Winding Up vs Arbitration: No to Stay but Court has Discretion to Dismiss the Winding Up

The Malaysian Courts continue to tackle the issue of the effect of an arbitration agreement on the litigant’s ability to present a winding up petition based on a debt. This is in the context of a purported debt arising from a contract containing the arbitration clause. There have been conflicting High Court decisions on this point, especially on the issue of whether the Court can stay the winding up pursuant to section 10 of the Arbitration Act 2005 (AA 2005).

The recent High Court decision in Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd (Grounds of Judgment dated 2 May 2019) decided that it would not stay the winding up proceedings under the AA 2005. Nonetheless, the Court agreed with the authorities from the UK, Singapore and Hong Kong to apply the test of whether there is a prima facie dispute of the debt. Since there was, the winding up petition was dismissed. The decision provides a useful summary of the cases in Malaysia and other jurisdictions.

Brief Facts

The Petitioner was a contractor who completed construction works for the Respondent for a project in Putrajaya. Based on the Statement of Final Account, a sum of over RM5.8 million was due and owing by the Respondent to the Petitioner. The contract between the parties contained an arbitration clause.

Based on the Statement of Final Account, the Petitioner issued the statutory demand for the debt of RM5.8 million and then filed the winding up petition against the Respondent.

The Respondent applied to stay the winding up proceedings pending arbitration (under section 10 of the AA 2005) and in the alternative, to strike out the winding up petition.

Malaysian Position

There have been conflicting Malaysian High Court decisions. In the High Court decision in NFC Labuan Shipleasing Ltd [2017] MLJU 900 (I have written about the case earlier), the High Court held that section 10 of the AA 2005 did not apply to a winding up petition. It was decided that essentially, a winding up petition was not in the nature of a substantive claim before the Court that is contemplated by section 10 of the AA 2005.

However, in the High Court case of Goh Nguang Chian [2018] MLJU 885, the High Court did stay the winding up petition pending reference to arbitration. The Court in the latter case did not refer to NFC Labuan.

In both cases, the petition was based on a statutory demand for a debt due.

This time, the Court in the present case of Awangsa Bina agreed with the decision in NFC Labuan in that section 10 of the AA 2005 does not apply to winding up petitions.

UK Position

The Court also referred to the English Court of Appeal case in Salford Estates (No 2) Ltd v Altomart Ltd [2015] Ch 589. There, the English Court of Appeal held that a winding up petition based on a particular debt was not a claim for payment of that debt. It was not certain that any winding up order which might follow would result in the right to payment of an amount equal to the debt specified. The stay pending arbitration would not apply.

Nonetheless, the winding up Court can still exercise its winding up discretion to either dismiss or stay the Petition. This was to compel parties to resolve their dispute over the debt by their chosen method of dispute resolution i.e. arbitration.

Singapore Position

Further, the Court referred to the Singapore High Court decision in BDG v BDH [2016] SGHC 211. This was a case where the Singapore Court granted an injunction to restrain the filing of a winding up petition. There was an arbitration clause in the underlying contract.

The Singapore Court held that ordinarily, the test for such an injunction was whether there was a bona fide dispute of the debt. However, where the dispute between the parties was subject to an arbitration clause, the test was that in Salford Estates on whether there was the lower threshold of a prima facie dispute.

Hong Kong Position

The Hong Kong Court of First Instance in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 also considered the above authorities.

This decision departed from the previous approach in Hong Kong. It decided that a winding up petition should generally be dismissed if (a) the company disputes the debt relied on by the petitioner; (b) the contract under which the debt is alleged to arise contains an arbitration clause; and (c) the company takes steps required under the arbitration clause to commence the dispute resolution process.

Decision

The High Court in this case applied the decisions in Salford Estates, Bdg v Bdh and Lasmos Limited. The Court applied the lower threshold of merely showing a prima facie dispute since the debt is the subject matter of an arbitration clause. The merits or otherwise of the dispute are matters to be decided by the arbitrator and not by the winding up Court.

The Court declined to stay the winding up petition under section 10 of the AA 2005. But in exercising its discretion as a winding up Court, the Court dismissed the winding up petition.

 

One thought on “Winding Up vs Arbitration: No to Stay but Court has Discretion to Dismiss the Winding Up

  1. Avatar Tricia June 4, 2019 / 3:59 pm

    Hi, Lee Shih. I have read an article on Committal Prima Facie Case Test and of Last Resort written sometime in 2015. I understand that committal proceeding is one of the last resort for debt recovery if the debtor refuse to comply the Judgement. However, can the Creditor still undergo for a committal proceeding over the Company/directors in the event that the debtor is a Company and the Company was placed under liquidation by way of court order? Thank you!

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