31^st May 2019

INTRODUCTION

Ordinarily, in order to defeat a winding-up petition and/or to restrain the presentation of a winding-up petition, one would need to prove that there is a ‘bona fide dispute of the debt’.

However, when the underlying agreement contains an arbitration clause, would the test still be the same? Can the winding-up petition be stayed and referred to arbitration when the debt appears to be disputed?

These issues were considered in the recent Malaysian High Court case of Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd.

BRIEF FACTS

The brief salient facts of the case are as follows:-

1.       The Petitioner was appointed as the contractor by the Respondent.

2.   The Petitioner completed the Project and a Statement of Final Account was certified by the Respondent’s Quantity Surveyor and Consultant Architect for the sum of RM5,829,742.60 (“Outstanding Sum”). However, it was not signed by the Respondent and because of this, the Consultant Architect did not issue the Final Certificate.

3.   The Respondent failed to make payment of the Outstanding Sum. Following therefrom, the Petitioner issued a Section 466 statutory demand against the Respondent and thereafter, proceeded to present a winding-up petition against the Respondent.

4.   The Respondent resisted the winding-up petition by filing an application to (1) stay the winding-up proceedings pending arbitration (“Stay Application”) pursuant to Section 10 of Arbitration Act 2005 (as the contract between the Parties contains an arbitration agreement) and (2) alternatively, to strike out the winding-up petition (“Striking Out Application”).

DECISIONS OF THE COURT ON STAY APPLICATION 

The Learned Judge, Wong Chee Lin J in dismissing the Respondent’s Stay Application, held that Section 10 of the Arbitration Act 2005 has no applicability to a winding-up petition. In arriving at her decision, the Learned Judge concurred with the High Court decision in NFC Labuan Shipleasing Ltd v Semua Chemical Shipping Sdn Bhd [2017] MLJU 900, which reasoned, amongst others, that:-

i) A winding-up proceeding is sui generis and not in the nature of a substantive claim contemplated within the remit of Section 10 Arbitration Act 2005.

ii) A winding-up proceeding is not an execution proceeding based on a judgment or proceedings to resolve disputes between parties.

iii) Following therefrom, a winding-up petition is not a ‘proceeding’ that is susceptible to a stay pending arbitration and to grant a stay of winding-up petition under Section 10 of the Arbitration Act 2005 would be patently inappropriate and conceptually incongruent within the winding-up context.

WINDING-UP PETITION

Having decided the above, the Learned Judge proceeded to examine the substantive merits of winding-up petition and the position in foreign jurisdiction in the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2)[2015] Ch 589, Singapore High Court decision in Bdg v Bdh [2016] 5 SLR 977, and lastly Hong Kong Court of First Instance decision in  Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426.

After conducting a comprehensive examination on the foreign authorities, the Learned Judge was satisfied that there was prima facie a dispute as to the debt and exercised her discretion under Section 465 of Companies Act 2016 to dismiss the winding-up petition. In doing so, the following principles in the above authorities become relevant:-

a)     The Companies Act confers the court the discretionary power to wind up a company and the Court shall only exercise this discretion in such a way which is not incongruent with the legislative policy embodied in the Act;

b)   When the Parties have agreed to refer the dispute relating to the debt to arbitration, the merits of the dispute are to be decided by the arbitrator and not the court.

c)   In such circumstance, it would be anomalous for the Court to conduct a summary judgment type analysis of liability for an unadmitted debt on which a winding-up petition is grounded.

d)   The exercise of the discretion to wind up a company would inevitably mean that the Court would have to conduct a summary judgment type of analysis and enquiry onto the merits of the dispute of the debt, and thus, depriving the other Parties from its contractual bargain – i.e. to resolve any dispute by way of arbitration.

e)   Further, the exercise of the discretion to wind up a company would also encourage parties to an arbitration agreement to by-pass the arbitration agreement by presenting a winding-up petition.

f)   In the upshot, if there was prima facie a dispute of debt, the petition may be dismissed to enable parties to resolve the dispute over the debt by their chosen method of dispute resolution – arbitration, rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds.

SIGNIFICANCE OF THE DECISION 

Following the decision, where the dispute falls within the ambit of the arbitration agreement, a winding-up petition can be dismissed or the presentation of a winding-up petition may be restrained if the debtor could demonstrate that:-

1.         There is a prima facie dispute of debt;

2.         The purported dispute fell within the ambit of the arbitration clause;

The ordinary standard of “bona fide dispute of debt” requires the Court to examine the affidavit evidence and consider summarily whether an arguable case has been made out.

Whereas the test of ‘prima facie dispute of debt’ requires a lower burden of proof considering that “a denial of the indebtedness constitutes a dispute”:-

 “… If the Respondent has to show that the debt was disputed bona fide on substantial grounds, I would hold that the Respondent has not discharged that burden.

28. However, applying the lower threshold of merely showing a prima facie dispute, since the debt here is the subject matter of an arbitration clause, I am of the view that the Respondent has discharged the burden of showing a prima facie dispute, bearing in mind that a denial of the indebtedness constitutes a dispute. The merits or otherwise of the dispute are matters to be decided by the arbitrator and not by this Court…”

CONCLUSION

The decision demonstrates the Court’s inclination to hold Parties to their contractual bargain, viz-a-viz the arbitration agreement in line with most common law jurisdiction.

In fact, the recent Singaporean High Court in the case of BWF v BWG [2019] SGHC 81 remarked that it is an abuse of court process for:-

“A creditor who wishes to file winding-up proceedings knowing that the debt which is its premise is the subject of a dispute which was earlier agreed to be arbitrated, would be misusing judicial facilities…”

Following the decision of Awangsa Bina, the presence of an arbitration clause in the underlying contract may result in the dismissal of a winding-up proceeding where there is a prima facie dispute to the debt and the Respondent need not satisfy the threshold of bona fide dispute to the debt. 

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