AnAn refined – Singapore Court of Appeal allows winding-up in spite of arbitration agreement

In May 2022 Founder Group's liquidators sought an order from the Singapore High Court that Singapore JHC Co Pte Ltd (JHC) be wound up, on the basis that a sum of approximately US$47.43 million was due and payable by JHC to Founder Group pertaining to an alleged sale of goods by Founder Group to JHC pursuant to three contracts. JHC resisted the winding-up application: it disputed the debt, claiming that the contracts were never meant to be enforced and that they were consequently null and void. It also argued that the dispute over JHC's liability for the debt fell within the scope of the arbitration agreements contained within the contracts and should be referred to arbitration.

The High Court dismissed Founder Group's winding-up application. Given that all the contracts contained arbitration clauses, the High Court considered that it had to apply the test set out in AnAn and consider (i) whether there is an arbitration agreement that is prima facie valid, (ii) whether the dispute is covered by the arbitration agreement; and (iii) whether raising such a dispute is not an abuse of process (the AnAn requirements - see Hogan Lovells alert AnAn affirmed – Singapore court confirms arbitration agreements trump winding-up applications). The High Court found that these requirements had been established and that Founder Group had failed to establish it had standing as a creditor.

On appeal, Founder Group sought to reverse the decision. It contended that the High Court had erred because (i) the test in AnAn related to whether it should succeed in its winding-up application, and not to whether it had standing to present the application; and (ii) JHC's dispute over the debt was an abuse of process.

The Court of Appeal's findings

The Court of Appeal disagreed with Founder Group's submissions that the AnAn requirements did not relate to standing: it held that establishing indebtedness may be relevant to the questions of both standing to bring the application in the first place, and of whether the grounds for winding up are made out. Where a debt is subject to a dispute that falls within the scope of an applicable arbitration clause, the claimant cannot be considered to be a creditor until the dispute has been resolved by arbitration in the claimant’s favour. It is for that reason that the court will ordinarily dismiss or exceptionally stay the application, provided that there has been no abuse of process on the defendant’s part.

Before applying the AnAn requirements however, the Court of Appeal noted that it was relevant to first consider whether they even should apply at all to the resolution of the dispute. The Court of Appeal found that the AnAn requirements did not apply: because JHC's position was that the contracts were null and void, so the arbitration agreements must logically also be null and void, on JHC's own case. The Court of Appeal disagreed with the High Court's finding that the doctrine of separability prevented a party from evading an obligation to arbitrate by denying the existence or validity of the underlying contract, and held that the High Court erred in its application of the doctrine of separability.

Referring to the case of Marty Ltd v Hualon Corp (Malaysia) Sdn Bhd (receiver and manager appointed) [2018] 2 SLR 1207 (Marty), the Court of Appeal held that as a matter of Singapore law, a party is not entitled to invoke an arbitration clause that is contained in a contract which a party maintains is not valid nor binding: the principle of separability cannot guarantee the survival of the arbitration clause in all circumstances.

This was consistent with the approach taken in the English case of Fiona Trust & Holding Corporation and others v Privalov and others [2007] 4 All ER 951. However, the Court of Appeal did not provide further clarity as to the limits of the doctrine of separability, stating that it was "unnecessary" to do so and that this would always be a fact-sensitive exercise, with much depending on the nature of the challenge mounted against the underlying contract. The Court of Appeal also observed that JHC's inconsistent position was a typical example of abuse of process.

Having established that the AnAn requirements did not apply, the court went on to find that there was no real dispute over the indebtedness. Founder Group had established its standing as creditor, and JHC should be wound up.

Takeaways

The Court of Appeal appears to have further refined the approach it adopted in AnAn, by first considering as a threshold inquiry whether the defendant could even invoke the existence of an arbitration agreement, so as to determine if the AnAn requirements were applicable at all. In applying the first AnAn requirement, the court will determine whether the arbitration agreement is null and void, inoperative or incapable of being performed – but if the court finds that a party is not entitled to invoke the arbitration agreement, the court need not even make that determination.

However, it is not immediately clear how the process can be reconciled with AnAn holding that only a prima facie standard of review should be applied to the arbitration agreement – the AnAn court had "exhort[ed] limited judicial intervention". It is worth noting that the High Court in this case had also considered Marty, but came to the conclusion that while there are limits to the doctrine of separability, to advance party autonomy and uphold the stated policy of minimal curial intervention, a duly constituted tribunal – and not the courts – should decide those issues.

Finally, it is also notable, in view of the Court of Appeal’s observation that JHC's position was an abuse of process under the third AnAn requirement, it is likely the Court of Appeal would have arrived at the same outcome, i.e. allowing the winding-up application, without having to undertake the threshold inquiry.

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