Background
 
The Federal Court appeal in V Medical Services M Sdn Bhd v Swissray Asia Healthcare Co Ltd (Civil Appeal No. 02(f)-1-02/2024(W)) concerned the legal question of whether a company facing a winding up petition, where the debt in question is governed by an arbitration agreement, should be granted a Fortuna injunction to restrain the petition. The core issue was the applicable threshold test to be applied in determining the above issue - the lower standard articulated in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 (“Salford”) or the higher conventional test applied in insolvency proceedings requiring a “genuine dispute on substantial grounds” over the debt (see Stonegate Securities Ltd v Gregory [1980] 1 All ER 241).
 
V Medical Services (M) Sdn Bhd (“Company”) sought an injunction against Swissray Asia Healthcare Co Ltd (“Swissray”) from commencing a winding up petition against the Company, arguing that the debt was disputed and fell within an arbitration clause in the agreement governing the transaction between the parties. The High Court granted the injunction following Salford, but the Court of Appeal overturned this decision and set aside the injunction granted by the High Court. The matter was then brought before the Federal Court.
 
The emergence of Sian
 
Two weeks after the Court of Appeal’s decision, the Privy Council in Sian Participation Corp (in liquidation) v Halimeda International Ltd (Virgin Islands)¹ [2024] UKPC 16 (“Sian”) held that Salford was wrongly decided.
 
In Sian, the appellant borrowed USD140 million under a Facility Agreement with an arbitration clause. Upon default, it disputed liability, citing a cross-claim involving a state-backed corporate raid. The respondent sought liquidation in the British Virgin Islands (“BVI”) courts, which found no “genuine and substantial” dispute over the debt and appointed liquidators.
 
The Privy Council explicitly overruled Salford, reaffirming that the correct (and higher threshold) test to be applied to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement or an exclusive jurisdiction clause and is said to be disputed, is whether the debt is disputed on genuine and substantial grounds.
 
While overturning Salford, the Privy Council upheld its reasoning that a liquidation petition does not trigger a mandatory arbitration stay, as it does not seek to determine the existence or amount of the debt but simply initiates insolvency proceedings.
 
This decision clarifies the law for both the BVI and England and Wales, ensuring liquidation can proceed where no substantial dispute exist.²
 
Key Issue before the Federal Court
 
The key issue for determination by the Federal Court was whether the appropriate test to apply in granting a Fortuna injunction or deciding to stay or dismiss winding up proceedings when the disputed debt falls under the scope of an arbitration agreement, is a lower threshold test, where a mere existence of a dispute subject to arbitration suffices, or a higher threshold test, requiring a genuinely disputed debt on substantial grounds, should be applied.
 
Decision of the Federal Court
 
The Federal Court endorsed the decision of the Privy Council in Sian and affirmed the higher threshold test for disputes involving arbitration clauses in winding up petitions. The Federal Court reasoned that the arbitration regime under the Arbitration Act 2005 (“AA”) and the insolvency regime under the Companies Act 2016 (“CA”) serve distinctly different legislative purposes and thus should not be conflated.
 
In arriving at this decision, the Federal Court considered approaches from several jurisdictions. In Singapore, the courts have consistently applied the Salford standard, favouring arbitration. In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, the Singapore Court of Appeal reaffirmed that winding up proceedings should generally be stayed or dismissed if there is a prima facie dispute subject to arbitration. In BDG v BDH [2016] 5 SLR 997, it was reasoned that ensuring adherence to arbitration agreements outweighed insolvency concerns, unless the petition was being used abusively. The Singapore High Court in Sapura Fabrication Sdn Bhd v GAS [2024] SGHC 241 followed this approach, distinguishing Sian by emphasising that arbitration clauses in international contracts must be given full effect.
 
The Hong Kong courts initially followed Salford in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (Lasmos), requiring the debtor company to initiate arbitration for the petition to be dismissed. However, subsequently, the Hong Kong Court of Appeal in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 expressed reservations on the Salford approach, whilst the High Court in Dayang (HK) Marine Shipping Co. Limited v Asia Master Logistics Limited [2020] HKCFI emphasised the retention of the higher threshold test.³
 
In BVI, the Jinpeng Group Ltd v Peak Hotels and Resorts Ltd BVIHCMAP2014/0025 (8 December 2015) (“Jinpeng”) case reaffirmed the orthodox approach, requiring a genuine dispute on substantial grounds before a winding up petition could be stayed or dismissed. However, a lower court in Rangercroft Ltd v Lenox International Holdings Ltd (BVIHC (Com) 2015/0089) distinguished Jinpeng and applied a lower threshold in granting a stay.
 
In adopting Sian, the Federal Court rejected the automatic application of a lower threshold in Salford merely due to the presence of an arbitration clause. The conventional test in insolvency proceedings should remain applicable, meaning that a winding up petition will only be stayed if the debtor can show that the debt is genuinely disputed on substantial grounds. According to the Federal Court:
 
“The AA does not purport to extend its reach to the insolvency provisions under the CA. Its provisions ought not to be invoked or incorporated into the exercise of discretion by the Companies Court in determining whether to grant a Fortuna injunction, or stay, dismiss or allow a winding up petition. Any such step would be contrary to the purpose and object of the respective statutes. It follows that the legislative intent of the AA, in like manner, cannot be extended from, or incorporated into, the CA. In short neither the mandatory stay provisions in section 10 of the AA nor the legislative intent underlying the AA may be invoked in the Companies Court when the latter is determining whether to allow, stay, restrain or dismiss a winding up petition.”
 
The Federal Court noted that arbitration aims to uphold party autonomy, ensuring disputes between contracting parties are resolved according to their agreement, while insolvency proceedings serve a collective public interest, protecting unsecured creditors by ensuring orderly distribution of an insolvent company's assets. The Federal Court further emphasised that the winding up process is not intended to adjudicate or resolve the specific disputes forming the basis of the underlying debt but rather to ascertain the financial status of the company for the collective benefit of creditors. The Federal Court added that there would be potential inequities if different standards are applied to different winding up petitions based on the existence or absence of an arbitration agreement.
 
Applying the higher threshold test to the instant case, the Federal Court examined the evidence, including fresh evidence admitted at this appellate stage, and concluded that there were genuine and substantial grounds for the Company to dispute the debt claimed by Swissray. There was demonstrated uncertainty regarding whether the transaction was an outright sale or subject to additional conditions.
 
The absence of a clear acknowledgment of liability further reinforced the existence of a bona fide dispute, as there were no acknowledgements or admissions of a debt in the sum of USD$158,413.75 claimed in the statutory demand. Instead, the acknowledgements by the Company related to payment of the deposit of the two medical devices, which is a far lesser sum than the full purchase price specified in the statutory demand.
 
On this basis, the Federal Court unanimously found that the debt was genuinely disputed on substantial grounds. Accordingly, the Fortuna injunction granted by the High Court was reinstated, effectively restraining the winding up proceedings and allowing the dispute to proceed to arbitration.
 
Conclusion
 
The Federal Court’s rejection of Salford aligns the Malaysian legal position with the higher threshold test adopted by the Privy Council in Sian in relation to a winding up petition arising from a debt that is governed by an arbitration agreement. It reaffirms that while arbitration agreements are binding, they do not bar creditors from pursuing insolvency proceedings unless the debt is genuinely disputed on substantial grounds. This ruling aligns Malaysia with jurisdictions like the BVI, and England and Wales⁴, ensuring arbitration does not override insolvency law.
 
The decision emphasises that Companies Court discretion remains key in assessing solvency and that arbitration clauses cannot shield companies from legitimate winding-up actions. Insolvency law serves a distinct purpose and should not be undermined by arbitration agreements used as tactical delays. This judgment upholds the integrity of insolvency legislation, protecting creditors from misuse of arbitration in insolvency proceedings.
 
Case Note by Victoria Low (Associate) of the Dispute Resolution Practice of Skrine.
 

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