When a company in financial distress encounters an arbitration clause, two legal worlds collide. Arbitration upholds party autonomy and the sanctity of contractual promises, providing a private, neutral, and efficient forum for dispute resolution. Insolvency law, by contrast, asserts collective control under judicial supervision, ensuring that assets are preserved and distributed equitably among creditors.
 
The friction between these regimes raises a recurring and difficult question: when private contracts collide with collective processes, which gives way?
 
The answer depends on the stage of the insolvency process.

 

 
A winding-up petition premised on a debt subject to an arbitration agreement raises an immediate jurisdictional tension. Should the Court proceed to determine if the debt is bona fide disputed on substantial grounds, or must it yield to arbitration?
 
In V Medical Services v Swissray Asia Ltd [2025] 2 MLJ 744, the Federal Court considered what is the correct test for granting a Fortuna injunction when the disputed debt arises under a contract containing an arbitration clause:

The Federal Court held that the higher threshold of bona fide dispute on substantial grounds test applies. In applying this test, the Court considered whether the debt is a genuine debt premised on substantial grounds or whether it is simply an abuse of process calculated to derail or stifle the arbitration process that the parties had agreed to abide by at the outset of their relationship.  
 
In the Privy Council case of Sian Participation Corp (in liquidation) v Halimeda International Ltd [2025] 1 All ER 596, the Court held that none of the objectives of arbitration - efficiency, party autonomy, non-interference by courts, were offended by allowing a winding up where a creditor’s unpaid debt is not genuinely disputed on substantial grounds.
 

 
When a company is under a restraining order or scheme moratorium, the statutory 'breathing space' purpose comes to the fore. The question becomes whether arbitration proceedings may commence or continue during this period.
 
In Re Top Builders Capital Bhd [2021] 10 MLJ 327, the High Court stated that leave to proceed may only be granted in exceptional circumstances, a principle echoed in Sapura Energy Bhd & Ors v Tecnimonthqc Son Bhd [2023] MLJU 124. The rationale is simple, the moratorium is designed to protect the restructuring process from fragmentation by individual enforcement actions, including arbitral claims. The court’s overriding concern is the preservation of the company’s assets and the maintenance of an orderly process for satisfying creditors.
 
Permission to proceed with arbitration proceedings risks diverting time, resources, and management attention away from the collective objective of rehabilitation.
 
However, a different balance was struck by the Singapore Court of Appeal in Sapura Fabrication & Ors v GAS (2025) SGCA 13, where the court permitted arbitration to proceed where it would not undermine the collective process.
 
In Sapura Fabrication, the Sapura Group underwent multiple restructuring proceedings in Malaysia, each supported by moratoria. These proceedings were recognized in Singapore as “foreign main proceedings” under the UNCITRAL Model Law on Cross-Border Insolvency which has been implemented into Singapore law.
 
The Court found that the arbitration claims were highly complex, fact-heavy, and legally intricate and were unsuitable for a proof of debt adjudication. The Court placed a condition upon the leave to proceed with arbitration that there would be no enforcement of the arbitration decision without leave.
 
The High Court in Re Millennium Mall Sdn Bhd (Low Yew Guan & Ors, Proposed Interveners) [2025] MLJU 2598 dealt with the issue of whether the proposed interveners should be granted leave to resume existing court actions against the applicant. Whilst this case does not deal with parties’ involvement in arbitration proceedings, the High Court considered the test for the grant of leave in both Re Top Builders Capital Bhd and Sapura Fabrication. The High Court adopted the test of ‘exceptional circumstances’ in Re Top Builders Capital Bhd and held that the burden is on the applicant to show the ‘exceptional circumstances’ for such leave to be granted.
 

 
Once a winding-up order is made, the focus shifts to the proof of debt process. Can disputes still be referred to arbitration at this stage?
 
The distinction lies between pure debt disputes which remain arbitrable and core insolvency matters which fall within the exclusive domain of the liquidation process. If the issue concerns the validity or quantum of a contractual claim, an arbitral tribunal may still determine it, subject to the liquidator’s control and insolvency set-off rules. However, questions such as the setting aside of preferences or disclaimers of onerous contracts are quintessentially insolvency matters reserved for the court.¹
 

 
The guiding principle where possible should be coexistence, not displacement. Arbitration remains a critical mechanism for resolving private commercial disputes, even when one party is in distress. At the same time, insolvency law’s collective framework ensures that no single creditor gains an advantage.
 
Courts across jurisdictions are increasingly seeking to balance these objectives by giving effect to arbitration agreements where possible, but always mindful of the collective interest that insolvency law protects. After all, the purpose and effect of arbitration and insolvency are distinct, and ought not to be conflated with one another.
 

 
The intersection of arbitration and insolvency continues to evolve as the Cross-Border Insolvency Bill 2025 awaits Royal Assent. The Bill adopts the UNCITRAL Model Law on Cross-Border Insolvency and will be Malaysia’s new framework for recognizing and cooperating with foreign insolvency proceedings, granting automatic stays, and enhanced court-to-court cooperation. These mechanisms will inevitably affect the commencement, continuation, and enforcement of arbitral proceedings involving insolvent or restructuring debtors.
 
For practitioners, the key to navigating the intersection between these two worlds lies in timing and strategy: whether to arbitrate, seek leave, or participate in the collective process.  As Malaysian Courts begin to interpret the new regime it will be important to stay alert to how cross- border insolvency tools may shape the arbitral landscape.
 
Article by Louise Azmi (Partner) and Latifa Haiqa Yusoff (Associate) of the Dispute Resolution Practice of Skrine.
 
 

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