In Swiss-ray Asia Healthcare Co Ltd v V Medical Services M Sdn Bhd [2024] 8 CLJ 21, the Court of Appeal recently answered a legal issue as follows:
“When contracting parties have agreed to resolve disputes through arbitration and one party issues a notice under Section 466(1)(a) of the Companies Act 2016 (CA 2016) to wind up the other, while the other seeks a Fortuna injunction to prevent this on the basis that the debt is disputed, must the party challenging the winding-up show:
(i) a bona fide dispute which is a higher threshold, or
(ii) a prima facie dispute which is a lower threshold because of the arbitration clause?”
The Court of Appeal held that a party seeking a Fortuna injunction must demonstrate a bona fide dispute, even when an arbitration clause exists. This decision reinforces the significance of arbitration clauses in commercial contracts while ensuring they are not abused to avoid legitimate claims.
Brief Facts
The respondent, Medical Services M Sdn Bhd (MSM), entered into a distributorship agreement (DA) with the appellant, a Taiwanese foreign company, Swissray Asia Healthcare Co Ltd (Swissray). The DA included an arbitration clause mandating disputes to be settled in Switzerland under Swiss arbitration rules.
A dispute arose when Swissray claimed a debt (Disputed Debt). However, due to MSM’s non-payment, Swissray terminated the DA on 30.8.2017. Subsequently, both parties attempted to resolve the dispute but only a partial payment of USD 20,000 was made in December 2017. Since there was no resolution, Swissray issued a second demand pursuant to Section 466(1)(a) of the CA 2016 on 12.2.2020 to MSM but to no avail.
Thereafter, at the High Court, MSM commenced an action and sought a Fortuna injunction to restrain Swissray from filing a winding-up petition against MSM. The basis of MSM’s contention was that the Disputed Debt existed without any award or final judgment and as such, a winding-up petition cannot stand. The High Court granted the Fortuna injunction on 6.7.2024. Swissray appealed to the Court of Appeal.
Decision Of The Court Of Appeal
The Court of Appeal allowed the appeal and set aside the Fortuna injunction. The court held that the appropriate test to be applied when one party issues a statutory demand notice under Section 466(1)(a) of the Companies Act 2016 for an outstanding debt and the other party seeks a Fortuna injunction to restrain the winding-up petition, is the bona fide dispute test, even when the contract between the parties includes an arbitration clause.
Swissray contended that MSM had repeatedly admitted the Disputed Debt and as such, there is no bona fide dispute of the debt. Further, Swissray also contended that for MSM to succeed in their quest for a Fortuna injunction, the relevant test to be fulfilled is the high threshold test i.e. there is a bona fide dispute.
On the other hand, MSM contended that in view of the arbitration clause, whether or not there is a bona fide dispute is to be determined by way of arbitration. MSM substantially relied on the English case of Salford Estates (No. 2) Ltd v Altomari Ltd [2014] EWCA Civ1575. In Salford Estates, the English court held that the test for a disputed debt governed by an arbitration agreement should be lowered. It was held that when faced with such a debt, the English Courts should dismiss or stay the winding-up application, except in "wholly exceptional circumstances," which are "difficult to envisage."
In dealing with parties’ contentions, the Court of Appeal highlighted the principles set out in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83, which is the leading authority for Fortuna injunctions:
(a) A winding-up petition with no chance of success could cause irreparable harm to the company.
(b) A creditor pursuing a winding-up petition amid a disputed claim, especially when other remedies exist, may be acting inappropriately.
Then, the Court of Appeal went on to explain the case of Tan Kok Tong v Hoe Hong Trading Co Sdn Bhd [2007] 2 CLJ 305 where the key propositions regarding a Fortuna injunction were held as follows:
(a) The court exercises its inherent jurisdiction when issuing such an injunction.
(b) This jurisdiction includes the power to prevent abuse of the court process.
(c) To grant the injunction, the court must be satisfied that the debt in question is bona fide disputed on substantial grounds.
In light of the principles in Fortuna Holdings and Tan Kok Tong, the Court of Appeal in Swiss-ray Asia Healthcare held as follows:
(a) A court cannot simply abdicate its role and surrender its inherent jurisdiction upon the invocation of an arbitration clause. This would then run contrary to the courts’ inherent jurisdiction to prevent abuse of the courts process.
(b) Even in the English case of Salford Estates, the injunction was subject to there being an unadmitted debt on which the winding-up petition was grounded upon.
(c) If Swissray could petition for a winding-up based on the Disputed Debt without requiring a judgment, it is unreasonable for MSM to restrain the petition to merely claim that the debt is disputed on a lower prima facie threshold. MSM must demonstrate that the Disputed Debt is bona fide and can withstand judicial scrutiny.
(d) MSM’s reliance on the arbitration clause does not automatically negate the need for curial scrutiny of the Disputed Debt. The repeated admissions of the debt raise serious doubts to MSM’s position, rendering the arbitration clause insufficient to secure a Fortuna injunction.
Hence, the Court of Appeal concluded that the applicable test for a Fortuna injunction remains that of a bona fide dispute, not merely a prima facie dispute. To hold otherwise would encourage the invocation of arbitration clauses as a ‘mechanical mantra’ against legitimate claims and would open the door to frivolous disputes aimed solely at staving off a winding-up petition.
Conclusion
The Court of Appeal’s decision highlights the need to balance between upholding arbitration clauses and preventing their misuse in delaying winding-up petitions. While arbitration clauses play a crucial role in resolving disputes, they do not exempt the courts of their responsibility to prevent the abuse of process.
The court’s role in safeguarding against frivolous claims and preventing misuse of arbitration clauses is critical in maintaining the integrity of both the arbitration and judicial processes. Ultimately, a party challenging a winding-up petition must meet the bona fide dispute test to successfully obtain a Fortuna injunction.
30 October 2024