to secure an arbitral award against Singapore JHC before invoking the insolvency jurisdiction through the winding up proceeding.
What parties contracting in Singapore should note
This is an exceptional and fact specific case which involved an interplay of PRC law, Singapore’s insolvency regime, and debts arising from contracts governed by arbitration agreements. Nonetheless, the decision reaffirms that:
- Including wide-ranging arbitration agreements in contracts – especially where the arbitral tribunal is given wide-ranging jurisdiction to determine disputes arising between the parties – deems the arbitral tribunal to be the final decision-maker of the substantive merits of any dispute.
- The Singapore Court will not substitute its judgment on the substantive merits of any disputed debt where the parties have agreed that any dispute should be referred to and conclusively determined by the arbitration process.
- Without taking the step of obtaining an arbitral award, a claimant may struggle to even establish its identity as a creditor of a company. Such standing is a necessary prerequisite (the Court described it as being “absolutely fundamental to“) of any application for a class-based remedy (the winding up process).
- If an applicant is not even able to prove its inclusion in such a class eligible to bring a winding up petition, its winding up application should and will be dismissed with costs.
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Our international disputes team acts for clients in arbitration proceedings worldwide. Through Prolegis LLC, we provide a seamless and integrated local litigation, restructuring and contentious insolvency capability to our clients.
If you have any queries on these practice areas, please contact one of our Singapore arbitration partners or your usual HSF Prolegis contact.
For further information, please contact:
Tomas Furlong, Partner, Herbert Smith Freehills
tomas.furlong@hsf.com
