(Mis)Using Arbitration Clauses In Winding-up: Till Death Do Us Apart?

Published date26 January 2021
Subject MatterLitigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution
Law FirmBlackstone & Gold
AuthorMr Baldev Bhinder and Ramandeep Kaur

Non-payment defaults, whether arising from Covid-19 or otherwise have skyrocketed prompting governments across the world to put in place temporary relief legislation to prevent an unprecedented spiral of insolvencies. These measures will eventually come to an end, as it has in Singapore where on 20 October 2020, certain protective measures against commencing insolvency or winding-up proceedings against companies in Singapore were lifted. With insolvency proceedings at their door, debtors will desperately try to hold on to their companies with their fingernails, raising all manner of disputes which can only be adjudicated by the arbitration clause contained in their contracts - a clause they say, binds them and their creditor, till death do them apart. Can a winding-up petition be derailed by raising disputes, even trivial or manufactured ones, that are nonetheless subject to arbitration?

The starting point is that parties are bound to resolve their disputes by the arbitration clause contained in their contracts. But a dispute and a debt are not the same - the latter is more often associated with liquidity issues rather than an actual quarrel over performance. The most common form of debt claim arises from a loan or financing arrangement where repayment liability is unconditional. When a debtor is unable to pay for an extended period, debt enforcement may require winding-up the debtor on the basis that it is insolvent. If there is no arbitration clause in the contracts, a debtor facing a winding-up petition has to demonstrate there is a triable issue, a process by which untenable or frivolous defences are sieved out by the judge when investigating the underlying facts. Where there is an arbitration clause, the presumption swings in favour of arbitration and a court examining a winding-up petition cannot engage in the same sieving out process because the investigation of the merits of the defence falls within the remit of arbitration and not the court. In the case of a winding-up petition brought as a result of non-payment under a contract that has an arbitration clause, the debtor has a lower threshold to demonstrate on a prima facie basis that a dispute exists and is covered by a valid arbitration clause . This could produce an outcome where a debtor seeks to invoke arbitration to stave off winding-up where it may not in fact have a substantial or good faith basis to dispute the debt.

Earlier this year, the Singapore Court of Appeal had to balance these...

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