The Singapore R&I Processes(in particular, an application in relation to judicial management or scheme of arrangement in respect of companies, and an application in relation to voluntary arrangement in respect of individuals) are each typically accompanied by a moratorium which stays or restrains any action or proceeding (including arbitration) against the insolvent party pending the Court’s determination of the application (Insolvency, Restructuring and Dissolution Act 2018 (No. 40 of 2018) (“IRDA”), Sections 64(1)(c), 95, 129, and 325).

Depending on the type of Singapore R&I Process, upon the commencement or grant of the application, an action or proceeding may only continue or be commenced against the insolvent party with leave of the Court or, in the case of judicial management, with the consent of the judicial manager in the alternative (IRDA, Sections 96(4)(c), 133 and 327(1)(c)).

Where leave of the Court is required, the Court may also impose certain conditions (for example allowing only some but not all of the claims to proceed) which might necessitate amendments to the initial claims in the arbitration.

In general, the Court will consider three broad factors in the context of winding up in deciding whether to grant leave (which will likely apply to personal bankruptcy as well): (i) the timing of the application for leave; (ii) the nature of the claim that was sought to be pursued, and (iii) whether the claim could be adequately addressed within the insolvency regime (Korea Asset Management Corp v Daewoo Singapore Pte Ltd [2004] 1 SLR(R) 671).

In the context of a scheme of arrangement (which will likely apply to judicial management as well), the Court will consider a number of factors when deciding whether to grant leave: (i) the impact on the other creditors; (ii) the possible distraction from restructuring; and (iii) the prejudice or effect of either refusing or allowing the application on the parties (Hyflux Ltd v SM Investments Pte Ltd [2020] 4 SLR 1265 at [27]). Whether leave would be granted will very much depend on the facts of each case and in circumstances where the application for leave is opposed (i.e. by other creditors) or if the Court wishes to retain some supervisory oversight, the Court may grant leave which is subject to certain conditions.

Further, in relation to a scheme of arrangement, once the scheme has been sanctioned by the Court, a claim against the scheme company (which may be subject matter of pending arbitration proceedings) may be compromised under the scheme.

In the context of judicial management, winding up and personal bankruptcy, a judicial manager/liquidator/Official Assignee may commence court proceedings to set aside or vary transactions entered into prior to or after the start of one of these insolvency procedures (such as an undervalue transaction or unfair preference) if the relevant grounds are met (“Avoidance Claims”). Such Avoidance Claims are considered to be non-arbitrable and may only be determined by the court.

The insolvency regime’s objective of facilitating creditors’ claims against a wound-up company or an insolvent individual overrides the latter’s freedom to choose the forum where such disputes are to be heard (Larsen Oil and Gas Pte Ltd v Petropod Ltd [2011] 3 SLR 414 at [46]) If the transaction sought to be avoided is already the subject matter of arbitral proceedings, ordinarily the tribunal would stay its proceedings (if not already stayed by the relevant insolvency process) pending determination of the Avoidance Claim.

Can one initiate arbitration against an insolvent entity?

Arbitration proceedings can be commenced against an insolvent party which is undergoing one of the Singapore R&I Processes, subject to the restrictions arising from the moratorium stated above.

However, given that a company that has been wound up or an individual who has been adjudged a bankrupt will likely lack funding to defend arbitration proceedings, monetary claims (which are subject to an arbitration agreement) against such company or individual will most often be resolved via the proof of debt process in liquidation or bankruptcy (as the case may be).

Further, Singapore law provides the Official Assignee (being the insolvency administrator appointed by the Singapore Minister of Law in the context of individuals), judicial manager and liquidator (in the context of companies) with the discretion to disclaim certain types of agreements.

In relation to bankruptcy, the Official Assignee has the discretion to adopt a contract containing an arbitration agreement and which was entered into prior to the commencement of the bankruptcy (IRDA, Section 420). If the Official Assignee does not adopt the contract, and a matter to which the arbitration agreement applies arises, the Official Assignee or any other party to the arbitration agreement may apply to the Court to determine whether the matter should be referred to arbitration in accordance with the arbitration agreement

There is no statutory equivalent for companies, but a judicial manager or liquidator may disclaim certain contracts in the context of judicial management or winding up respectively if, for example, the agreement within which the arbitration agreement is housed constitutes an “unprofitable contract” (IRDA, Section 230).

If the contract is not disclaimed, an arbitration agreement entered into pre-insolvency will continue to be valid and enable arbitration of prior private inter se disputes that stem from pre-insolvency rights and obligations. However, disputes that stem from rights and obligations that arose only upon the onset of insolvency due to the operation of the insolvency regime are not arbitrable (Larsen Oil and Gas Pte Ltd v Petropod Ltd [2011] 3 SLR 414 at [51]).

Can an insolvent entity commence arbitration?

Yes, an insolvent party can commence arbitration proceedings.

Under Singapore law, a judicial manager, liquidator or Official Assignee is empowered to bring or defend any action or other legal proceeding in the name or on behalf of a company in judicial management or liquidation or an individual who has been adjudged a bankrupt (as the case may be)  (IRDA, Sections 144(1)(e) and 378(b), and paragraph (e) of the First Schedule to the IRDA). This power is generally unfettered save in the case of a winding-up where the liquidator must obtain prior authorisation from the Court or the Committee of Inspection.

In the case of a compulsory winding up, the creditors and contributories of the insolvent party can compel the appointment and decide the composition of a Committee of Inspection (comprising their representatives) to act with the liquidator: Sections 150 and 151 IRDA. The Committee of Inspection (if constituted) oversees the acts of the liquidator. Section 144(1) IRDA. There are no restrictions which prevent a company proposing a scheme of arrangement or an individual proposing a voluntary arrangement from commencing arbitration proceedings.

In practice, a judicial manager, liquidator or Official Assignee is generally hesitant to commence arbitration proceedings, especially in circumstances where the prospects of success are unclear or finely balanced, and if funding is not available.

Prior to the commencement of winding up or bankruptcy proceedings by a creditor, the debtor will typically be served with a letter of demand (otherwise referred to as a statutory demand) for the amounts claimed. If the debtor disputes the claim, it may apply to set aside the statutory demand on the basis that there is a dispute over the debt owed which should be referred to arbitration. Alternatively, the debtor may also dispute the claim in the winding up/bankruptcy proceedings on the same grounds.

In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158, the Singapore Court of Appeal clarified the position under Singapore law. Where there is a disputed debt or a cross-claim that is subject to an arbitration agreement, the courts will apply a prima facie standard of review such that winding-up proceedings should be stayed or dismissed so long as (i) there is a valid arbitration agreement between the parties, and (ii) the dispute falls within the scope of that arbitration agreement, provided that the dispute is not raised by the debtor in abuse of the court’s process. This principle should similarly apply in the context of bankruptcy proceedings.

If the arbitral award deals with a claim which is the subject of a secured creditor’s security, the secured creditor will be entitled to enforce its security during the liquidation or bankruptcy process. However, in judicial management or scheme of arrangement, a moratorium will likely be in place to restrict a secured creditor from enforcing its security (if the subject matter of the security is the company’s assets) unless leave of Court is obtained.

In the context of judicial management, the secured creditor may seek the consent of the judicial manager to exercise its enforcement rights in the alternative. If the security is inadequate, the shortfall will be regarded as an unsecured claim.

If the arbitral award relates to a debt against a defendant which has been wound up or adjudged a bankrupt, there is precedent (see Pacific King Shipping Pte Ltd and another v Glory Wealth Shipping Pte Ltd [2010] 4 SLR 413, at [19]) which suggests that the claimant may rely on the award as proof of an unsecured debt in the liquidation or bankruptcy.

However, as the law in this regard is not settled, a successful claimant should still seek recognition of the award as a Singapore court judgment prior to proving the debt in liquidation or bankruptcy if time permits so as to pre-empt any potential challenge by the liquidator or Official Assignee (as the case may be) (International Arbitration Act (Cap 143A), Sections 19 and 29). Leave of the Court is required to commence such proceedings (see response above).

Should the award be recognised as a Singapore court judgment, the judgment debt will rank as an unsecured debt and in the case of a winding up or bankruptcy, the estate of the liquidated company or bankrupt will be applied pari passu in satisfaction of its liabilities to all unsecured creditors (IRDA, Section 172).

In April 2020, the Singapore Government enacted the COVID-19 (Temporary Measures) Act (the “COVID-19 Act”) to moderate the economic fallout from the pandemic. The COVID-19 Act allows a non-performing party, during certain prescribed periods, to obtain a temporary stay on certain creditor actions for non-performance.

As of January 2021, this applies to (amongst others): (a) any performance bond in respect of a construction contract or supply contract; or (b) any construction contract and any supply contract, in both cases, where, (i) amongst others, the relevant obligations are due to be performed on or after 1 February 2020 under contracts entered into or renewed before 25 March 2020 and (ii) the inability to perform is to a material extent caused by a COVID-19 event.

The relevant prescribed period for this stay will end on 31 March 2021. For completeness, the COVID-19 Act previously introduced temporary changes relating to the monetary thresholds and timelines for bankruptcy and winding up but these changes have lapsed at the time of this write-up.

Further, with effect from 29 January 2021 for a period of 6 months, a Simplified Insolvency Programme is available under the IRDA to provide simpler, faster, and lower-cost proceedings to assist micro and small companies in need of winding up (Part 10A of the IRDA) or restructuring (Part 5A of the IRDA ), particularly those that were severely affected by the pandemic.