STUCK IN THE MIDDLE? SINGAPORE COURT WARNS PARTIES IN A CHAIN FROM TAKING INCONSISTENT POSITIONS IN EITHER DIRECTION, BUT BLOCKS WINDING-UP PROCEEDINGS IN FAVOUR OF ARBITRATION

In BWG v BWF [2020] SGCA (“BWG”) the Singapore Court of Appeal considered the application of the “prima facie dispute” ground which a Singapore debtor (the Respondent) raised to resist winding up proceedings when there was a valid arbitration agreement. The Court of Appeal considered this in circumstances where the Appellant alleged that the debtor’s position in the winding up proceedings is allegedly an abuse of process which is inconsistent with the position the debtor has taken in other proceedings against X.

In the other proceedings against X, the debtor raised four defences including the defence of illegality, in particular that the purported coal sales contracts up and down the chain were a sham hiding an illegal loan.

The Singapore debtor had already obtained a bankruptcy order against X’s CEO in Hong Kong litigation, for non-payment under a personal guarantee. The Singapore court agreed that the Singapore debtor’s claim against X's CEO was "on its face, seemingly inconsistent with its belief that the transaction may be illegal".

However, the Singapore court explained that it would nonetheless be inappropriate to prevent the Singapore debtor from relying on the illegality defence on the basis of the abuse of process doctrine. The court must balance the competing policy factors and "determine which position carries the greater risk of injustice". It was clear that the Singapore debtor was not a typical litigant seeking to profit from an illegal transaction. It was itself a victim of deception.

The Singapore court was thus faced with a clash between the imperative to prevent a party from relying on inconsistent positions and the principle that a court will not lend its aid to enforce an illegal contract. It concluded that the risk of injustice would be "indubitably greater" should the Singapore debtor be barred from raising the illegality defence.

Commentary

As the economic impact of COVID-19 deepens, we expect a continued increase in enquiries from commercial parties stuck in distressed contractual chains – whether sale of goods, supply chains or infrastructure and construction contracts. Whilst the Singapore debtor appears to have been a victim and in a difficult position, this decision makes clear the importance of considering the wider disputes strategy before responding to claims in either direction in the chain. Adopting inconsistent positions under different contracts is a treacherous path that will often backfire.

We are also seeing a rise in commercial arbitrations with related (potential) insolvency proceedings. BWG follows, and was heard with, the Court of Appeal decision in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“AnAn Group”), in which the court held that, where a winding-up application relies on a debt which is subject to arbitration, a debtor need only show to the prima facie standard that there is a dispute (rather than the normal higher triable issue standard), provided that the dispute is not being raised by the debtor in abuse of process (see here for our note on the case and here for our note on the High Court’s first instance decision in BWG). BWG confirms the difficulty in disputing an alleged “prima facie dispute” to a debt, although parties should take note of the safeguards established by the court in AnAn Group.

Background

There were a string of back-to-back contracts relating to the sale and purchase of the same cargo of crude oil (the "Cargo") under which X sold to the Singapore creditor, who in turn sold to the Singapore debtor, who finally sold the Cargo back to X. X was therefore both the ultimate seller and the ultimate buyer of the Cargo.

X failed to pay the Singapore debtor. The Singapore debtor and X entered into a settlement agreement (the "Settlement Agreement”), which provided for a payment schedule. X failed to make payments under the Settlement Agreement and the Singapore debtor in turn did not pay the Singapore creditor. The Singapore creditor served a statutory demand on the Singapore debtor. The Singapore debtor sought to set aside the statutory demand and to restrain the Singapore creditor's pending winding-up proceedings on the basis that the dispute should be referred to arbitration. The Singapore debtor also commenced separate proceedings against X for non-payment and successfully obtained a bankruptcy order in Hong Kong against X's CEO for non-payment under a personal guarantee he had given.

The High Court applied the prima facie standard of review and concluded that the debt was disputed and that such dispute fell within the arbitration agreement. It also concluded that there had been no abuse of process. Accordingly, it granted the Singapore debtor an injunction to restrain the Singapore creditor from taking out winding-up proceedings.

The Singapore creditor appealed to the Singapore Court of Appeal on the basis that three of the four defences relied on by the Singapore debtor to show a prima facie dispute were inconsistent with the positions it adopted in its proceedings against X and its CEO in Hong Kong (the "Price Defences"). Such inconsistency, the Singapore creditor submitted, amounted to an abuse of process.

Decision

The Court of Appeal began by noting that the Singapore debtor's four defences satisfied the prima facie threshold. With respect to one of these defences there was no allegation of inconsistency with the position taken in other proceedings, and so the appeal was doomed to fail, since the Singapore debtor's remaining defence would on its own satisfy the prima facie review standard.

The court nonetheless considered whether the Singapore debtor disputing the debt on illegality grounds constituted an abuse of process.

Abuse of process

The court agreed with the Singapore debtor that the contract at the top of the chain (between X and the Singapore creditor) appeared not to have been a bona fide transaction for the sale of goods but was a disguised loan arrangement.

The Singapore creditor alleged that the Singapore debtor had acted inconsistently by raising the illegality defence as against the Singapore creditor whilst enforcing the Settlement Agreement against X. The court agreed that the Singapore debtor, by maintaining its claim against X's CEO was "on its face, seemingly inconsistent with its belief that the transaction may be illegal".

However, the court explained that, even if that were so, it would nonetheless be inappropriate to prevent the Singapore debtor from relying on the illegality defence on the basis of the abuse of process doctrine. The court must balance the competing policy factors and "determine which position carries the greater risk of injustice". It was clear that the Singapore debtor was not a typical litigant seeking to profit from an illegal transaction. It was itself a victim of deception. The court was thus faced with a clash between the imperative to prevent a party from relying on inconsistent positions and the principle that a court will not lend its aid to enforce an illegal contract. It concluded that the risk of injustice would be "indubitably greater" should the Singapore debtor be barred from raising the illegality defence.

Doctrine of approbation and reprobation and waiver by election

Although the court decided that the issue of inconsistent positions is properly dealt with under the doctrine of abuse of process, as the parties had made submissions on the doctrine of approbation and reprobation and of waiver by election, it expressed its views on their proper scope and applicability.

The court, having surveyed the authorities, concluded that the doctrine of approbation and reprobation does extend to inconsistent positions against different parties in different proceedings, "as long as the party has received an actual benefit as a result of an earlier inconsistent position".

The court concluded that the Singapore debtor's judgment against the CEO in bankruptcy proceedings was a benefit. However, the proceedings against X and its CEO were never intended to benefit or enrich the Singapore debtor. Any benefit accruing to the Singapore debtor was always intended to be paid to the Singapore creditor to discharge the Singapore debtor's purported liability. Accordingly, despite the benefit to the Singapore debtor, it would be inappropriate to apply the doctrine of appropriation to bar the Singapore debtor from raising the illegality defence.

As for the doctrine of waiver by election, the court found that there is not a strict bar against the application of the doctrine in relation to different proceedings against different parties in respect of different contracts.

The court concluded that the Singapore debtor was entitled to rely on all four defences to show that there was a prima facie dispute. The court noted that the defences in fact went beyond raising a prima facie dispute and amounted to triable issues (even if that higher standard was applied). Therefore the injunction was granted with liberty for the parties to apply to lift the injunction if the creditor can show legitimate concerns about the solvency of the debtor-company. There was no evidence that that was the case here.

For more information, please contact Gitta Satryani, Partner, Tomas Furlong, Partner, Mitchell Dearness, Associate, or your usual Herbert Smith Freehills contact.