The claimant in Europ Assistance Holding SA v ONB Technologies Pte Ltd (ONB Holdings Pte Ltd, non party) [2023] SGHC 226 sought to wind up the defendant under Section 125(1)(e) of the Singapore Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) (the IRDA), on the basis that the defendant was unable to pay its debts.

The court found that the claimant failed to discharge its burden of proving that the defendant was unable to pay its debts as it failed to satisfy the cash flow test.  More pertinently, the court dismissed the winding up application because it found on a prima facie basis that the parties’ dispute over the debt in question was subject to an arbitration agreement. 

The prima facie standard of review

Under the AnAn standard of review, “once the court [is] satisfied that there [is] a prima facie dispute governed by an arbitration agreement and the dispute was not raised by the debtor in an abuse of the court’s process, the court will ordinarily dismiss the winding up application”.

As described by the Singapore High Court earlier this year in Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] SGHC 159, this represents a departure from the “general approach”, in which absent an arbitration agreement, an insolvency court will consider whether the defendant disputes the debt bona fide and on substantial grounds, i.e. whether it raises any triable issue on the debt. 

The departure is justified because it promotes coherence in the law and advances party autonomy: “It upholds the parties’ agreement to have an arbitral tribunal rather than the court decide whether, and if so to what extent, the claimant is a creditor of the defendant.”

In Europ Assistance the court applied the AnAn standard of review and found that the arbitration agreement was prima facie valid, and the dispute in question fell within the scope of the arbitration agreement.  The court seemed to also take comfort in its finding that there was no proof of the debtor’s insolvency,  although as Founder Group confirms the Singapore courts are prepared to dismiss winding up applications despite doubts about the debtor’s solvency, absent an arbitral award in the creditor’s favour over the disputed debt.

A key caveat to the AnAn standard of review is that “the court will not grant a stay [to the winding up application] notwithstanding that the prima facie standard has been met if the application for a stay amounts to an abuse of process”. The court in Europ Assistance found the fact that the defendant had not commenced arbitration proceedings was not an abuse of process.  The threshold for an abuse of the court’s process is a high one, and even when faced with unattractive arguments from a defendant debtor, the court should defer to the parties’ agreement to have their arguments heard by an arbitral tribunal – not the courts.

Takeaways – the position in Singapore and Hong Kong

This judgment reinforces the approach laid out by the Court of Appeal in AnAn concerning the interplay between insolvency proceedings and arbitration, and confirm Singapore’s stance as a pro-arbitration jurisdiction. Companies doing business in the region should be confident that courts in Singapore – even insolvency courts – will defer to parties’ valid arbitration agreements and uphold party autonomy to choose to resolve disputes via arbitration. Potential claimants will not be able to bypass the arbitral process by lodging winding-up applications.

An objection to the AnAn standard as put by the first instance judge in the case is that it “may be seen to deal a blow to the insolvency regime since creditors legitimately seeking to wind up insolvent companies may be delayed in or entirely derailed from the recovery of their debts by debtor-companies, which would be able to stave off winding up proceedings simply by raising disputes which they say should be resolved by arbitration, even if these allegations may be entirely unmeritorious”.

However the objection is premised on legitimate creditors’ aim of winding up insolvent companies: it ignores the fact that claimants may sometimes use winding-up applications tactically, irrespective of their counterparty’s general solvency. As put by the court in Founder Group, it is itself an “abuse of process to present a winding up application […] for the purpose of putting improper pressure on a defendant” to pay a disputed debt.

The approach to the interplay between insolvency proceedings and arbitration is not universally settled in the various common law jurisdictions however. Three recent Hong Kong first instance court decisions have left undecided the question of whether a winding-up petition will trump an agreement to arbitrate when it comes to a winding-up and particularly in the context of unmeritorious defences and cross-claims.

A Hong Kong Court of Final Appeal decision earlier this year, Re Lam Kwok Hung Guy [2022] 4 HKLRD 793 had appeared to suggest that the parties' agreement would be upheld but the issue – particularly when it comes to unmeritorious and late arbitration applications – is dividing the courts (see Hogan Lovells alert Agree to disagree – does winding-up or arbitration take precedence in insolvency?).

This nuanced position denotes the Hong Kong courts’ due concern for the interests of claimant creditors and public policy considerations where there is creditor community risk, so as to “prevent a debtor from mounting a completely frivolous defence - an abuse of process designed to put off the evil day.” We are keen to see how future caselaw continues to refine this issue in both Singapore and Hong Kong, two pro-arbitration jurisdictions.

Authored by James Kwan, Shi Jin Chia, Hugo Petit, and Nigel Sharman.