Insolvency Law

• Published date: 01 December 2011
• Author: LEE Eng Beng SC LLB (Hons) (National University of Singapore), BCL (Oxon); Advocate and Solicitor (singapore); Managing Partner, Rajah & Tann LLP. Kelvin POON LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Partner, Rajah & Tann LLP.
• Date: 01 December 2011

Introduction

16.1 The year 2011 saw a number of significant decisions by the Court of Appeal on insolvency law issues. With the prevalence of arbitration as a means of resolving disputes, the Court of Appeal's decision in Larson Oil and Gas Pte Ltd v Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 provides valuable guidance as to the kinds of insolvency-related claims that cannot be resolved via arbitration.

16.2 In Lim Lye Hiang v Official Assignee[2012] 1 SLR 228, the Court of Appeal held that Central Provident Fund monies would form part of the assets of a bankrupt. The Court of Appeal also had the opportunity to clarify and explain the difference between the annulment of a bankruptcy order and where a bankrupt is discharged, and particularly whether the discharge of bankruptcy had the effect of re-vesting the bankrupt's assets in him.

16.3 Continuing guidance as to the application of the law of unfair preferences was also given in the related Court of Appeal decisions in DBS Bank Ltd v Tam Chee Chong (judicial managers of Jurong Hi-Tech Industries Pte Ltd) (under judicial management)[2011] 4 SLR 948 and Cooperatieve Centrale Raiffeisen Boerenleenbank BA (trading as Rabobank International Singapore Branch) v Jurong Technologies Industries Corporation Ltd[2011] 4 SLR 977. The decisions illustrate that, the fact that the insolvent company may have given a preference to a creditor on account of commercial pressure being asserted upon the former may not, per se, be sufficient to prove an absence of a desire to prefer.

16.4 Apart from the decisions of the Court of Appeal, the High Court was also confronted with a number of interesting and important issues relating to bankruptcy procedure (substituted service of bankruptcy application: Lee Chee Wei v Tan Hor Peow Victor[2011] SGHC 175; setting aside of bankruptcy statutory demand on the ground that the debt was incurred outside of Singapore: Rafat Ali Rizvi v ING Bank NV Hong Kong Branch[2011] SGHC 114). The High Court was also asked to address, for the first time, the effect of an annulment of a bankruptcy order (Tan Teck Guan v Mapletree Trustee Pte Ltd (trustee of Mapletree Industrial Trust)[2011] 3 SLR 1031).

16.5 In an interesting case involving insured claims being made against a company which had entered into a scheme of arrangement with its creditors under s 210 of the Companies Act (Cap 50, 2006 Rev Ed), the High Court decided that the legislative framework did not confer a statutory result that a scheme extinguishes an insured claim against a company, after the completion and termination of a scheme (Azman bin Kamis v Saag Oilfield Engineering (S) Pte Ltd (formerly known as Derrick Services Singapore Pte Ltd)[2011] 4 SLR 825). This decision has since been reversed by the Court of Appeal on 30 January 2012.

Arbitrability

16.6 Larson Oil and Gas Pte Ltd v Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore)[2011] 3 SLR 414 was an appeal against the High Court decision in Petropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore)v Larsen Oil and Gas Pte Ltd[2010] 4 SLR 501.

16.7 The liquidators of the company commenced proceedings to set aside various transactions as undervalue transactions or transactions amounting to unfair preference within the meaning of ss 98 and 99 of the Bankruptcy Act (Cap 20, 2009 Rev Ed) read with s 329(1) of the Companies Act and/or which were made with the intent to defraud creditors in contravention of s 73B of the Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed) (CLPA). The defendant applied to stay the proceedings on the ground that the disputes with the company arose out of a management agreement between the company and the defendant and which contained an agreement by the parties to arbitrate their disputes. In the High Court, the learned judge held that the company's claims should properly be characterised as claims founded on the avoidance provisions in the Bankruptcy Act and Companies Act. The claims were independent of whether there had been a breach of the management agreement. Accordingly, the learned judge held that the proceedings commenced by the liquidators against the defendant did not fall within the ambit of the arbitration agreement and the stay was denied.

16.8 The Court of Appeal affirmed the learned judge's decision. The Court of Appeal noted that the preponderance of authority in the UK, the United States, Canada and Australia favours the view that arbitration clauses should be construed expansively such that all manners of claims, whether common law or statutory, should be regarded as falling within their scope unless there is good reason to conclude otherwise (Premium Nafta Products Ltd v Fili Shipping Co Ltd[2007] 2 CLC 553; Moses H Cone Memorial Hospital v Mercury Construction Corporation460 US 1 (1983); Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Inc[1996] 39 NSWLR 160; Onex Corp v Ball CorpUNK(1994) 12 BLR (2d) 151). Such a view also has the strong support of the academic community and is consistent with the Singapore court's philosophy of favouring arbitration.

16.9 The Court of Appeal further noted that the underlying basis for such an approach is the assumption that commercial parties, as rational business entities, are likely to prefer a dispute resolution system that can deal with all types of claims in a single forum. The Court of Appeal held, however, that this line of reasoning did not apply to avoidance claims that arose at the onset of insolvency as such claims can only be pursued by the liquidators or judicial managers of insolvent companies and there is no reason to objectively believe that a company's pre-insolvency management would ordinarily contemplate including such avoidance claims within the scope of an arbitration agreement. In the circumstances, the Court of Appeal found that arbitration clauses should not ordinarily be construed to cover avoidance claims in the absence of express language to the contrary and the arbitration clause in question did not cover the company's claims. On this basis, the appeal was dismissed.

16.10 Whilst the Court of Appeal's decision on the ambit of the arbitration clause would have disposed of the appeal, it helpfully explicated its views on what would be the proper judicial approach towards any arbitration agreement that expressly includes insolvency-related claims, such as avoidance claims.

16.11 The Court of Appeal held that there is ordinarily a presumption of arbitrability where the words of an arbitration clause are wide enough to embrace a dispute, unless it is shown that Parliament intended to preclude the use of arbitration for that particular type of dispute in question, or that there is an inherent conflict between arbitration and the public policy considerations involved in that particular type of dispute.

16.12 In its judgment, the Court of Appeal drew a distinction between disputes involving an insolvent company that stem from its pre-insolvency rights and obligations and those that arise only upon the onset of insolvency due to the operation of the insolvency regime.

16.13 In relation to the latter, which would include avoidance and wrongful trading claims, the Court of Appeal noted that the statutory provisions in the insolvency regimes are in place to recoup for the benefit of the company's creditors, losses caused by the misfeasance and/or malfeasance of its former management. The Court of Appeal held that this objective could be compromised if a company's pre-insolvency management could restrict the avenues by which the company's creditors could enforce the very statutory remedies which were meant to protect them against the company's management. This is particularly important as some of these remedies may include charges against the former management who would not be party to any arbitration agreement. In addition, wider public interest requires that different findings by different adjudicators should be avoided. As such, disputes arising from the operation of the statutory provisions of the insolvency regime per se would be non-arbitrable even if the parties had expressly included them within the scope of the arbitration agreement.

16.14 The position in relation to disputes involving an insolvent company that stem from its pre-insolvency rights and disputes is slightly different. The Court of Appeal observed that, whilst such disputes differ from those arising on the onset of insolvency, there are other public issues that may militate against giving effect to them. First, it is difficult to justify why the liquidator (who represents the creditors of the insolvent company, who are the parties with the real interest in any dispute that involves the insolvent company) should be compelled to give up its rights to judicial remedies in favour of arbitration when these creditors are not parties to any arbitration agreement. Second, an argument can be made that allowing an insolvent company's creditor to arbitrate a dispute against the company falls foul of the principle that a company cannot contract with its creditors for the non-application of certain insolvency rules as that creditor would, in effect, be contracting out of the proof of debt process. In the circumstances, the Court of Appeal concluded that arbitration agreements entered into by an insolvent company should not be allowed to be enforced against the liquidator where it affects the substantive rights of other creditors.

16.15 The Court of Appeal added, however, that in cases where the arbitration agreement is invoked only to resolve the prior private inter se disputes between the insolvent company and another party, there will usually be no good reason not to observe the terms of the arbitration agreement. The Court of Appeal reasoned that for such...