A. Introduction
In a case where there is an arbitration clause between parties and the dispute between parties fall within the scope of such clause, the Court proceedings on such a dispute can be stayed under section 10 of the Arbitration Act 2005 (“AA 2005“). However, this rule does not apply on winding-up proceedings. The High Court case of PRPC Utilities and Facilities Sdn Bhd v PBJV Group Sdn Bhd & Anor [2022] 2 CLJ 276 addressed this issue.
The High Court case of PRPC v PBJV concerns a Fortuna injunction to restrain the winding up proceedings in light of arbitral proceedings. In this case, the High Court clarified two important points.
First, a winding up proceeding is not substantive in nature and is not subject to section 10 of the AA 2005. A stay under section 10 of the AA 2005 only applies to substantive proceedings.
Second, the threshold applicable on a Fortuna injunction is lower when there is an existing arbitration clause or arbitration proceedings. Instead of having to prove that there is a bona fide dispute of debt, the party applying for Fortuna now only needs to prove that there is a prima facie dispute that the debt falls within the arbitration clause.
B. Background Facts
The defendants were engaged as contractors for a project. Disputes arose between parties. The defendants commenced Court proceedings against the plaintiff to claim for a sum which includes progress claim no. 9 of the contract. The plaintiff then applied to stay the proceedings pending arbitration. The stay application was granted.
The plaintiff then issued a notice of arbitration against the defendants. The arbitration proceedings could not proceed in light of a restraining order. The defendants then issued a payment claim pursuant to the Construction Industry Payment and Adjudication Act 2012. The registration of the CIPAA payment claim could not proceed unless and until the notice to the Director of the AIAC to register an adjudication is filed. No further steps were taken to continue with the CIPAA payment claim.
The defendants then issued the plaintiff a statutory demand under section 466 of the Companies Act 2016 for progress claim no. 9. As a result, the plaintiff applied for leave in the restraining order suit to apply for Fortuna injunction against the defendants. Leave was granted.
The High Court in PRPC v PBJV allowed the plaintiff’s application for Fortuna injunction.
C. High Court’s Reasoning
General Principles of Fortuna Injunction
The High Court summarised the principles of a Fortuna injunction as follows:
(i) whether there is a bona fide and substantial dispute as to the debt;
(ii) whether the dispute as to the debt will affect the likelihood or chances of success of the intended winding up petition;
(iii) whether the presentation of a winding up petition would cause irreparable damage to the company; and
(iv) where the debt is undisputed, whether there is a genuine crossclaim. In this situation, the burden of proof is still the same as in the case of a disputed debt i.e whether there is a likelihood that the petition to wind up may fail.
Issue 1: Winding-Up Proceedings Do Not Fall Under the AA 2005
The High Court first dealt with the issue of whether the intended winding up proceedings are subject to the arbitral proceeding. This is an issue which will have impact on the Fortuna injunction. On this issue, the High Court referred to its case of NFC Labuan Shipleasing I Ltd v Semua Chemical Shipping Sdn Bhd [2017] 1 LNS 943, where it was held that a winding-up petition is not substantive in nature and consequently, cannot be contemplated by Section 10 of the AA 2005. In NFC Labuan, the High Court described a winding-up petition as being “premised on the inability of the debtor to pay the debt of the creditor” and it is “not to determine whether the respondent is legally indebted to the petitioner“.
The legal position on this issue is the same in other Commonwealth jurisdictions. See for example, the Australian case of Community Development Pty Ltd v Engwirda Construction Co [1966] 120 CLR 455 and the English Court of Appeal case of Salford Estates (No. 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575.
The conclusion to this issue is that the existence of an arbitral proceeding or arbitration clause itself does not ipso facto bar a creditor from presenting a winding-up petition.
Issue 2: Lower Prima Facie Threshold for Fortuna When There is a Pending Arbitration Proceeding
The second issue is whether an arbitral proceeding or an arbitration clause would affect the requirements for a Fortuna injunction. The short answer to this is yes. The plaintiff in a Fortuna injunction has a lower hurdle to pass. The High Court referred to its decision in Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd [2019] 1 LNS 590, which held that when there is an arbitral proceeding or an arbitration clause, instead of having to prove a bona fide or substantial dispute of debt, the plaintiff in a Fortuna injunction only needs to prove that the dispute prima facie falls within the arbitration clause.
The legal position on this issue is the same in other Commonwealth jurisdictions. See for instance, the English Court of Appeal case of Salford Estates (No. 2), the Singapore High Court case of Bdg v Bdh [2016] 5 SLR 977 and the Hong Kong Court of First Instance case of Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426.
The only distinction perhaps between these cases and PRPC v PBJV is that in these cases, a winding up petition has already been presented and the lower prima facie threshold was applied to dismiss or stay the winding up proceedings. However, the High Court in PRPC v PBJV held that it does not see “why this same test should not also apply to an application where a Fortuna injunction is sought“. The High Court further reasoned that if a petitioner in an intended winding up petition cannot succeed in rebutting this prima facie threshold, he will not be able to succeed in resisting a Fortuna injunction on substantive grounds.
On the facts, the High Court in PRPC v PBJV held that the plaintiff in the Fortuna injunction went above and beyond satisfying the lower prima facie threshold. Not only that the plaintiff is able to prove that the dispute prima facie falls under the arbitration proceedings, the plaintiff is also able to show that there is a bona fide dispute of debt. In particular, the High Court found that progress claim no. 9 was not properly certified. In any event, the plaintiff had a cross-claim which far exceeds the sum claimed by the defendant in the statutory demand.
The High Court in PRPC v PBJV further made an interesting point. It held that the commencement of Suit 72 and the CIPAA proceedings shows that “the defendant had considered that there are other processes that can be taken or even needs to be taken to claim the sum under progress no. 9 … and that in itself would affect the suitability of proceeding with a winding-up petition to resolve the matter or rather the defendant’s claim“.
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