Case Review: Peninsula Education (Setia Alam) Sdn Bhd (previously known as SEGI International Learning Alliance Sdn Bhd) v Biaxis (M) Sdn Bhd (in liquidation) [2024] 5 MLJ 388

 

Background

In the Court of Appeal case of Peninsula Education (Setia Alam) Sdn Bhd (previously known as SEGI International Learning Alliance Sdn Bhd) v Biaxis (M) Sdn Bhd (in liquidation) [2024] 5 MLJ 388, the parties entered into a PAM Contract (With Quantities) (“PAM Contract”) for a building project. However, Biaxis (M) Sdn Bhd (“Contractor”) was wound up in April 2022 and went into liquidation. Subsequently, Peninsula Education (Setia Alam) Sdn Bhd (“Employer”) terminated the Contractor’s employment due to its liquidation.

In March 2023, the liquidator initiated a suit in the name of the Contractor in the High Court for unpaid interim payment certificates in the sum of approximately RM13 million. The Employer disputed the claim and filed an application under section 10 of the Arbitration Act 2005 (“AA 2005”) for a stay of court proceedings pending reference to arbitration, by reason that there was a valid arbitration agreement in the PAM Contract.

 

High Court

The High Court held that the Contractor’s liquidation rendered the arbitration agreement inoperative. The learned High Court Judicial Commissioner (“JC”) relied on the Canadian Supreme Court case of Peace River Hydro Partners v Petrowest Corp [2022] SCJ No. 41 (“Peace River”) to find that a party in liquidation is afforded insolvency protection, thus the arbitration agreement is rendered inoperative. Further, upon considering the prohibitive costs of arbitration that a company in liquidation would have to bear, the High Court dismissed the Employer’s application for a stay of court proceedings pending arbitration.

 

Court of Appeal

The Employer appealed against the High Court’s decision. The four issues before the Court of Appeal were as follows:

• whether the liquidation of the Contractor renders the arbitration agreement “inoperative” having regard to the acute factor of costs and efficiency in resolving the dispute;
• whether the insolvency regime takes precedence over the arbitration agreement, such that all disputes now be resolved in the Courts and more so when there is allegedly no dispute in the debt claimed;
• whether there are issues pending which require resolution by an Insolvency Court as there are non-arbitrable; and
• whether in spite of the arbitration agreement, the Court may have regard to the prohibitive costs of arbitration in refusing a stay under section 10 of the AA 2005 when the party suing is in liquidation.

 

The Law on Stay of Court Proceedings Pending Reference to Arbitration Under Section 10 of the AA 2005

Section 10 of the AA 2005 provides that the Court shall stay court proceedings where the matter is subject to an arbitration agreement before a party takes any steps in the proceedings and makes the section 10 of the AA 2005 application, unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

 

Issue (1): Whether the liquidation of the contractor renders the arbitration agreement inoperative, having regard to the acute factor of costs and efficiency in resolving the dispute

The Court of Appeal found that the High Court JC misread the legal principles in the case of Peace River. Arbitration agreements would survive the termination of contracts and challenges made to the contract pursuant to the doctrine of separability enshrined in section 18 of the AA 2005. Winding up would have the effect of terminating agreements which the liquidator would not want to affirm and proceed with. However, arbitration agreements would survive such a termination of the contract.

In Peace River, the Canadian Supreme Court held that the fact that a party entered receivership or insolvency proceedings, or is financial impecunious, is not in itself a sufficient basis for the court to hold that an arbitration agreement is inoperative. Nonetheless, on the facts of the case, the Canadian Supreme Court held based on policy grounds that the arbitration agreement was inoperative as arbitration would compromise the orderly and efficient resolution of the company’s receivership.

The Canadian Supreme Court emphasised that the outcome of Peace River was context-specific due to its unique facts, notably:

• there were multiple arbitration agreements and the wordings of each arbitration agreement differed;
• each arbitration agreement applied to different set of disputes with different procedures;
• several purchase orders did not incorporate arbitration clauses;
• should the matters be referred to arbitration, the company in liquidation would have to be involved in four different arbitrations with seven other counterparties;
• the matter involved other entities which were not privy to the arbitration agreements; and
• the parties admitted that court proceedings would be more expeditious.

In contrast, the present case involves a single dispute regarding alleged unpaid sums owed to the Contractor based on several certificates. The present dispute could be resolved via arbitration, which was the mode of dispute resolution that the Parties agreed to when they entered into the PAM Contract. Pertinently, PAM Contracts are an industry-based standard form contract.

Further, the liquidator is not a party to the arbitration agreement. However, when a liquidator commences any action on behalf of a company, the liquidator steps into the shoes of said company. Therefore, the liquidator was bound by the terms of the arbitration agreement in the PAM Contract, unless the liquidator applies to the Court to disclaim from being bound by the Contract’s terms.

Clause 25.3 of the PAM Contract does not specifically state that the arbitration agreement becomes inoperative upon insolvency or winding up. It merely states that the Contractor’s employment shall forthwith be automatically determined upon its insolvency or winding up. Notwithstanding the termination of the PAM Contract, accrued rights continue to exist and certain obligations continue to be in force e.g., the release of the retention fund, liquidated ascertained damages, defect claims, etc.

Therefore, the Court of Appeal held that the arbitration agreement had not become inoperative on the basis that the fees of the arbitration are high or there would be unnecessary delay.

 

Issue (2): Whether the insolvency regime takes precedence over the arbitration agreement, such that all disputes must now be resolved in the Courts and more so when there is allegedly no dispute on the debt claimed by the Contractor in liquidation

The language of section 10 of the AA 2005 is mandatory and provides that the Court shall stay proceedings pending reference to arbitration if the “matter” falls within the scope of an arbitration agreement.

Insolvency and winding up petitions are not “matters” within the meaning of section 10(1) of the AA 2005. However, the mere fact that the debt is not admitted is sufficient for it to come within the meaning of a “matter which is the subject of an arbitration agreement”.

The Court of Appeal cited the Privy Council case of FamilyMart China Holding Co Ltd v Ting Chuan [2023] UKPC 33 (“FamilyMart”) which held that a “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings. A matter is susceptible to be determined by an arbitral tribunal as a dispute. If the matter is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought.

In FamilyMart, the mandatory stay provision did not apply to the liquidation application as a creditor’s petition is more in the nature of a class action where any creditor may support the petition. These creditors may not have an arbitration agreement with the company being wound up.

In contrast, the question of whether which regime would trump and take precedence over the other did not arise in the present case. This was not a case on whether the matter subjected to the arbitration agreement was raised in a winding up petition. The Contractor was already wound up by another creditor. The Contractor, by its liquidator, is now commencing a claim for work done for the Employer’s benefit.

Further, in determining whether to grant a stay of court proceedings pending arbitration, the Court does not need to delve into the matter to determine if there is a genuine dispute to be referred to arbitration. The Court need only decide whether the matter fell within the scope of the arbitration agreement.

A company would be wound up where there is no bona fide dispute to the debt and the presumption of the inability to pay debts is not rebutted. However, where a debt is disputed on a bona fide and substantial ground, the Winding Up Court does not decide on whether the debt is owed and the amount owed. That dispute regarding the debt would have to be determined by the civil court, or by an arbitral tribunal where the parties pursue arbitration.

The Court of Appeal further referred to the Privy Council case of Sian Participation Corp (In Liquidation) v Halimeda International Ltd (Virgin Islands) [2024] UKPC 16 whereby the Privy Council held that as a matter of law in the British Virgin Islands, the test for granting or dismissing a winding up petition where the debt on which the application is based is subject to an arbitration agreement or exclusive jurisdiction clause and is said to be disputed is whether the debt is disputed on genuine and substantial grounds.

A party’s liquidation would not change the mode of resolving a dispute, whether by pre-agreed arbitration or by court litigation. Liquidation is not opposed to arbitration as arbitration is merely a dispute resolution method to establish liability and the quantum of damages.

 

Issue (3): Whether there are issues pending which require resolution by an Insolvency Court as they are non-arbitrable

Section 4 of the AA 2005 recognises that there are certain matters that are not arbitrable or which the arbitration agreement would be contrary to public policy, such as issues arising out of liquidation, adoption, an order for sale under the National Land Code, etc.

Notwithstanding that, the case concerned monies purportedly owed by the Employer to the Contractor and the amount owed. The Employer may subsequently raise the defence of set off and counterclaim for delay and defects (if any) and liquidated ascertained damages. Those issues are suitable to be determined by an arbitral tribunal and not by a Winding Up Court.

 

Issue (4): Whether in spite of the arbitration agreement, the Court may have regard to the prohibitive costs of arbitration in refusing a stay under section 10 of the AA 2005 when the party suing is in liquidation

The Contractor cannot claim that the arbitration would be costly and time-consuming, which would in turn drain the company’s limited assets and affect the distribution to creditors in liquidation proceedings. Parties may explore several avenues to reduce costs and save time, such as chess clock arbitration, documents-only arbitration or for the arbitrator to be appointed by PAM should parties not agree on an arbitrator.

The PAM Contract and the arbitration clause within the PAM Contract has been in existence for a while. The Parties cannot claim to be unaware of the costs of arbitration. Parties subscribe to the advantages of autonomy, confidentiality, speed and finality when they choose to arbitrate. Further, pursuant to section 8 of the AA 2005, the Courts would give primacy to upholding freedom of contract and favour non-interference in arbitrations.

 

Conclusion

The Court of Appeal allowed the Employer’s appeal and the High Court’s order was set aside. The Court of Appeal further granted an order to stay the court proceedings and for the Parties to refer the matter to arbitration.

The arbitration agreement in the PAM Contract did not become inoperative upon the Contractor’s liquidation. Moreover, the debt claimed by the Contractor is disputed. The Contractor’s liquidator further did not apply to the Court to disclaim the Contractor’s rights, obligations or burdens under the PAM Contract. The dispute in the case was arbitrable as it was a contractual dispute.

Insolvency does not automatically render an arbitration agreement inoperative. The benefits of party autonomy, confidentiality and finality in arbitration are attractive to parties. However, when parties enter into arbitration agreements, they should be aware of the potential cost implications. The Courts will uphold the parties’ bargain to arbitrate and favour non-interference with arbitration.