Knowledge Highlights 29 August 2024
Court of Appeal finds insolvency trumps arbitration where there is no bona fide dispute of debt
The Court of Appeal in Swissray Asia Healthcare Co Ltd v V Medical Services (M) Sdn. Bhd. [2024] CLJU 1358 recently held that a petitioner is not obligated to refer a debt claim to arbitration and may instead proceed with a winding up petition if the debt claimed is not genuinely disputed under a contract which is subject to an arbitration agreement.
This is the first Malaysian appellate court decision that deals with an interplay of insolvency and arbitration. Historically, Malaysian High Court decisions have been divided between a pro-insolvency approach and a pro-arbitration approach. This decision clarifies the appropriate test for granting an injunction to restrain a winding-up petition in the context of a debt claimed under a contract provides for arbitration in the event of a dispute is the bona fide dispute test.
This article provides an overview of the Court of Appeal’s decision.
Snapshot
The matter concerned alleged non-payment of debts arising from a Distributorship Agreement (“DA”) for medical devices. The appellant entered into the DA with the respondent for a term of three years from 1 April 2016 to distribute medical machines. On 24 May 2016, the respondent received two medical machines (“devices”) pursuant to the DA.
The appellant claimed that the respondent had not made payment for the devices, while the latter contended that the devices were only for demonstration and promotional purposes, and that they had not placed a confirmed order. The disagreement led to the termination of the DA by the appellant on 30 August 2017.
Following failed settlement discussions and a statutory demand notice issued by the appellant, the respondent sought an injunction from the High Court to restrain the appellant from presenting a winding-up petition on the grounds that the debt was disputed and subject to arbitration pursuant to the arbitration clause in the DA. The High Court granted the injunction and the appellant appealed.
Judgment
The Court of Appeal set aside the injunction and allowed the appeal.
The key question before the Court of Appeal was whether, when faced with a claim that is subject to an arbitration agreement, the court should apply the standard of a “bona fide dispute”, which has a higher threshold, or a “prima facie dispute” with a lower threshold, in deciding whether to grant the injunction. While acknowledging the lower threshold set out in the English Court of Appeal case of Salford Estates (No. 2) Ltd v Altomart Ltd (No. 2) [2015] EWCA Civ 1575 and the Singapore case of BDG v BDH [2016] 5 SLR 997, the court in the present case observed that judges should not “abdicate their responsibility and refrain altogether from inquiring into the genuineness of the dispute”.
The Court of Appeal ultimately held that the bona fide dispute test was the appropriate standard. As it is the court’s inherent jurisdiction to prevent abuse of the court process, a balanced approach is required to prevent frivolous disputes from being alleged just to stave off the presentation of a winding up petition when in fact, there is no genuine dispute of debt.
On the facts of the case, the court found that the respondent had acknowledged the debt on multiple occasions, contradicting their claim that the devices were for demonstration purposes only. The court emphasised that the arbitration clause in the DA could not be used as a pretext to avoid paying the debt. It was necessary to establish a genuine dispute to justify an injunction, and the court concluded that the debt here was not genuinely disputed and set aside the injunction.
Comment
This decision provides welcome clarification of the Malaysian courts’ approach in relation to disputed debt that is subject to arbitration. The judgment confirms that a creditor has the right to petition to the court to wind up a debtor without having to go through a potentially lengthy arbitration process where there is no genuine dispute of debt.
The Federal Court has granted leave to appeal in relation to specific questions of law. It remains to be seen whether the Court of Appeal’s decision will withstand the Federal Court’s scrutiny. The decision of the Court of Appeal also brings the Malaysian position on this issue in line with the Privy Council’s recent decision in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16, where it held that a winding up petition should not be stayed or dismissed merely because the underlying debt is subject to an arbitration agreement.
It will be of interest to businesses and legal practitioners alike to see if the Federal Court will follow the Privy Council approach.
