Singapore Court of Appeal applies prima facie standard of review where debt subject to arbitration

28 July 2020

BWG v BWF [2020] SGCA 36

The Singapore Court of Appeal in BWG v BWF dismissed the appeal and granted an injunction to restrain the commencement of winding-up proceedings against the respondent with liberty for parties to apply where there were legitimate concerns about the solvency of the respondent. Following AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 (“VTB Bank”), the court held that, in respect of a winding-up application premised on a debt subject to arbitration, the prima facie standard of review applied, such that the debtor needed simply to show that there was a dispute in relation to the debt which was the subject of an arbitration agreement. The court also explained that the abuse of process doctrine was discretionary, and might apply to deny an applicant from raising a defence to restrain the commencement of winding-up proceedings.

Facts

Background

The appellant and respondent were involved in a series of transactions with another party, X. The appellant would purchase cargo from X (“X-appellant contract”), before it was to be sold to the respondent (“appellant-respondent contract”). Subsequently, the respondent would sell the cargo to X (“respondent-X contract”). At the time the respondent entered into the appellant-respondent contact, it did not know that X would be both the ultimate buyer and the ultimate seller of the cargo. The contracts provided that X was to pay the respondent before the respondent was due to pay the appellant, though the respondent was supposed to receive the cargo from the appellant before it was delivered to X. The respondent stood to gain a sum of US$8,000 as an intermediary, while the appellant was to receive approximately US$300,000.

X failed to pay the respondent under the respondent-X contract and the respondent in turn failed to pay the appellant under the appellant-respondent contract. Prior to the non-payment, there were negotiations between the respondent, the appellant and X. It was made known during the negotiations that X would not be able to pay the respondent by the date stipulated in the respondent-X contract.

The respondent then discovered that the appellant had initially bought the cargo from X, and that X was both the ultimate buyer and ultimate seller of the cargo. The respondent also found out that the appellant had procured a letter of credit from a bank in order to pay X under the X-appellant contract. Subsequently, the respondent and appellant discussed delayed instalment payments by X to the respondent. The respondent entered into a settlement agreement for payment of US$30,253,600 by way of four instalments. The settlement agreement also contained an undertaking for the Chief Executive Officer of X (“Sit”) to execute a personal guarantee for the sum of US$30,253,600.

As the respondent failed to receive full payment of the first instalment under the settlement agreement, the respondent could not make payment to the appellant.

Proceedings below

On failing to receive payment from the respondent, the appellant served a statutory demand on the respondent for its failure to pay outstanding sums under the appellant-respondent contract. The respondent denied liability and claimed, among other things, that it was only due to pay the appellant after X paid the respondent.

The respondent applied to set aside the appellant’s statutory demand and to restrain the appellant’s pending winding-up proceedings, while having successfully obtained a bankruptcy order in Hong Kong against Sit for non-payment under the personal guarantee.

The respondent raised four defences (“four defences”) in support of its contention that the prima facie standard of review had been satisfied: (a) the non-receipt of documents defence, that the appellant had failed to present the seller’s commercial invoice, copies of non-negotiable bills of and certificates of quantity, quality and origin, (b) the title defence, that the appellant never passed title or delivered the cargo to the respondent, (c) the illegality defence, the assertion that the entire transaction involving the appellant, respondent and X was a sham or tainted by illegality because the appellant had induced the bank, upon provision of false documents, to effect payment under the letter of credit, and (d) “pay when paid defence”, that the respondent was only obliged to pay the appellant after it had been paid by X. The appellant contended that the respondent had acted inconsistently with the first three defences when the respondent took out proceedings against Sit.

Judgment

The Court of Appeal was of the view that any or all of the four defences raised by the respondent would have satisfied the prima facie standard of review. For the appellant to rely on the abuse of process exception to displace the respondent’s right to refer the dispute to arbitration, it had to establish that all four defences were “infected” by abuse of process. The court held that all of the defences raised by the respondent would give rise to a prima facie dispute that would justify restraining the winding-up application and further, that the defences raised triable issues.

In coming to its decision, the Court of Appeal made the following rulings:

  • Transaction was a disguised loan arrangement: The court found that the X-appellant contract was not a transaction made in good faith for the sale of goods, but a disguised loan arrangement between two parties and that X must have known that it would be the eventual buyer of the cargo from the respondent after the deal between the appellant and the respondent. The court also found that the appellant was privy to the entire loan arrangement and that it had secured the letter of credit from the bank on a false premise. 
  • In relation to the title and non-receipt of documents defences, the respondent had not acted inconsistently: The court found that the respondent had not acted inconsistently in relying on the title defence as the claims made against Sit and X were made pursuant to the settlement agreement and personal guarantee and was a separate cause of action from the underlying claim under the respondent-X contract. In relation to the non-receipt of documents defence, the respondent had not acted inconsistently. In the claim against X under the settlement agreement, the respondent did not represent that it had delivered the necessary shipping documents to X and so, there was no inconsistency with the respondent’s position that it had never received the relevant shipping documents from the appellant as provided for in the appellant-respondent contract. 
  • For the illegality defence, the respondent appeared to have acted inconsistently by pursuing Sit to bankruptcy, and against X in settlement agreement: The court found that the respondent appeared to have acted inconsistently by pursuing Sit to bankruptcy, and against X in the settlement agreement while simultaneously raising the illegality defence in the present proceedings. The respondent had proceeded against X and Sit despite its suspicion that the appellant had deceived the bank in order to obtain a letter of credit and its belief that the transaction involving X and the appellant might be illegal. 
  • The court may find party not in abuse of the court’s process despite a party’s inconsistent conduct: The court observed that the abuse of process doctrine was to be exercised at the court’s discretion, depending on all the interests and circumstances of the case. This may entail balancing considerations of public policy and the interests of justice. One example of how an abuse of process might manifest was where a debtor adopted an inconsistent position in raising a defence to dispute the debt in order to restrain a winding-up application. The court held that in assessing whether a debtor had adopted inconsistent positions, it had considered each defence separately to determine whether there was abuse of process. Where multiple defences are raised, some of which did not involve inconsistent positions, the raising of those defences would not amount to an abuse of the court’s process. As the doctrine is a discretionary one, and by reason of policy considerations and in exceptional circumstances, the court might decide that a party was not in abuse of the court’s process despite that party’s inconsistent conduct if there was a risk of a greater injustice in barring that party from taking such an inconsistent position.   
  • It would be inappropriate to deny the respondent from relying on illegality defence on basis of abuse of process: The court found that even if the respondent’s actions against Sit were inconsistent with its illegality defence, it would be inappropriate to prevent the respondent from relying on the illegality defence on the basis of abuse of process given the exceptional circumstances of the case. Otherwise, there would be a risk of a greater injustice. The court, in balancing the competing factors and determining which position carries the greater risk of injustice, considered the following factors:
    • The respondent was not the typical litigant seeking to profit from an illegal transaction after mounting inconsistent positions and there was no evidence that the respondent knew of the true nature of the entire transaction when it was first contemplated. 
    • The respondent had no real choice but to take all reasonable defences to resist the appellant’s claim while seeking to recover from X in order to pay the appellant. The court noted that the respondent did not have direct knowledge of the purported illegality, but relied on the information provided to it by third parties and, on the basis of the information supplied, adopted a certain position against the appellant. 
    • When pursuing X and Sit, the respondent would not have known what defence X and Sit would raise. The risk of a windfall was unlikely given that the respondent had repeatedly confirmed that it would pay the appellant after receiving payment from X. 
    • Barring the respondent from raising the illegality defence would mean that the appellant would be allowed to enforce a potentially illegal contract without the illegality defence being explored at all.

For these reasons, the court dismissed the appeal and granted the injunction to restrain the commencement of winding-up proceedings against the respondent.

Reference materials

The Court of Appeal judgment is available on the Supreme Court website www.supremecourt.gov.sg or by clicking here.