ARBITRATION OF INSOLVENCY DISPUTES: THE VIEW FROM THE AUSTRALIAN COURTS

Two recent judgments from different Australian courts have considered circumstances in which insolvency disputes can (or cannot) be arbitrated in accordance with pre-existing arbitration agreements. In particular, the decisions address the following two key issues:

• when certain insolvency claims can be arbitrated; and
• when a third party can participate in arbitral proceedings either claiming or defending ‘through or under’ a party to the arbitration agreement.

Key takeaways

The decisions further clarify the extent to which insolvency disputes can be arbitrated in Australia, notably addressing:

• the arbitrability of insolvency disputes: the decision in Mansfield considered below, adds further clarity to the instances in which insolvency disputes can and cannot be arbitrated, highlighting that so long as the respective claims ‘have been vested in or are exercisable’ by the party to the arbitration agreement, a liquidator can pursue them; and
• third-parties: the decision in King River v Salerno considered below, confirms that a third party can exercise the rights corresponding to a party to an arbitration agreement (including the ability to seek a stay of court proceedings) where:

(i) the third party is claiming or defending ‘through or under a company’ which is the party to an arbitration agreement – this may include an individual who is the sole director and shareholder of a company;

(ii) the action is ‘a matter which is the subject of an arbitration agreement’; and

(iii) the arbitration agreement is not ‘inoperative’.

(1) Mansfield (Liquidator) v Fortrust International Pty Ltd, in the matter of Palladium Investments International Pty Ltd (in liq) [2023] FCA 350

In Mansfield, the Federal Court of Australia held that when arbitration claims ‘have been vested in or are exercisable’ by the party to the arbitration agreement, a liquidator can pursue them. However, disputes concerning undervalued transactions and transfers to defeat creditors were not arbitrable.

Background

Mansfield concerned a dispute following the liquidation of an Australian company, Palladium Investments International Pty Ltd (Palladium). The liquidator of Palladium, Mr Mansfield, sought to recover a payment of $6.95 million made by Palladium to co-defendant PT Indrogo Institut (Indrogo).

Under the underlying transaction:

• Palladium was incorporated to act as investment manager for the co-defendant, Mr Yang;
• Palladium and Mr Yang entered into an investment management agreement, together with a Hong Kong based company, GS Asia Investment Co Ltd (GS), that was wholly owned by co-defendant Mr Suprapto (Investment Agreement);
• in 2016, Palladium transferred $6.95 million to Indrogo, which Indrogo then transferred to GS. GS used the funds to purchase investments for Mr Yang, in accordance with the Investment Agreement;
• on 3 August 2017, Mr Yang, Palladium and GS entered into a set-off and settlement agreement (Settlement Agreement), by which the property acquired pursuant to the Investment Agreement would be assigned to GS and that assignment would constitute a part payment towards alleged ‘loan debts owed by Mr Yang to GS’; and
• on 6 March 2018, Mr Yang presented a creditors’ petition.

The Settlement Agreement included an arbitration clause (which was mirrored in the Investment Agreement), which provided that ‘any dispute, controversy, or claim arising out of or relating to’ the Settlement Agreement be referred to arbitration under the Singapore International Arbitration Centre (SIAC) Rules.

Palladium was subsequently placed into liquidation and Mr Yang went bankrupt. Mr Mansfield was appointed as liquidator of Palladium. On 26 March 2022, Mr Mansfield commenced court proceedings claiming that the property transfer in the Settlement Agreement was either:

• an undervalued transaction; and/or
• a transfer of property intended to defeat creditors;

in contravention of ss 120 and 121 of the Bankrupt Act.

After the parties had exchanged documents, there were no documents which verified the existence of any debt owed by Mr Yang to GS. By interlocutory application, Mr Mansfield sought the following court orders:

• that Mr Mansfield, in his capacity as the trustee of Mr Yang’s bankrupt estate, be joined as a plaintiff;
• that GS be joined as defendant; and
• that Mr Mansfield have leave to amend the statement of claim to seek relief against GS.

The defendants opposed the application, arguing that the dispute should be referred to arbitration in accordance with the arbitration clauses in the Investment and Settlement Agreements.

Decision

The Federal Court of Australia granted Mr Mansfield’s application. Jackson J found that the arbitration clauses in the Investment and Settlement Agreement satisfied the definition of an ‘arbitration agreement’ under the International Arbitration Act 1974 (Cth) (IA Act). The court found that Mr Mansfield, as liquidator of Palladium, was a party who was able to ‘claim through or under’ the arbitration clause.

Then, in considering whether Mr Mansfield’s causes of action were arbitrable, Jackson J cited Australian High Court authority in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332, noting that:

an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party before the person claiming through or under the party can rely on the cause of action or ground of defence. A liquidator may be a person claiming through or under a company because the causes of action or grounds of defence on which he relies are vested in or exercisable by the company

However, in this instance, Jackson J held that Mr Mansfield’s causes of action were not arbitrable, finding that, in essence, Mr Mansfield’s claims ‘do not appear to me to be derivative in the sense discussed in Tanning Research Laboratories, and are actionable only by the trustee in bankruptcy. None of the elements of ss 120 and 121 appear to me to have been vested in or exercisable by Mr Yang himself’.

Adding further justification to the decision, Jackson J referred to the courts’ general desire to ‘to avoid a multiplicity of proceedings where that is reasonably practicable’ noting that the defendants’ position to bifurcate the dispute into court and arbitral proceedings was ‘unnecessarily cumbersome’.

(2) King River Digital Assets Opportunities SPC v Salerno [2023] NSWSC 510

In King River v Salerno, the Supreme Court of New South Wales stayed court proceedings in favour of arbitration, finding that a sole director of a company in administration was party to an arbitration agreement entered into by the company.

Background

The defendant, Mr Salerno, was the sole director and shareholder of Trigon Trading Pty Ltd (administrators appointed) (Trigon), a company specializing in digital asset trading, who would purchase digital assets on behalf of King River from international cryptocurrency exchange, FTX Trading Limited (FTX).

On 23 February 2022, King River Digital Assets Opportunities SPC (King River), executed a Master Purchase Agreement (MPA) with Tragion, which included:

• an arbitration agreement providing for arbitration in Australia under the Australian Centre for International Commercial Arbitration (ACICA) rules; and
• a clause providing that the MPA ‘shall be binding on and inure to the benefit of the Parties and their respective successors, heirs, personal representatives, and permitted assigns’.

In accordance with the MPA, King River would entrust Trigon with funds to purchase digital assets, which Trigon would then purchase from FTX. In November 2022, FTX collapsed and paused its clients from withdrawing funds and assets, causing King River to lose circa US$20.4 million which it had entrusted to Trigon.

On 22 December 2022, King River commenced court proceedings against Mr Salerno personally for the recovery of funds under the Australian Consumer Law, on the basis of accessorial liability for misleading and deceptive conduct engaged in by Trigon. Specifically, that Trigon had exposed King River to third party risk by purchasing digital assets from FTX.

By way of interlocutory application, Mr Salerno requested that the court proceedings be stayed pursuant to s 8(1) of the Commercial Arbitration Act 2010 (QLD) (CAA) and referred to arbitration in accordance with the arbitration agreement in the MPA. The key issue in dispute being whether Mr Salerno was able to be considered a party to the arbitration agreement in the MPA.

Decision

The court cited High Court authorities, Tanning Research and Rinehart v Hancock, in considering whether Mr Salerno was a party under s 2 of the CAA ‘through or under’ Trigon, finding that he indeed was by virtue of his legal position in defending the claim.

The court then considered whether the action brought was ‘a matter which is the subject of an arbitration agreement’. The court referred to well-established principles such as kompetenz-kompetenz and the application of ‘broad and liberal construction’ to the arbitration agreement. In doing so, the court found that King River’s action was a matter which was the subject of the arbitration of agreement under the MPA.

Lastly, the court considered King River’s argument that the arbitration agreement was inoperable by reason of abandonment/waiver. Noting that Mr Salerno was not a party to the arbitration agreement, the court considered it appropriate to reframe King River’s point as whether ‘Mr Salerno has abandoned his statutory right to seek a stay of these proceedings in favour of arbitration as “a person claiming through or under a party to the arbitration agreement”’. The Court rejected this, noting that Mr Salerno, upon becoming aware of the extended definition of ‘party’ to the arbitration agreement, immediately sought to have the court proceedings stayed.

Both decisions confirm the sophisticated and nuanced approach taken by Australian courts when balancing arbitration and insolvency considerations.

For more information, please contact Leon Chung, Partner, Guillermo Garcia-Perrote, Executive Counsel, Inigo Kwan-Parsons, Solicitor, or your usual Herbert Smith Freehills contact.