Focus: Arbitrability of insolvency related claims denied
8 July 2011
In brief: The Court of Appeal of Singapore recently upheld a High Court decision that insolvency related avoidance claims are not arbitrable, as they relate to a type of dispute that only the courts can resolve. Partner Matthew Skinner , Senior Associate Justin Simpkins and Lawyer Tom Levi report.
How does it affect you?
- Claims that arise only at the onset of insolvency, such as those made under the avoidance provisions in the Bankruptcy Act (Cap. 20), cannot be settled by way of arbitration. Similarly, a liquidator will not be bound by an arbitration agreement where that agreement affects the rights of other creditors.
- However, a company in liquidation is able to resolve a dispute by way of arbitration where that dispute arose before the liquidation, and relates to a private dispute between the company and another party.
We reported last year, in our Focus: Arbitrability of insolvency related claims, that the High Court of Singapore declined to stay proceedings in favour of an arbitration where the dispute was based on insolvency related claims.
Petroprod Ltd and its four subsidiaries entered into a management agreement with Larsen Oil and Gas Pte Ltd, under which Larsen provided management services to Petroprod. The management agreement referred any disputes to arbitration in Singapore, according to the provisions of the Singapore Arbitration Act (Cap. 10). When Petroprod was placed in liquidation, it commenced proceedings against Larsen, seeking the avoidance of payments that it and its subsidiaries had made on insolvency related grounds.
Justice Tan Lee Meng, in the High Court, held that the public policy underlying the avoidance provisions in the Bankruptcy Act (Cap. 20) 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 appeal, the court considered whether the claims were arbitrable.1 Petroprod's claims, when properly characterised, were avoidance claims under the Singapore insolvency regime. The management agreement was only relevant as evidence that the payments could have been for a legitimate commercial reason.
Regarding the arbitrability of claims by, or against, an insolvent company, the court drew a distinction between:
- claims that arise only upon the onset of insolvency, due to the operation of the insolvency regime; and
- those that stem from a company's pre-insolvency rights and obligations.
The court considered that insolvency/bankruptcy law is an area 'replete with public policy considerations that [are] too important to be settled by parties privately through [arbitration]'. It noted that the focus of avoidance provisions is to 'address situations where value has been subtracted from the insolvent company to the detriment of the general creditors'. Accordingly, it held that courts should treat disputes arising from the operation of the insolvency regime as non-arbitrable, even if the parties have expressly included them in the scope of the arbitration agreement. Where a claim is not arbitrable, a stay of proceedings in favour of arbitration will not be granted.
While the same considerations do not apply to the claims stemming from a company's pre-insolvency rights and obligations, the court considered that a liquidator representing the company's creditors should not be compelled to 'give up its rights to judicial remedies in favour of arbitration'. Accordingly, the court held that an agreement to arbitrate will not be enforceable against a liquidator where the agreement affects the substantive rights of other creditors. However, where the agreement to arbitrate relates only to a prior private dispute between the company and another party, the liquidator will be bound by the arbitration agreement.
Petroprod's claims against Larsen were reliant on the Bankruptcy Act directly and indirectly and, accordingly, only arose as a consequence of Petroprod's and its subsidiaries' insolvency. The court held that the claims were not arbitrable and upheld the High Court's decision refusing to stay the proceedings in favour of arbitration.
The court's decision affirms the position that claims arising from the insolvency regime are not arbitrable. This is founded on public policy and accords with the domestic laws in many other jurisdictions, which similarly reserve jurisdiction over insolvency disputes to the local courts.
- Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore)  SGCA 21.
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