Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore)

• Jurisdiction: Singapore
• Court: Court of Three Judges (Singapore)
• Judge: Chan Sek Keong CJ
• Judgment Date: 11 May 2011
• Neutral Citation: [2011] SGCA 21
• Citation: [2011] SGCA 21
• Hearing Date: 28 September 2010
• Published date: 18 May 2011
• Plaintiff Counsel: Chen Leng Sun, Goh Kok Leong and Ng Weiting (Ang and Partners) (Instructed by Leonard Chia (Asia Ascent Law Corporation))
• Subject Matter: Insolvency law,Arbitration
• Defendant Counsel: David Chan, Koh Junxiang and Carol Teh (Shook Lin and Bok LLP)
• Docket Number: Civil Appeal No 122 of 2010
• Date: 11 May 2011

V K Rajah JA (delivering the grounds of decision of the Court): Introduction

Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors. The appeal before us raised an interesting and novel point of law relating to the interfacing of these two policies where private proceedings could have wider public consequences. To what extent ought claims involving an insolvent company be permitted to be resolved through the arbitral process? We now give the reasons why we dismissed this appeal with costs.

Background facts

The facts of this case are relatively straightforward and have been succinctly summarised by the judge at first instance (“the Judge”) in his grounds of decision (“GD”) in Petroprod 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. We will therefore set out here, only a broad overview of the factual background that would be helpful in explaining our decision.

The respondent, Petroprod Ltd (“Petroprod”), a Cayman Islands company, and its four wholly-owned subsidiaries (“the four subsidiaries”), which had no employees, entered into a Management Agreement (“the MA”) with the appellant, Larsen Oil and Gas Pte Ltd (“Larsen”) on 21 December 2006. Pursuant to the MA, Larsen was to provide management services to Petroprod and the four subsidiaries. Petroprod pleaded that as a result of the MA and subsequent amendments, Larsen gained control over its finances as well as those of the four subsidiaries. Petroprod also claimed to be a creditor of the four subsidiaries.

On 17 July 2009, Petroprod was placed in official liquidation in the Cayman Islands by an Order of the Grand Court of the Cayman Islands. It was subsequently placed in compulsory liquidation in Singapore by an order of the High Court on 3 August 2009. On 3 September 2009, the Singapore liquidators of Petroprod commenced proceedings against Larsen: to avoid a number of payments that Petroprod made to Larsen on the ground that these payments amounted to unfair preferences or transactions at an undervalue within the meaning of ss 98 and 99 of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“BA”), read with s 329(1) of the Companies Act (Cap 50, 2006 Rev Ed) (“Companies Act”); and to avoid a number of payments made by the four subsidiaries to Larsen pursuant to s 73B of the Conveyancing and Law of Property Act (Cap 61, 1994 Rev Ed) (“CLPA”) on the ground that they were made with the intent to defraud it as a creditor of the subsidiaries.

On 2 December 2009, Larsen filed a summons applying for a stay of all further proceedings brought by Petroprod pursuant to s 6(2) of the Arbitration Act (Cap 10, 2002 Rev Ed) (“AA”). The basis of its application was that an arbitration clause (cl 18) in the MA (“the Arbitration Clause”) required the parties to resolve their disputes through arbitration. The Arbitration Clause reads as follows:

This Agreement shall be construed and enforced in accordance with and governed by the laws of Singapore. Disputes which cannot be resolved amicably shall be resolved by arbitration in Singapore in accordance with the provisions of the Singapore Arbitration Act, Chapter 10.

Larsen’s application for a stay of further proceedings was heard by the Judge on 26 March 2010, and judgment was given together with the GD on 30 June 2010. The Judge dismissed Larsen’s stay application on the basis that the issues were (a) non-arbitrable; and, further, that (b) Petropod’s claim pertaining to s 73B CLPA should be resolved in the same forum (see GD at [22] and [24]). Issues arising in this appeal

The issues that arose in the appeal were as follows: whether Petroprod’s claims against Larsen fell within the scope of the Arbitration Clause; whether the Court’s discretion to grant a stay of proceedings pursuant to s 6(2) of the AA was dependent on the arbitrability of the dispute in question; if the Court’s discretion was dependent on the arbitrability of the dispute, whether Petroprod’s claims against Larsen were arbitrable.

Our decision The scope of the Arbitration Clause The proper characterisation of Petroprod’s claims against Larsen

Larsen contended that Petroprod’s claims against it were founded on Larsen’s alleged breach of the MA, and that such a claim fell within the scope of the Arbitration Clause. It claimed that Petroprod could only show that the payments made to Larsen by Petroprod and the four subsidiaries were preferential payments by relying on the terms of the MA, and proving that the payments were made with the intent to prefer Larsen over the other creditors rather than in accordance with the MA. As a corollary, Larsen also argued that Petroprod could only show that the payments made to Larsen by Petroprod and the four subsidiaries were undervalue transactions/fraudulent conveyances if the amounts paid were more than what Petroprod (and the four subsidiaries) were obliged to pay under the MA. Therefore, all of Petroprod’s claims were intimately connected to the MA and any disputes relating to the payments under the MA fell within the scope of the Arbitration Clause.

The Judge rejected Larsen’s arguments. He held at [16] of the GD that:

[T]he rights created by the avoidance provisions exist for the benefit of the general body of creditors in an insolvency or insolvency-related context. This is why avoidance rights may be exercised even if the relevant transaction is binding under general law on the company. It is also pertinent to note that undervalue transactions and undue preferences can be avoided only when the company is being wound up. In my view, the policy underlying the avoidance provisions in question would be compromised if their enforcement is subject to private arrangements, including an agreement to arbitrate, between the company and the wrongfully advantaged creditor or transferee. In this regard, a company’s rights under the avoidance provisions should be contrasted with its rights under the general law.

We agreed with the Judge’s characterisation of Petroprod’s claims against Larsen. Petroprod’s Statement of Claim against Larsen revealed that Petroprod did not allege that Larsen had breached the MA by causing Petroprod to make the payments to Larsen. Rather, all that Petroprod claimed was that it had made certain payments to Larsen within two years of its insolvency, and that the law presumed that the payments were made with an intention to prefer Larsen as a creditor because of Larsen’s control over the management of Petroprod. Similarly, Petroprod’s claims against Larsen based on an undervalued transaction and a fraudulent conveyance were entirely independent of the question of whether Larsen had breached the MA.

In our opinion, Petroprod’s claims against Larsen were founded entirely on the avoidance provisions of the BA and Companies Act. The focus of these avoidance provisions is to address situations where value has been subtracted from the insolvent company to the detriment of the general creditors, independent of the nature of the relationship between the parties. These provisions allow for the adjustment of concluded transactions upon the onset of insolvency. The only relevance of the MA to Petroprod’s claims against Larsen was that it provided some evidence that the payments made from Petroprod to Larsen could have been for some legitimate commercial reason other than to prefer Larsen as a creditor. The question of whether Larsen had committed a breach of the MA by causing Petroprod to make those payments was irrelevant. Accordingly, we rejected Larsen’s claim that Petroprod’s claims were pure contractual claims merely because of the MA. Rather, we found that Petroprod’s claims against Larsen were avoidance claims that sprung from the special regime created by the BA and Companies Act.

The proper approach towards the construction of arbitration clauses

Of course, the mere fact that Petroprod’s claims against Larsen were avoidance claims did not preclude them from falling within the scope of the Arbitration Clause. The scope of any arbitration clause is based on the parties’ expressed intention, and it is conceivable that the parties to a contract may agree that all disputes between them, including disputes arising out of avoidance actions in the event of insolvency, should fall within the scope of the arbitration clause. This would be a matter of documentary construction.

The traditional approach of the English courts was to determine the scope of an arbitration clause by looking at the precise words used in it. Hence, the use of expansive words such as “any dispute” between the parties were often regarded as wide enough to include any matter related to the contract, even if the action brought was based in tort (see generally Astro Vencedor Compania Naviera SA of Panama v. Mabanaft GmbH, The Damianos [1971] 2 QB 588). On the other hand, words such as “arising under the contract” were held to be of narrower scope, and there was a divergence of views between courts as to whether such a clause could include a tort claim that was related to the contract (see Heyman and another v Darwins, Limited [1942] AC 356; Union of India v EB Aaby’s Rederi A/s, The Evje [1974] 2 All ER 874).

The case of Premium Nafta Products Ltd & Ors v Fili Shipping Co Ltd & Ors [2007] 2 CLC 553 (“Premium Nafta”) heralded a change in how arbitration clauses ought to be construed. The dispute in that case was whether an arbitration clause that purported to cover “any dispute arising under this charter” was wide enough to cover...