Court of Appeal : Arbitration Agreement Survives Liquidation

In Peninsula Education (Setia Alam) Sdn Bhd v Biaxis (M) Sdn Bhd (In Liquidation) (Civil Appeal No.: B-02(IM)(C)-1834-11/2023) (Peninsula Education), the Court of Appeal took the opportunity to underline the resilience of an arbitration agreement, namely that it would survive and remain operative despite one of the contracting parties entering into liquidation.
 
In Peninsula Education, the Respondent was appointed by the Appellant as the contractor for a construction project pursuant to a standard form PAM contract containing an arbitration agreement. During the pendency of the construction project, the Respondent entered into liquidation. Pursuant to the terms of the PAM contract, the employment of the Respondent was automatically terminated. The Respondent commenced legal proceedings against the Appellant to recover sums it was allegedly owed pursuant to several interim payment certificates. The Appellant responded by applying for a stay of proceedings pending arbitration pursuant to section 10 of the Arbitration Act 2005 (“AA 2005).
 
The Respondent contended, among others, that the arbitration agreement had become inoperative upon the liquidation. On the other hand, the Appellant argued that the arbitration agreement remained intact and subsisting and liquidation does not alter the pre-agreed mode of resolving the parties’ disputes via arbitration.
 
The Decision of the High Court
 
Having considered cases from various other jurisdictions, the High Court held that the arbitration agreement had become inoperative and dismissed the Appellant’s application for a stay under section 10 of the AA 2005. In coming to this decision, the High Court placed reliance on a decision of the Canadian Supreme Court in Peace River Hydro Partners v Petrowest Corp [2022] SCJ No. 41 (Peace River), where it was held that the arbitration agreement in that case had been rendered inoperative where arbitration would compromise the orderly and efficient resolution of a receivership. The High Court also held that a party in liquidation is subject to insolvency protection and as such, the arbitration agreement became inoperative on the grounds that to allow recourse to arbitration would prejudice the interests of the creditors and shareholders of the liquidated company. Among others, the High Court considered the prohibitive costs of arbitration that a company in liquidation would have to surmount.
 
Aggrieved by the High Court’s decision, the Appellant appealed to the Court of Appeal.
 
The Court of Appeal’s Decision
 
The issues to be determined by the Court of Appeal were as follows: 
(i) Issue 1:Whether the liquidation of the [Respondent] renders the arbitration agreement inoperative having regard to the acute factor of costs and efficiency in resolving the matter”;
(ii) Issue 2: Whether the insolvency regime takes precedence over the arbitration agreement such that all disputes must now be resolved in the Courts…”;
(iii) Issue 3: Whether there are issues pending which require resolution by an Insolvency Court as these are non-arbitrable; and
(iv) Issue 4: Whether in spite of the arbitration agreement the Court may have regard to prohibitive costs of arbitration in refusing a stay under s 10 [of the AA 2005] when the party suing is in liquidation. 
Issue 1: Whether the liquidation of the Respondent renders the arbitration agreement inoperative
 
The Court of Appeal answered this in the negative by relying on, among others, sections 18(1) and (2) of the AA 2005, which reflect the doctrine of separability of an arbitration agreement. The doctrine of separability treats an arbitration agreement in a contract as a separate self-contained agreement, independent of the other terms of the contract. Therefore, even though a winding up of a company may have the effect of terminating agreements which the liquidator may not want to affirm and continue with, this does not render the arbitration agreement in itself inoperative.
 
The Court of Appeal disagreed with the High Court’s interpretation of Peace River, stating that the decision in the case was context specific and based on policy grounds. This is because the subject company in Peace River and its affiliates had various subcontracting agreements with Peace River, wherein the arbitration agreements contained therein differed in their wording, while some did not even contain arbitration agreements. According to the Canadian Supreme Court, this created a serious risk of conflicting outcomes. Further, the Court of Appeal highlighted that, more importantly, there was an admission by all parties in Peace River that proceedings through the Court would be a more expeditious option.
 
The Court of Appeal emphasised that its decision was in any case consistent with Peace River, where the Canadian Supreme Court held that a party going into receivership or insolvency proceedings or being financially impecunious does not on its own constitute a sufficient basis for the court to find an arbitration agreement inoperative. The Canadian Supreme Court emphasised that it was the peculiar circumstances mentioned above which justified departing from the legislative and judicial preference of holding parties to their arbitration agreements in this case.
 
Issue 2: Whether the insolvency regime takes precedence over the arbitration agreement
 
The Court of Appeal found this issue to be irrelevant and emphasised that an insolvency or winding-up petition is not a ‘matter’ which is the subject of an arbitration agreement and is therefore not within the meaning of ‘matter’ in section 10(1) AA 2005.1 The Court of Appeal explained that the issue raised in a winding-up petition is whether a sum claimed for example by the Contractor is a sum that is not bona fide or genuinely disputed and on substantial ground. Where there is no bona fide dispute and the presumption of inability to pay debts is not rebutted, then the company would be wound up. Where the debt is disputed on a bona fide and substantial ground, the winding-up Court does not proceed to decide whether the debt is owing and if so, how much. That falls under the purview of matter in the context of section 10 of the AA 2005, where arbitration will prevail as the means of dispute resolution.
 
In response to the Respondent’s argument that there was no serious dispute on the debt owed to it, the Court of Appeal highlighted the mandatory nature of section 10 of the AA 2005, where a stay “shall be granted where the matter in dispute is subject to an arbitration agreement. The Court of Appeal emphasised the consistent position of the courts that it does not need to delve into the matter to determine if there is a genuine dispute to be referred to arbitration, only whether it fell within the scope of the arbitration agreement. The Court of Appeal highlighted that prior to 2011, the court would not stay proceedings in favour of arbitration if it found “that there is in fact no dispute between the parties with regard to the matters to be referred” under paragraph 10(1)(b) of the AA 2005. However, paragraph (b) had been completely repealed when the Arbitration (Amendment) Act 2011 came into operation.
 
Issue 3: Whether there are issues pending which require resolution by an Insolvency Court as these are non-arbitrable
 
The Court of Appeal answered this in the negative, as the present dispute is a pre-insolvency matter and not an insolvency dispute which requires the Courts determination under the Companies Act 2016 where Parliament had carved out these issues from arbitration and made it non-arbitrable as a matter of public policy under section 4 of the AA 2005.2
 
Issue 4: Whether the Court may have regard to prohibitive costs of arbitration in deciding a stay pending application when a party is in liquidation
 
The Court of Appeal answered this in the negative and highlighted that the option was available to the parties to carry out the arbitration in a cost-effective manner. It is not sufficient for the Respondent to merely say that the arbitration process would be, among others, slow and expensive and holding up distribution to creditors as a ground to render the arbitration agreement inoperative. The Court of Appeal further emphasised that the benefits of party autonomy, confidentiality, speed and finality would be what parties generally subscribe to when they agree to arbitrate rather than litigate” and that the Courts would give primacy to upholding freedom of contract and lean in favour of non-interference in arbitration matters.
 
Accordingly, the Court of Appeal allowed the appeal, finding that the arbitration agreement did not become automatically inoperative upon the Respondent going into liquidation. Here, as the debt claimed was disputed, the dispute was one which was arbitrable in accordance with the intention of the parties.
 
Comments
 
With this decision, the Court of Appeal has made it clear that, in accordance with the doctrine of separability, an arbitration agreement survives the liquidation of a company. Although the Court of Appeal acknowledged that this is an issue that would have to be dealt with on a case-by-case basis, this decision highlights that merely because a company is undergoing insolvency proceedings or financially impecunious, this does not, on its own, render an arbitration agreement inoperative.
 
Case Note by Rachel Ang (Associate) of the Dispute Resolution Practice of Skrine.
 
 
 

1 Section 10(1) of the AA 2005 provides that, “A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
2 See section 486 read with Part I and Part II of the Twelfth Schedule and section 517 of the Companies Act 2016.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.