THE AUTHORS:
Divyansha Agrawal, Independent Legal Practitioner
Ananya Pratap Singh, Advocate & Arbitrator
The issue of conflict between arbitration and insolvency proceedings has previously been discussed in several forums. There are generally two types of insolvency proceedings that can affect the enforceability of the arbitration agreement, namely, liquidation or winding up, and restructuring. In this piece, we will examine the enforceability of an arbitration agreement during a restructuring proceeding, in light of the recent decision by the Singapore Court of Appeal (“SCOA”) in Sapura Fabrication Sdn Bhd and others and GAS and another (“Sapura Fabrication”). We will also look at the practices in India and the UK for a comparative analysis.
Sapura Fabrication and the Singaporean Practice
In this case, GAS, a relatively small creditor of Sdn Bhd and Sapura Offshore Sdn Bhd (“Appellant”) was granted a carve-out in favour of arbitration by the Singapore High Court (“SHC”) while restructuring proceedings were pending against the Appellant before the Malaysian High Court. This was allowed by SHC on two grounds:
- Discretionary Ground;
- Mandatory Ground.
For Discretionary Ground, SHC applied the test enunciated in Wang Aifeng v Sunmax Global Capital Fund 1 Pte Ltd (“Wang Aifeng”). According to this test, while exercising its discretion to allow or not to allow a carve-out in favour of arbitration vis-à-vis ongoing bankruptcy proceeding, certain essential factors are to be considered by a court which includes:
- Carve-out application’s timing;
- Nature of claim of the creditor seeking such carve-out;
- Existing remedies available to such creditor;
- Merits of its claim;
- Any adverse effect on other creditors or restructuring proceedings; and o
- Other miscellaneous factors, such as the opening of floodgates of litigation, the cost implications on the debtor company, and the opinion of its majority creditors.
For Mandatory Ground, SHC found itself to oblige the pro-arbitration approach of Singapore’s courts and held that even if its exercise of discretion is inappropriate, it is nevertheless bound by this approach, favouring direct parties to arbitration when a valid arbitration agreement exists between the parties and the dispute falls within its scope. For this purpose, SHC relied on AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) (“AnAn”).
The Appellant appealed to SCOA, which, inter alia, upheld the decision of SHC on Discretionary Ground while disagreeing with the approach adopted in deciding the Mandatory Ground on the given facts of the case. It is relevant to mention that, as an ancillary argument, the correctness of AnAn was questioned in light of the recent judgment of the Privy Council in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 (“Sian”). However, as elaborated later in this piece, SCOA refused to take on that exercise, concluding that AnAn still holds to be a good law.
On the Discretionary Ground, the Appellant urged that Wang Aifeng is not the proper test to decide such carve-out applications. On this ground, SCOA inter alia observed that while deciding a carve-out application, the court must base its discretion considering the rationale of the moratorium in restructuring proceedings. It further noted that such moratorium is intended to provide the debtor company with “breathing space” to reorganise its affairs and propose a restructuring plan. While SCOA recognised that restructuring proceedings are inherently unitary in nature, it also acknowledged that the law permits judicial discretion to carve-out specific claims in appropriate cases. The test in Wang Aifeng relies on specific andnon-exhaustive markers which precisely guides the court while exercising this discretion.
While testing the facts of the case from the touchstone of Wang Aifeng factors, the SCOA concurred with SHC that the complex nature of the claims in the present dispute is better suited for arbitration as adjudication of these claims is likely to require witness testimonies especially in comparison with restructuring proceeding where GAS’s proof of debts remained unadjudicated for more than two years.
Pertinently, the SCOA concluded that allowing the carve-out would not unduly prejudice other creditors as GAS’s claim was comparatively a small fraction of the overall debt of the Appellant, and in terms of timely adjudication, the Appellant could not reasonably expect GAS to wait indefinitely for its claim to be adjudicated. In any case, in SCOA’s view, any potential prejudice to the other creditors could be mitigated by imposing a condition that the award, if any, may not be enforced in any jurisdiction without prior leave of the SHC.
On the Mandatory Ground, the SCOA factually distinguished the present case from AnAn where the SCOA inter alia held that when a court faces a disputed debt covered by an arbitration agreement, the prima facie standard should apply. This means that the winding-up proceedings will be stayed or dismissed as long as a valid arbitration agreement exists and the dispute falls within its scope, provided that the dispute is not being raised by the debtor to abuse the court’s process. SCOA ultimately held that SHC’s decision on Mandatory Ground was incorrect and, in its present form, it would significantly reduce the effectiveness of a moratorium while also undermining the rationale behind it.
Thus, the SCOA has carried out a balancing activity while leaving the ultimate decision to be determined based on the facts and circumstances of each case.
Analysis
The decision in Sapura is a significant one, as it balances the policy concerns related to both the promotion of arbitration and the protection of insolvency proceedings. Notably, the SCOA makes an important distinction between “winding up”, “liquidation”, and “restructuring” and acknowledges that the enforceability of arbitration agreements in the context of each may require different treatment. However, in the same breath, the SCOA introduces a carve-out that may arguably risk producing impractical outcomes in practice.
During this process, the debtor company typically invites creditors to submit proofs of debt, which are then reviewed and either admitted, revised, or rejected. As per the restructuring plan, the creditors are generally grouped into separate classes. The restructuring plan may cap the liability of different classes of creditors to an allocated sum and propose a distribution formula. If a creditor is allowed a carve-out from moratorium and obtains a higher award through arbitration, they are still bound by the restructuring terms and cannot recover more than their pro-rata entitlement under the plan. While arbitral awards may clarify the nature and scope of claims, the issue of quantum remains subject to restructuring plans. Moreover, the award creditor would not ordinarily be entitled to enforce its claims ahead of other creditors until the proof of debt process is completed and the final restructuring plan is approved. Thus, even if allowed, in reality neither of the parties is likely to benefit from an arbitral award on this matter.
The SCOA has allowed carve-out to arbitration based on the quantum of claim, which the SCOA has found to be minuscule. This could potentially open the floodgates to carve-out applications by similarly situated creditors who may individually have small claims, but whose cumulative impact on the debtor company’s overall pool of assets can be substantial. This may well impact the organisation of the overall estate of the debtor company, triggering a cascading effect on the claims of other creditors who may not have the option of pursuing claims in arbitration against the debtor company.
The SCOA also put a significant weightage on the argument that the creditor cannot be allowed to wait indefinitely for its claim to be adjudicated through the “proof of debt” regime. Insolvency proceedings (winding up, liquidation, or restructuring) are inherently time-consuming, as the debtor company typically navigates financial distress and must carefully assess its assets and liabilities in relation to various classes of creditors. If the time taken in adjudication is to be taken as one of the benchmarks to decide in favour of arbitration as against insolvency proceedings, then in most cases, the former will always have an upper hand on the latter, the reason being that arbitration is, in most jurisdictions, an expedited mode of resolving disputes.
Conclusion
Courts around the world generally do not take a straight-jacket approach in determining the impact of insolvency on the enforcement of arbitration agreements. Some courts appear to be moving away from the view that arbitration must be mandatorily commenced when there is an agreement to arbitrate, even in the context of insolvency proceedings. This shift is evident in the English Privy Council’s decision in Sian, which was also highlighted before the SCOA in Sapura. The SCOA was urged to revisit its earlier decision in AnAn. However, since it distinguished the facts of the present case from AnAn, it did not reconsider AnAn in light of Sian. Such a reassessment would be noteworthy, especially given that the Singapore courts have previously followed the English approach on this issue as set out in Salford Estates (No 2) v Altomart Ltd (“Salford”). In Salford, the English Court of Appeal decided that so long as there is a prima facie dispute that was subject to an arbitration agreement, and there were no indications that issues were not raised bona fide, the court should grant an injunction to restrain winding up proceedings, a position which has now been overturned by Sian. In Peace River v. Petrowest, the Canadian court has gone as far as to consider an arbitration agreement becoming “null and void, inoperative or incapable of being performed” once the insolvency proceeding has been initiated. Then there are Indian courts which, without specifically referring to, align with the position taken by the Privy Council in Sian.
What is clear is that the Courts are now favouring a more nuanced approach towards the enforcement of arbitration agreements. In case of restructuring, as noted by the SCOA, moratorium provides a “breathing space” to the debtor company to apply its mind effectively and structure the most suitable payout plan to its creditors. Moratorium is also aimed at preventing a race to courtrooms and encouraging collective negotiations between different pools of creditors and the debtor company. Therefore, if one creditor is allowed a carve-out to arbitrate its dispute, it gains an undue leverage to distort the restructuring plan by increasing uncertainty about the debtor’s liabilities. This could be contrary to the collective insolvency regime’s goal of maximising value and fairness for all creditors.
We tend to agree with the case-by-case enforcement of the arbitration agreement in light of insolvency proceedings, as encouraged by the SCOA, given that complex legal and commercial problems often require equally complex and context-sensitive solutions. In our view, insolvency and arbitration are not inherently conflicting regimes, as is sometimes portrayed in comparative discourse. Rather, when applied harmoniously, they can contribute to achieving the most efficient and equitable outcomes for the creditor body as a whole. Therefore, while the legal and policy implications of carve-outs remain to be fully understood, their practical impact on restructuring proceedings, particularly with respect to creditor equality and the preservation of value, merits careful consideration based on the peculiar facts of each case.
ABOUT THE AUTHORS
Divyansha Agrawal is a practising lawyer with a cross-border commercial practice spanning India and the GCC region. She recently completed her Master’s in Transnational Arbitration and Dispute Settlement from Sciences Po Law School, Paris, and holds a B.A. LL.B. (Hons.) from Jindal Global Law School, India. Her work focuses on international arbitration, transnational litigation, and private international law. She has previously trained with international law firms and arbitral institutions and is particularly interested in the intersection of procedural law and cross-border dispute resolution.
Ananya Pratap Singh is an Advocate, Arbitrator, and Academician currently based in New Delhi, India. He is an esteemed member of the Chartered Institute of Arbitrators (CIArb) and the Singapore Institute of Arbitrators (SIArb). His areas of practice include International Commercial Arbitration, International Dispute Settlement, Adjudication, Security & Insolvency Law, and Commercial Contracts. In addition to his legal practice, he regularly contributes to legal blogs, articles, and case commentaries, particularly in the field of International Commercial Arbitration.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
