Key takeaways

• The policy of enforcing arbitration agreements does not trump the insolvency regime in all circumstances, such that claims subject to arbitration must always be carved out of an insolvency moratorium. If so, this would undermine the purpose and effectiveness of moratorium protections, which is meant to give a company breathing room to put forward a proposal.
• Conversely, the existence of a moratorium per se does not ipso facto render an arbitration agreement inoperative or incapable of being performed. In the context of applications by a creditor for a carve-out of a moratorium under the Model Law, the court retained discretion to consider whether to grant leave for the arbitration(s) to proceed.
• The exercise of the court's discretion would include consideration of the following factors ("Wang Aifeng factors"):
  • The timing of the application for a carve-out
  • The nature of the claim
  • The existing remedies
  • The merits of the claim
  • The existence of prejudice to the creditors or to the orderly administration of the restructuring proceedings
  • Other miscellaneous factors such as a potential avalanche of litigation being unleashed by the grant of permission, the proportionality of the cost of the proceeding to the scheme company's resources, and the views of the majority creditors.

Background

The Sapura Group of companies has been engaging in restructuring proceedings in Malaysia since 2022. The respondent (GAS) filed proofs of debt in the restructuring proceedings based on contracts ("Contracts") which GAS had entered into with two entities in the Sapura Group ("Sapura Entities"). Two sets of convening and restraining orders and relief had been granted by the Kuala Lumpur High Court (KLHC) and duly recognised as foreign main proceedings by the General Division of the Singapore High Court (SGHC) in January 2023 and November 2023.

In September 2023, GAS commenced separate arbitration proceedings against the Sapura Entities arising from the termination of the Contracts ("Arbitration Claims"). The arbitration proceedings were seated in Singapore and administered by the Singapore International Arbitration Centre (SIAC).

In February 2024, the Sapura Group applied for a third set of convening and restraining orders and relief ("Third Reorganisation Proceeding"). This was granted by the KLHC in March 2024.

The proceedings below

The Sapura Entities applied to the SGHC for recognition of the Third Reorganisation Proceeding, which were uncontested save for GAS's application for a carve-out to proceed with the arbitration proceedings against the Sapura Entities. 
The High Court (SGHC) granted recognition of the Third Reorganisation Proceedings. As regards the carve-out sought, the SGHC found, in exercise of his discretion, that this was warranted upon consideration of the Wang Aifeng factors ("Discretionary Ground"). The SGHC also observed in obiter dicta that a carve-out would have to be ordered in any event, in view of what he considered to be the court's mandatory obligation to enforce arbitration agreements ("Mandatory Ground").

Dissatisfied, the Sapura Entities appealed to the SGCA.

Decision of the SGCA

As noted above, the Sapura Entities had already withdrawn the appeals by the time that the SGCA rendered its judgment. Nevertheless, the SGCA stated that it would have dismissed the appeals as it agreed with the SGHC's decision to grant the carve-out on the Discretionary Ground.

On the Discretionary Ground, the SGCA disagreed with the Sapura Entities' contention that it should adopt a test of "exceptional circumstances" in deciding whether to grant carve-outs from a restructuring moratorium. Whilst a restructuring moratorium is intended to give the subject company "breathing space" to formulate a restructuring proposal, adopting the "exceptional circumstances" test would not give effect to this aim as it was too vague and simply connotes a broad balancing exercise between the interests of the general body of creditors and the interests of the party seeking the carve-out, albeit one weighted against a particular outcome.

Instead, the SGCA affirmed that the court's discretion should remain guided by the Wang Aifeng factors, which are "specific, non-exhaustive markers to guide the court in balancing the various considerations and interests involved". Importantly, the SGCA observed that more weight may be given to considerations touching on the need to give the debtor breathing room to put forward a proposal, such as the existence of prejudice that the carve-out would pose to the general body of creditors or to the orderly administration of the restructuring proceedings.

The SGCA then proceeded to consider the SGHC's application of the Wang Aifeng factors. The SGCA agreed that the carve-out should be granted as the Arbitration Claims were highly factually complex and therefore unsuitable to be adjudicated by a scheme adjudicator – this was the "overriding consideration" in this case. The SGCA also highlighted that: (a) the carve-out would not affect the Sapura Entities' ability to propose an arrangement as the Arbitration Claims only represented approximately 6-7% of the total debt sought to be restructured; (b) it was speculative that the Malaysian court would not allow a further reorganisation proceeding and that granting the carve-out may unleash a deluge of other carve-out claims; and (c) while the Sapura Entities would suffer some "prejudice" in the form of increased costs for arbitration, this had to be balanced against GAS's right to have its claims adjudicated without undue delay.

On the Mandatory Ground, the SGCA disagreed with the SGHC's reasoning that the SGCA's previous decision in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158 ("AnAn") stood for the proposition that the policy of enforcing arbitration agreements should trump the insolvency regime under all circumstances. First, AnAn was a case where the policy concerns of the insolvency regime were not strictly engaged as it dealt with the situation where a winding-up petition was brought on the basis of a disputed debt – at that point, the company has not yet been determined to be a debtor or found to be insolvent. In contrast, the policy concerns of the insolvency regime were clearly engaged in the present context where the Sapura Group was already in restructuring proceedings to stave off insolvency. Second, while the AnAn situation was one where an alleged creditor could abuse the court's winding-up process to bypass the arbitration agreement, such risk of abuse does not exist in the present context where the creditor seeks a carve-out to commence or continue arbitration proceedings. Finally, the implementation of the Mandatory Ground would significantly reduce the effectiveness of a moratorium, which should not be easily circumvented by the invocation of a prima facie valid arbitration agreement.

Finally, the SGCA also considered and rejected the Sapura Entities' argument that the Court should adopt the Canadian position i.e. that a moratorium per se renders all arbitration agreements ipso facto inoperative or incapable of being performed. The SGCA reasoned that a moratorium should not per se render an arbitration agreement inoperative since allowing a creditor to arbitrate a prior private dispute does not necessarily undermine the policy aims of the insolvency regime. Moreover, the Canadian position had been further qualified such that the court would still have to exercise its discretion in determining whether the arbitration agreement should be treated as inoperative. It would be superfluous to superimpose this over the Wang Aifeng factors which already involves materially similar considerations.

Conclusion

The SGCA's decision provides commendable clarity on the subject of when carve-outs to a restructuring moratorium should be granted. It eschews a categorical trump of arbitration over insolvency (or vice versa), preferring instead a calibrated, discretion-based balancing approach which permits the court to ascribe particular weight to the specific imperatives in play.

The decision is an important and noteworthy one as various key restructuring jurisdictions continue to grapple with the inherent tension between the arbitration and insolvency regimes. For example, it remains to be seen whether the seemingly strict position in AnAn (which the SGHC relied upon in the decision below) ought to be revisited in light of the Privy Council's recent contrary decision in Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16 (as noted by the SGCA).

In the meantime, other initiatives have emerged which seek to bridge the gap between the inherently distinct policy drivers behind the arbitration and insolvency processes. The SGCA for example expressly recognised the potential significance of the draft SIAC Insolvency Arbitration Protocol which modifies the SIAC Rules for use by parties resolving their disputes by arbitration in the insolvency context, noting that this may facilitate the court's task in deciding whether to grant a carve-out.

Our Firm will be hosting its flagship Asia Construction Conference in Ho Chi Minh City on 15 April 2025, where our leading practitioners in the construction arbitration space from Vietnam, Japan, Singapore, Malaysia, and Korea will engage with representatives from the SIAC to discuss cutting-edge issues and trends in construction arbitration, including insights on the draft SIAC Insolvency Arbitration Protocol. If you would like to attend this conference, please reach out to rebecca.pang@bakermckenzie.com.

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