Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) v Larsen Oil and Gas Pte Ltd

Tan Lee Meng J:

[1] The defendant, Larsen Oil and Gas Pte Ltd (“Larsen”), sought to stay an action (“the main action”) instituted against it by the plaintiff, Petroprod Ltd (“Petroprod”) for the purpose of avoiding a number of transactions that allegedly violate insolvency laws. Larsen contended that its dispute with Petroprod in the main action should be referred to arbitration in accordance with the terms of its contract with the latter. According to counsel, this is the first time in this jurisdiction that a stay of proceedings in favour of arbitration is being sought in relation to the type of claims in the main action.

[2] Petroprod, a Cayman Islands company, has a number of wholly-owned subsidiaries (“the four subsidiaries”) that are relevant to the present proceedings. These are Petroprod 1 Ltd (“PP1”), Petroprod 2 Ltd (“PP2”), Petroprod 3 Ltd (“PP3”), and Petroprod D&P 1 Ltd (“DPL”). Petroprod pleaded in its Statement of Claim in the main action that it is a creditor of all the four subsidiaries at the material time.

[3] PP1, PP2 and PP3 are “one-ship” corporations. Their business is to effect the conversion of their vessels into floating production and storage units. The conversion was performed at Jurong Shipyard. DPLwas engaged in constructing a jack-up rig, also at Jurong Shipyard. This project has since been terminated.

[4] On 21 December 2006, Petroprod, which had no employees of its own, entered into a Management Agreement with Larsen, under which the latter agreed to provide management services to the former. Petroprod pleaded that, as a result of the Management Agreement and subsequent amendments, Larsen had control over the finances as well as the finances of the four subsidiaries.

[5] On 17 July 2009, Petroprod was placed in official liquidation in the Cayman Islands by an Order of the Grand Court of the Cayman Islands. On 3 August 2009, it was placed in compulsory liquidation in Singapore by an order of the High Court. According to Petroprod, although the four subsidiaries were not placed in liquidation, they were technically insolvent as from 31 December 2008.

[6] In the main action, Petroprod sought the following:

[7] Clause 18 of the Management Agreement, which requires the parties to resolve their disputes through arbitration, provides as follows:

[8] Although Larsen’s application for a stay was made pursuant to s 6 of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“the IAA”), its counsel, Mr Eric Chew, clarified at the hearing that his client was in fact relying on s 6 of the Arbitration Act (Cap 10, 2002 Rev Ed).

[9] Section 6(1) and (2) of the Arbitration Act provides as follows:

[10] Petroprod submitted that the question of staying the main action in favour of arbitration did not arise because the issues that required determination are not arbitrable in the sense that they relate to a type of dispute that can only be resolved by the courts. As for what type of disputes are not suitable for arbitration, it is explained in Nigel Blackaby and Constantine Partasides, Redfern and Hunter on International Arbitration, 5 ed (Oxford: Oxford University Press, 2009), at pp 123–125, as follows:

[11] As for the arbitrability of insolvency disputes, the learned authors added at para 2.128 as follows:

[12] In the IAA, the concept of arbitrability is recognised in s 11(1), which provides that any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless it is contrary to public policy to do so. In contrast, there is no explicit reference to the concept of arbitrability in the Arbitration Act. Even so, this concept ought to be taken into account when a court is asked to exercise its discretion to grant a stay under s 6(2) of the Arbitration Act. With this in mind, the specific nature of Petroprod’s claims in the main action will now be considered.

[13] As has been mentioned, Petroprod’s claims relate to ss 98 and 99 of the Bankruptcy Act read with s 329(1) of the Companies Act, as well as s 73B of the CLPA. The position under the Bankruptcy Act and the Companies Act will be considered first.

[14] It is convenient at this juncture to set out the relevant statutory provisions. Sections 98 and 99 of the Bankruptcy Act provide as follows:

Section 329(1) and (2) of the Companies Act provides as follows:

[15] The policy underlying avoidance provisions such as those referred to above was explained by Professor Roy Goode in his monograph, Principles of Corporate Insolvency Law, 3 ed (London: Sweet & Maxwell, 2005) at pp 410–411 as follows:

[16] In short, the rights created by the avoidance provisions exist for the benefit of the general body of creditors in an insolvency or insolvency-related context. This is why avoidance rights may be exercised even if the relevant transaction is binding under general law on the company. It is also pertinent to note that undervalue transactions and undue preferences can be avoided only when the company is being wound up. In my view, the policy underlying the avoidance provisions in question would be compromised if their enforcement is subject to private arrangements, including an agreement to arbitrate, between the company and the wrongfully advantaged creditor or transferee. In this regard, a company’s rights under the avoidance provisions should be contrasted with its rights under the general law.

[17] In this regard, the decision of the New South Wales Supreme Court in New Cap Reinsurance Corporation Limited v A E Grant & Ors, Lloyd’s Syndicate No 991 [2009] NSWSC 662 (“New Cap Reinsurance”) is instructive. In that case, Barrett J, who took the view that avoidance claims under s 588FF(1) of the Australian Corporations Act 2001 did not fall within the arbitration clause in that case, explained at [87] and [88] as follows:

[18] While Barrett J did not clearly distinguish between the interpretation of the arbitration clause and the arbitrability of the dispute, it is quite obvious that his conclusion was influenced by the nature of the Australian avoidance provisions.

[19] Larsen did not challenge the correctness of New Cap Reinsurance, but it argued that it was premised on a regime where a liquidator was treated distinctly from the company in liquidation. Such a formal distinction cannot be sustained. Whether the avoidance claims are brought in the name of the company in liquidation or the liquidator does not detract from their nature and underlying purpose, which is decisive of the issue of arbitrability.

[20] Larsen also asserted that there is a legislative policy in favour of arbitrating claims in bankruptcy. He referred to the following part of s 148A of the Bankruptcy Act:

[21] Section 148A does not support Larsen’s case. Apart from the fact that it only applies to a matter to which the arbitration agreement applies, the court has a discretion in deciding whether or not to refer the matter to arbitration. In my view, s 148A leaves room for the applicability of the concept of arbitrability.

[22] For the reasons stated, I hold that the avoidance claims in relation to the payments made by Petroprod to Larsen are not arbitrable.

[23] I now turn to Petroprod’s claim under the CLPA with respect to the payments made by its subsidiaries to Larsen. Section 73B(1) of the said Act provides as follows:

[24] The policy considerations which were mentioned with regard to the avoidance provisions in the Companies Act and the Bankruptcy Act apply with equal force here. Admittedly, it is arguable that the dispute between Petroprod and Larsen regarding the payments by the former’s subsidiaries to the latter should be resolved through arbitration since Petroprod, the allegedly prejudiced creditor, had agreed with Larsen to have its differences with the latter resolved by means of arbitration. However, there is likely to be a substantial overlap of factual issues when considering the claims in relation to the payments made by Petroprod’s subsidiaries to Larsen and the claims in relation to Petroprod’s own payments to Larsen. In the interest of a swift, economical and internally consistent settlement of all the disputes in question, it would be preferable if all the claims made by Petroprod are considered in the same forum: see Taunton-Collins v Cromie [1964] 1 WLR 633. As some of these claims are non-arbitrable in nature, that forum is undoubtedly the High Court.

[25] For the reasons stated, Larsen’s application for a stay of the main action in favour of arbitration is dismissed.