Singapore Court of Appeal: When can an Arbitration Agreement be enforced against a Party which is undergoing Insolvency?
In Sapura Fabrication Sdn Bhd v GAS [2025] SGCA 13, the Singapore Court of Appeal decided the issue of whether arbitration can be invoked against a creditor company which is undergoing restructuring / insolvency in another jurisdiction despite there being a moratorium on initiation of any proceedings against such company. While deciding this issue, the Court of Appeal draw a balance between the referral court’s duty to refer the disputes of parties to arbitration when there exists a valid arbitration agreement between the parties at the same time giving due consideration to the moratorium imposed on initiation of proceedings against the creditor during restructuring / insolvency proceedings to provide a breather to such creditor company to restructure its debts. This judgment paves way to resolve the conflict between arbitration and insolvency proceedings which has recently seen a rise in commercial world.
Factual Matrix
In the facts of the case, Sapura Fabrication Sdn Bhd and Sapura Offshore Sdn Bhd (Sapura Companies / Appellants), Malaysian companies, were engaged in restructuring proceedings in Malaysia. Resultantly, they applied to the Malaysian High Court seeking stay of all proceedings against them (moratorium) and permission to convene meeting of their creditors. This was allowed by the Malaysian High Court. Accordingly, creditors were asked to file their proof of debts. The Respondents, GAS, was one of the creditors of the Appellant who also filed their claims.
Separately, Sapura Companies filed proceedings in Singapore relying on the moratorium granted by the Malaysian High Court and seeking recognition of Malaysian restructuring proceedings in Singapore and inturn the moratorium. This was allowed by the Singaporean High Court.
It appears that as per Malaysian law, the moratorium can be in effect only for 12 months. Therefore, the Appellant filed another similar moratorium application in Malaysia which was allowed (Second Moratorium). Basis this, Sapura Companies again filed a similar application before the Singaporean High Court which was allowed as well.
While the Second Moratorium was in effect, GAS invoked a Singapore seated arbitration against Sapura Companies before SIAC for the similar claims it had filed proof in the restructuring proceedings of Sapura Companies.
As the 12 months period of the Second Moratorium was about to expire, Sapura Companies filed another application before the Malaysian High Court seeking another moratorium (Third Moratorium) which was again allowed. Like on previous occasion, Sapura Companies filed for similar protection in Singapore. This time, GAS contested this move of Sapura Companies before the Singapore High Court seeking a ‘carve out’ of moratorium in favour of arbitration which has been invoked by GAS against Sapura Companies in Singapore.
The Singapore High Court granted this carve-out of moratorium in favour of arbitration. This was primarily based on two grounds i.e., Discretionary Ground & Mandatory Ground. The Discretionary Ground involved application of a test to be applied in such circumstances promulgated by the Singapore High Court in Wang Aifeng v Sunmax Global Capital Fund 1 Pte Ltd and another [2023] 3 SLR 1604 (Wang Aifeng).
This test involves consideration of factors like timing of the application for a carve-out, nature of the claim of the party seeking carve-out, existing remedies of such party, merits of the claim, the existence of prejudice to the other creditors or to the orderly administration of the restructuring proceedings and other miscellaneous factors such as the potential of an avalanche of litigation being unleashed by the grant of permission, the proportionality of the cost of the proceeding to the scheme creditor company’s resources, and the views of the majority creditors (‘Wang Aifeng factors’).
The Singapore High Court also allowed this carve-out application based on Mandatory Ground which was based on the Singapore court’s mandatory obligation to enforce the arbitration agreements on a party’s request if the arbitration agreement is valid and the dispute between the parties fell within its scope. For this, the High Court relied on Court of Appeal’s decision in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158 (“AnAn”)
Sapura Companies appealed against this decision before the Singapore Court of Appeal which was decided in the present proceedings. It is pertinent to mention that at the close of the hearing before the Court of Appeal, parties settled their dispute and Sapura Companies withdrew its appeal. Yet, given the issues involved in the case were legal points of general interest and significance, the Court of Appeal proceeded with deciding the question of law in the public interest.
Issues before the Court of Appeal
The main issues before the Court of Appeal were two-fold i.e.,:-
- Whether the Singapore High Court erred in the exercise of his discretion in granting a carve-out for the arbitration proceedings; and
- Whether the court is under a mandatory obligation to grant a carve-out to enforce the arbitration agreements.
Parties Contention
Discretionary Ground
As per Sapura Companies, the Singapore High Court, while exercising its discretion in deciding carve-out application should have applied “exceptional circumstances” standard as propounded by Malaysian High Court decision in Re Top Builders Capital Bhd & Ors [2021] 10 MLJ 327. This test provides that where the debtor company had obtained a moratorium, a creditor would be granted permission to continue or commence court or arbitration proceedings only in “exceptional circumstances”. The underlying rationale for this standard is that a scheme proceeding is time-sensitive and seeks to revive the financially distressed company as a going concern. Therefore, the public interest of benefitting the many ought to outweigh the interests of the individual creditor.
Even otherwise, as per Sapura Companies, the Singapore High Court has wrongly applied the test provided in its own judgment of Wang Aifeng. According to Sapura Companies, the claims referred to arbitration are capable of being resolved under the scheme adjudication process as the proof of debt processes adopted in restructuring process were robust and the adjudication process provided thereunder are modelled after those approved in the English cases of Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch) (Re Lehman Brothers) and Re Noble Group Ltd and another (No 2) [2019] 2 BCLC 548 (Re Noble Group (No 2).
They further argued that the grant of a carve-out would be prejudicial to them as allowing the arbitration to proceed will cause the Sapura Companies to incur substantial time and costs on the arbitration. It would further lead to other creditors seeking similar carveouts, which could cause the Sapura Companies to be subject to a deluge of claims by other creditors, adversely impacting the restructuring process.
Finally Sapura Companies argued that Singapore High Court has not afforded due deference to the principle of comity by not attaching sufficient weight to the Malaysian court’s prior decision in Sapura Energy Bhd & Ors v Tecnimonthqc Sdn Bhd [2023] MLJU 124 (Tecnimonthqc), where another scheme creditor was denied leave to commence arbitration proceedings against other entities in the Sapura Group.
Per contra, GAS denied that “exceptional circumstances” standard should be applied in this case as it is very vague. As per GAS, Wang Aifeng factors were rightly considered by Singapore High Court. Further GAS contended that comity are broad principles and do not by themselves form standalone principles or substantive rules in insolvency law.
Mandatory Ground
According to Sapura Companies, the decision of AnAnwas not applicable in this case as AnAn was a case dealing with pre-insolvency rights and the anterior question whether a debtor should be placed in the insolvency process.
Relying on Ontario Superior Court of Justice in The Attorney General of Canada v Reliance Insurance Co (2007) 87 OR (3d) 42 (Reliance) they further argued that while a moratorium is in place, all arbitration agreements are ipso facto rendered “inoperative” or “incapable of being performed.
In response, GAS supported the decision of High Court. GAS highlighted that the decision in Reliance is no longer the most recent word on the Canadian position on the effect of moratoria on arbitration agreements, as the position has since been qualified by the Supreme Court of Canada in Peace River Hydro Partners v Petrowest Corp [2022] SCJ No 41 (Peace River). In any case, GAS disagreed with the positions taken the Canadian courts on the basis that it would detract from the policy of enforcing international arbitration agreements as a matter of right and not discretion, said to be embodied in Art II of the New York Convention and the Singapore’s International Arbitration Act (IAA).
Observations by the Court of Appeal
The Court of Appeal observed as under:-
- While deciding carve-out application, adopting the “exceptional circumstances” test would not be the right course of action because the test is vague and does not assist the court in determining when and how a creditor may satisfy the threshold of “exceptional circumstances”.
- The wording of the test simply connotes, without more, a broad balancing exercise between two sets of interests, albeit one weighted against a particular outcome.
- In the court’s evaluation of the circumstances of the case, more weight may be given to considerations that directly touch on the rationale for moratorium in restructuring proceedings, i.e., to give a debtor breathing room to put forward a proposal. This allows the court to give effect to the purpose of the moratorium while preserving the court’s flexibility to assess carve-out applications on a case-by-case basis.
- In determining whether to grant a carve-out from a moratorium arising from restructuring proceedings, the starting position remains that the restructuring proceedings are a unitary process for the resolution of the rights involved. However, the law recognises the court’s discretion to allow particular claims to be carved out.
- The court’s discretion remains guided by the Wang Aifeng factors, which are specific, non-exhaustive markers to guide the court in balancing the various considerations and interests involved.
- In the balancing process, more weight may be given to considerations touching on the need to give the debtor breathing room to put forward a proposal, such as the existence of prejudice that the carve-out would pose to the general body of creditors (to the extent this is relevant) or to the orderly administration of the restructuring proceedings. Therefore, there are no compelling reasons to adopt the “exceptional circumstances” test.
- The English courts in Re Lehman Brothers and Re Noble Group (No 2) are distinguishable because they concerned the sanction of a scheme and not a carve-out application.
- A moratorium per se does not render all arbitration agreements ipso facto inoperative or incapable of being performed. Allowing a creditor to arbitrate a prior private inter se dispute against the insolvent company does not necessarily undermine the underlying policy aims of the insolvency regime.
- The Canadian court in Reliance also made it clear that, despite the arbitration agreement being inoperative, the court still retained the discretion to consider whether to lift the stay and grant leave for the arbitrations to proceed. Therefore, in the context of a creditor’s carve-out application, the practical benefit of following Reliance is limited since the court would still have to examine the facts in the exercise of its discretion. In any case, Reliance has been qualified by the Supreme Court of Canada in Peace River. The court in Peace River had clarified that while a moratorium would in most circumstances cause an arbitration agreement to cease to have effect for the future, this would not always be the case. Further, the factual matrix of Peace River is the converse of the present context of a carve-out application.
Held
The Court of Appeal applied the Wang Aifeng test which according to the court is satisfied in the following manner:-
ON DISCRETIONARY GROUND
Nature of claim:-
- The complexity of the case and of the dispute is the overriding consideration in deciding the carve-out application in the present case. It directly engages the question whether the claim is of a type that ought to proceed by arbitration rather than the adjudication process. The adjudication of the arbitration claims of GAS would almost certainly require a factually complex exercise of assessing the GAS’s entitlement to terminate the contracts between Sapura Companies and GAS, the consequences of those actions and the relevant remedies. Therefore, such a dispute would be impracticable for an adjudicator appointed in the restructuring proceedings to meaningfully adjudicate.
The Existing Remedies:-
- The factor of existing remedies involves a comparative exercise which examines whether the nature of the claim is such that it can be dealt with adequately within the relevant insolvency regime. In this case, that regime would be the scheme adjudication process. The actual implementation of the adjudication process does not show it is adequate or sufficiently robust for the resolution of the GAS’s arbitration claims. This was because even though more than two years have lapsed since the GAS’s proofs of debt were submitted, they were still not adjudicated. Thus, the length of delay strongly indicates that the scheme adjudication process is not adequate to deal with the GAS’s arbitration claims, which arise out of the same contracts and are similarly (if not more) complex and disputed compared to the GAS’s proofs of debt.
Timing of the application and prejudice to the parties:-
- The factor of prejudice examines whether the grant of a carve-out would cause undue prejudice to the general body of creditors. The factor of prejudice may be given more weight if the grant of the carve-out would cause the debtor company to have insufficient “breathing space” to put forward a restructuring proposal. GAS’s arbitration claims are for more than USD185m in damages, or approximately RM825m. The Sapura Companies are seeking to restructure liabilities of around RM12bn. At best, the GAS’s arbitration claims represent about 6–7% of the total debt.
- Given the small fraction of the claims relative to the overall debt, GAS’s vote on the scheme, either way, would likely be inconsequential to the viability of the scheme. In other words, regardless of whether the court grants a carve-out or not, that decision will have a negligible impact on the scheme. In this sense, the grant of a carve-out does not affect the Sapura Companies’ breathing space to propose an arrangement.
- The only impact of granting the carve-out would be the time and costs that the Sapura Companies would incur in defending the arbitration. It would undoubtedly be more expensive compared to adjudication by way of proof of debt, and therefore might be a strain on the resources of the Sapura Companies. However, this is where the balancing exercise becomes crucial. The Sapura Companies, as debtors, cannot have it both ways. While it is their right to dispute the GAS’s claims, it cannot expect the respondent to wait indefinitely for the claim to be adjudicated. It should not be overlooked that equally a creditor has the right to pursue its claim without undue delay.
- While it cannot be denied that the Sapura Companies would suffer some form of “prejudice” by way of the increased costs for the arbitration, this is the inevitable consequence of their decision to dispute and then delay in adjudicating the respondent’s proofs of debt.
The relevance of comity:-
- The principle of comity does not go as far as to require the Singapore court to decide the present case on a similar basis as the Malaysian court did in Tecnimonthqc.
- The carve-out application in Tecnimonthqc concerned a different dispute between different parties where the Malaysian court applied a different test. In such a context, there is nothing in Singapore’s Insolvency, Restructuring and Dissolution Act 2018 (2020 Rev Ed) (SG Model Law) to indicate that the Singapore court, as the recognising court, ought to follow the approach taken by the Malaysian court.
In view of the above findings, the Court of Appeal held that the Singapore High Court did not err in granting the carve-out application.
ON MANDATORY GROUND
- AnAn does not stand for the proposition that the policy of enforcing arbitration agreements should trump the insolvency regime under all circumstances. As per AnAn, it is only when the debt is established to be due and owing and the debtor company found to be insolvent as a result thereof that the policy interest of the insolvency regime in protecting the general body of creditors becomes relevant. In comparison, the policy concerns of the insolvency regime are strictly engaged in the present context.
- In AnAn, the court was also concerned about the fact that an alleged creditor, who was also a party to an arbitration agreement, could potentially abuse the court’s winding-up jurisdiction by using the winding-up process to bypass the arbitration agreement. Such a risk of abuse is clearly not present when a creditor asserts his rights under an arbitration agreement in a carve-out application, which explains why the Mandatory Ground is not necessary in the present context.
- The implementation of the Mandatory Ground, as envisioned by the Singapore High Court, would significantly reduce the effectiveness of moratorium. A moratorium in the restructuring context is meant to give a company breathing room to put forward a proposal. This purpose would be severely compromised if it could be easily circumvented by the invocation of a prima facie valid arbitration agreement automatically overruling the policy considerations of the insolvency proceeding.
Therefore, the Court of Appeal concluded that High Court’s views as regards the court’s mandatory obligation to grant a carve-out in order to enforce the arbitration agreements should not be followed.