AKN and another v ALC and others and other appeals

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 31 March 2015
• Neutral Citation: [2015] SGCA 18
• Year: 2015
• Date: 31 March 2015
• Published date: 08 April 2015
• Hearing Date: 26 January 2015
• Subject Matter: Setting aside,Recourse against award,Arbitration,Award
• Plaintiff Counsel: Andre Yeap Poh Leong SC, Adrian Wong Soon Peng, Jansen Chow Chao Wu, Ang Leong Hao and Ng Lip Chih (Rajah & Tann Singapore LLP)
• Citation: [2015] SGCA 18
• Defendant Counsel: Philip Jeyaretnam SC and Evans Ng Hian Pheng (Rodyk & Davidson LLP),Alvin Yeo SC, Chan Hock Keng, Lin Wei Qi Wendy Lin and Chong Wan Yee Monica (WongPartnership LLP),Davinder Singh SC, Zhuo Jiaxiang, Vishal Harnal, Chan Yong Wei and David Fong (Drew & Napier LLC)
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals Nos [P], [Q] and [R]

Sundaresh Menon CJ (delivering the judgment of the court): Introduction

At the heart of this judgment is the question of the proper relationship between arbitral tribunals and the courts. Before us are three appeals from the decision of the High Court judge (“the Judge”) in AKM v AKN and another and other matters [2014] 4 SLR 245 (“the High Court Judgment”) concerning an arbitral award issued by a three-member arbitral tribunal in an arbitration administered by the Singapore International Arbitration Centre (“the SIAC”). The Judge set aside the arbitral award (“the Award”) in its entirety, primarily on the grounds of one or more breaches of natural justice. He also found that the arbitral tribunal (“the Tribunal”) had acted in excess of its jurisdiction. The claimants in the arbitration, AKN and AKO, have appealed to this court. Their central contention is that the Judge overstepped his bounds by scrutinising the merits of the Award too closely, and further, that he should not have set aside the Award.

Background

To maintain the confidentiality of the arbitration, the Judge used pseudonyms in place of the names of the parties and their related entities. He also converted all sums denominated in local currency into the approximate equivalent in US dollars, and used fictional names for the countries and the products concerned. This device is maintained in this judgment.

The factual context

This case arose from the liquidation of a company in the country of Moria (“the Corporation”). The Corporation was the largest regional producer of a product called Mithril. Its principal production facility was in a city within Moria called Erebor.

The Corporation was heavily indebted to a number of secured creditors (generically referred to hereafter as “Secured Creditors”) as well as to the city of Erebor in respect of unpaid taxes. Those taxes were due in respect of the land on which the Corporation’s principal production facility was situated, the production facility itself and the machinery within the production facility. The liquidator of the Corporation (“the Liquidator”) devised a plan to sell some of the Corporation’s assets (“the Plant Assets”) to AKN and AKO, the appellants in all three appeals before us (collectively referred to hereafter as “the Purchasers”), with the Corporation to retain its remaining assets (“the Retained Assets”).

The Plant Assets comprised the Corporation’s principal production facility in Erebor, and included the land on which the production facility was situated (“the Plant Land Assets”) as well as the machinery and other aspects of the production facility (“the Plant Non-Land Assets”). To give effect to the sale of the Plant Assets, two key agreements were entered into, an asset purchase agreement dated 10 September 2004 (“the APA”) and an omnibus agreement dated 15 October 2004 (“the OMNA”).

The two key agreements

The APA was between the Liquidator, the Secured Creditors listed in Schedule I of the APA, the Corporation’s shareholders and the Purchasers. The Corporation’s shareholders are not parties to the present dispute, and for the purposes of this judgment, they can be discounted as parties to the APA.

Under the APA, the Purchasers agreed to purchase the Plant Assets from the Corporation. Section 2.1 of the APA reads:

Sale and Purchase of the [Plant Assets] Upon the terms and subject to the conditions of this APA, … the [Liquidator], the [Secured Creditors] and the [Corporation’s] Shareholders agree to sell, convey, transfer, assign and deliver to the [Purchasers], on the Closing Date, [the Plant Assets], free from and clear of all Liens of any kind …

The “Closing Date” referred to in s 2.1 was stipulated in s 5.1 of the APA to be 8 October 2004. However, this was eventually rescheduled to 15 October 2004, and it is that date which we shall term the “Closing Date” in this judgment. The Secured Creditors were referred to in s 2.1 because it was contemplated that they would retain their security interests in the Plant Assets. In return for their agreement under s 2.1 to deliver the Plant Assets to the Purchasers “free from and clear of all Liens of any kind”, the Purchasers agreed to issue two notes for their benefit. The terms of these two notes (“the Notes”) were set out in the second key agreement, the OMNA. This was between the Purchasers and the Secured Creditors, with a Morian bank acting as the facility agent. In essence, the Purchasers were to make payments at periodic intervals to the holders of the Notes. The original holders of the Notes were the Secured Creditors who were the original parties to the APA (also referred to hereafter as “Original Secured Creditors” where appropriate to the context).

The OMNA provided, in s 9.04, that the Secured Creditors were entitled to assign all or any portion of their rights and obligations under the OMNA and the Notes. By the time of the arbitral proceedings, a few of the Original Secured Creditors had sold their rights under the Notes to third parties, including the investment funds which are the respondents in Civil Appeal (“CA”) No [P] (“the Funds”). The OMNA contained, in s 9.08(b), a distinct dispute resolution mechanism from the one found in the APA. The APA contained an arbitration agreement in s 10.2, which contemplated disputes being referred to arbitration in Singapore in accordance with the rules of the SIAC. The OMNA, in contrast, contained a non-exclusive jurisdiction clause that pointed to the Morian courts, and did not contain any arbitration agreement.

One of the conditions precedent to the closing of the transactions contemplated under the APA was the approval by the Erebor municipal authorities of a deferred payment scheme for the unpaid taxes that were owed by the Corporation. The Liquidator eventually procured a tax amnesty agreement (“the TAA”) with the Erebor municipal authorities on 13 October 2004. The TAA granted the Corporation relief from paying interest and penalties on all the unpaid taxes it had hitherto incurred, and allowed it to settle the unpaid taxes in eight instalments starting in December 2004 and ending in December 2012. Hence, although the TAA did not secure a waiver of the taxes owed by the Corporation, it did achieve a plan for deferred payment of the taxes to be made without the imposition of any penalties or interest as a result of the deferred payment. The TAA, however, was liable to be revoked if any taxes in relation to the Corporation’s assets, including the Plant Assets, were not paid on time.

Soon after the Closing Date (ie, the revised closing date of 15 October 2004), the relationship between the parties started to sour. The breakdown of the parties’ relationship was triggered by the revocation of the TAA, and that transpired apparently because certain tax liabilities were not paid. These tax liabilities can be broken down into three categories as follows (adopting the same terminology as that used by the Judge): The first category – “Pre-Closing Taxes” – comprised arrears of taxes that had accrued from 1999 to 15 October 2004 over all of the Corporation’s real property, regardless of whether that real property was comprised in the Plant Assets or in the Retained Assets. The Pre-Closing Taxes were meant to be paid pursuant to the TAA, and were the Liquidator’s responsibility. The second category of tax liabilities – “Post-Closing Plant Assets Taxes” – comprised current taxes owing on the Plant Assets (both the Plant Land Assets and the Plant Non-Land Assets). Although the Plant Land Assets had been transferred to the Purchasers on the Closing Date, they remained in the Corporation’s name. As such, as far as the Erebor municipal authorities were concerned, the Corporation remained the registered owner and, therefore, the taxpayer responsible for those taxes. The APA was silent as to who was liable for the Post-Closing Plant Assets Taxes. However, from the sequence of events that led up to the revocation of the TAA, it seemed that the Purchasers had undertaken the responsibility of paying those taxes (see the Award at paras 170–192). On the Tribunal’s analysis, the Purchasers had in fact attempted to pay the first instalment of the Post-Closing Plant Assets Taxes, but a portion of their payment was instead allocated to the third category of tax liabilities, the “Post-Closing Retained Assets Taxes” (see the Award at para 191). As a result, there were outstanding Post-Closing Plant Assets Taxes. As just mentioned, the third category of tax liabilities consisted of the Post-Closing Retained Assets Taxes. These were current taxes payable on the Retained Assets, and were clearly the responsibility of the Liquidator.

Right from the time of the first instalment payable under the TAA, problems arose and some of the aforesaid tax liabilities were not paid. The TAA was eventually revoked. However, it was unclear what exactly triggered the revocation of the TAA and when exactly the TAA was revoked (whether automatically upon non-payment, or only upon notice from the Erebor municipal authorities).

Upon the revocation of the TAA, the Purchasers stopped making payments pursuant to the Notes. They also applied to the Morian courts on 9 October 2008 for an injunction restraining the Secured Creditors from, amongst other things, declaring that the Purchasers were in default of their payment obligations under the Notes. The Morian court dismissed the application on 10 October 2008. On the same day, the Purchasers commenced arbitration in Singapore. Their notice of arbitration dated 10 October 2008 (“the Notice of Arbitration”) named as respondents the Liquidator, the Corporation’s shareholders and the 24 Secured Creditors listed in Annex 1 of the notice (collectively referred to hereafter as the “Arbitration Secured Creditors” where appropriate to the context). During the arbitration, the parties proceeded on the basis that all the...