Focus: Arbitrability of insolvency related claims
3 August 2010
In brief: In a recent case concerning an application for a stay in favour of arbitration, the High Court of Singapore has decided that insolvency related avoidance claims are not arbitrable as they relate to a type of dispute that can only be resolved by the courts. Partner Matthew Skinner and Senior Associate Justin Simpkins report.
How does it affect you?
- In exercising its discretion to stay proceedings in favour of arbitration, a court will look at whether it is against public policy to do so.
- Avoidance claims in an insolvency related context are not arbitrable.
Petroprod Ltd had four subsidiaries in respect of which it claimed it was a creditor. On 21 December 2006, Petroprod entered into a management agreement with Larsen Oil and Gas Pte Ltd, pursuant to which Larsen provided management services to Petroprod. Clause 18 of the management agreement referred any disputes to arbitration in Singapore in accordance with the provisions of the Singapore Arbitration Act (Cap. 10).
Petroprod alleges that, as a consequence of the management agreement, Larsen had control over its finances and its subsidiaries' finances.
On 17 July 2009, Petroprod was placed in official liquidation in the Cayman Islands and on 3 August 2009, it was placed in compulsory liquidation in Singapore. Although the four subsidiaries were not placed in liquidation, Petroprod alleged that they were each technically insolvent as from 31 December 2008.
Petroprod commenced proceedings against Larsen, seeking the avoidance of a number of payments:
- that it made to Larsen on the ground that these payments amounted to unfair preferences or transactions at an undervalue (under sections 98 and 99 of the Bankruptcy Act (Cap. 20) read with s329(1) of the Companies Act (Cap. 50)); and
- made by the subsidiaries to Larsen pursuant to s73B of the Conveyancing and Law Property Act (Cap. 61) on the ground that they were made with the intent to defraud it as a creditor of the subsidiaries.
This case concerned Larsen's application to have the proceedings stayed in favour of arbitration pursuant to Clause 18 of the management agreement.1
Petroprod opposed the application on the basis that the issues in dispute were not arbitrable as they related to matters that can only be resolved by the courts, namely insolvency related claims under specific legislation.
This was the first time a Singapore court had been asked to consider the arbitrability of insolvency related claims.
Although there is no explicit reference to the concept of arbitrability in the Arbitration Act, Justice Tan Lee Meng referred to s11(1) of the International Arbitration Act (Cap. 143A) and held that when a court is asked to exercise its discretion to grant a stay under s6 of the Arbitration Act, it should take into account the general concept that any dispute which the parties have agreed to submit to arbitration under an arbitration agreement should generally be determined by arbitration unless it is contrary to public policy to do so.2 In that context, the court looked at the underlying policy behind the avoidance claims being made by Petroprod in the substantive proceedings and held that the rights created by avoidance provisions exist for the benefit of the general bodies of creditors in an insolvency or insolvency related context.
In following a recent Australian decision3, Justice Tan Lee Meng took the view that the policy underlying the avoidance provisions in question would be compromised if their enforcement were subject to private arrangements, including an agreement to arbitrate between the company and the wrongfully advantaged creditor or transferee. On that basis, Larsen's application to stay the proceedings in favour of arbitration was dismissed.
When considering the arbitrability of a dispute, a court will look at whether it would be contrary to public policy to allow the dispute to be resolved by private arrangement. In the context of avoidance claims in an insolvency related context, public policy dictates that such disputes are not arbitrable.
- Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) v Larson Oil and Gas Pte Ltd  SGHC 186 (30 June 2010).
- At .
- New Cap Reinsurance Corporation Limited v A E Grant & Ors, Lloyd's Syndicate No 991  NSWSC 62.