Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 MarsdenLR 5017

HIGH COURT MALAYA KUALA LUMPUR
DATO LER CHENG CHYE & ANOR – Appellant
Versus
ATURAN PRISMA SDN BHD & ORS – Respondent
[Writ Of Summons No: WA-22NCC-378-06/2024]

Petitioner Advocates:Wong Fook Meng ,Respondent Advocate: Wilson Lim,Huam Wan Ying

An arbitration agreement remains valid despite the insolvency of one party, and a stay of proceedings must be granted under Section 10 of the Arbitration Act 2005 if preconditions are met.

Headnote:(A) Arbitration Act 2005 - Sections 4 and 10 - Validity of arbitration agreements in insolvency - The court considered whether an arbitration agreement remains valid upon the insolvency of one party and whether the agreement contradicts public policy. It found that insolvency does not invalidate arbitration agreements, as established in Peninsula Education (Setia Alam). The court also addressed the issue of whether a stay of proceedings is warranted when co-defendants are not parties to the arbitration agreement and concluded that it is mandatory under Section 10 of the Arbitration Act to grant a stay if the preconditions are satisfied. (Paras 1-4, 18, 56-57, 123, 124)

Facts of the case:
The plaintiffs, as liquidators of a company in liquidation, sought to claim a retention sum from a contractor, who applied for a stay of proceedings pending arbitration, citing an arbitration clause in their contract. The plaintiffs contested the stay on grounds of insolvency and the involvement of non-parties.

Findings of Court:
The court ordered a stay of proceedings against the contractor, affirming the validity of the arbitration agreement despite insolvency, while allowing the suit against the non-party directors to proceed.

Issues: The main issues included the validity of arbitration agreements in the context of insolvency and whether a stay should be granted when co-defendants are not parties to the arbitration agreement.

Ratio Decidendi: The court ruled that arbitration agreements survive insolvency and are enforceable unless proven otherwise, emphasizing the mandatory nature of granting a stay when conditions under Section 10 are met.

Result: Stay of proceedings against the contractor granted, suit against the directors to proceed.

Judgement Key Points

Based on the provided legal document, here are the key points:

Validity of Arbitration Agreements in Insolvency: An arbitration agreement remains valid and operative despite the insolvency or liquidation of one party. Liquidation does not alter the pre-agreed mode of dispute resolution via arbitration unless the matter is non-arbitrable on grounds of public policy (!) (!) (!) (!) (!) (!) (!) (!) .
Mandatory Stay under Section 10: Under Section 10 of the Arbitration Act 2005, a stay of proceedings is mandatory if the preconditions are met (valid agreement, dispute within scope, agreement not null/void/inoperative/incapable of performance). The court has no discretion to refuse a stay once these conditions are satisfied (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) .
Arbitrability of Set-Off Claims: Disputes regarding set-offs are not exclusively within the purview of winding-up courts and are arbitrable. The true issue is the entitlement to set-off, which stems from pre-insolvency contractual rights rather than post-insolvency statutory remedies like undue preference or fraudulent trading (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) .
Definition of Insolvency Dispute: An "insolvency dispute" is one that arises from the operation of statutory provisions of the insolvency regime per se (e.g., avoidance of payments, fraudulent trading). Pre-insolvency contractual disputes, such as construction set-offs, do not qualify as non-arbitrable insolvency disputes (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) .
Costs and Efficiency: The argument that an insolvent company lacks the financial ability to engage in expensive arbitration or that arbitration would hinder the efficiency of the liquidation process is insufficient to refuse a stay. Courts cannot rewrite contract terms or intervene unless expressly provided by the Arbitration Act (!) (!) (!) (!) (!) (!) (!) (!) .
Presence of Non-Party Co-Defendants: The existence of co-defendants who are not parties to the arbitration agreement does not render the arbitration agreement "inoperative" or "incapable of being performed" under Section 10. The agreement's validity is not affected by overlapping issues with non-parties (!) (!) (!) (!) (!) (!) (!) (!) .
Proper Approach to Overlapping Proceedings: When dealing with overlapping court and arbitral proceedings involving non-parties, the court must balance competing interests. The mandatory stay applies to parties bound by the arbitration agreement. For non-parties, the court may use its inherent jurisdiction to manage proceedings (e.g., staying the arbitration pending the resolution of the court suit against non-parties) to achieve the most just result, but this does not negate the mandatory stay for the parties to the arbitration (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) .
No Requirement to Prove Existence of Dispute: Under the current Section 10 of the Arbitration Act 2005, it is not necessary for the applicant to prove that a dispute actually exists to obtain a stay. The determination of whether a dispute exists is a matter for the arbitral tribunal, not the court (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) (!) .
Outcome: The court ordered a stay of proceedings against the 1st Defendant (Aturan) pending arbitration, while the suit against the 2nd to 6th Defendants (non-parties to the arbitration) was allowed to proceed for trial (!) (!) (!) .

JUDGMENT

Leong Wai Hong J:

[Stay Of Proceedings Pending Arbitration Notwithstanding Insolvency Of A Party To The Arbitration And Co-Defendants Who Are Not Parties To The Arbitration]

Introduction

Issues

[1] The issues before me, [as framed by the plaintiffs in their reply written submissions at para 2 and modified by me], are:

i. Whether an arbitration agreement remains valid if one party becomes insolvent;

ii. Whether the arbitration agreement is contrary to the objectives of the insolvency regime and against public interest under s 4 and/or s 10 of the Arbitration Act 2005 [" AA 2005"];

iii. Whether a stay of the plaintiffs' suit should be granted as the Second to Sixth defendants are not parties to the arbitration agreement between Pustaka Efektif Sdn Bhd (In Liquidation) ("Pustaka") [the plaintiffs in this suit are Ler Cheng Chye and Lum Tuck Cheong as liquidators of Pustaka] and the 1st defendant Aturan Prisma Sdn Bhd ("Aturan"); and

iv. Whether a stay of the plaintiffs' suit should be granted if there are no dispute necessitating reference to arbitration.

Projects

[2] Aturan is the main contractor for two projects known as the "Scott Tower Project" and the "PR1MA Tebrau Project" located at Johor Bahru ["Projects"]. Aturan employed Pustaka as the sub-contractor for the Projects.

[3] The contractual relationship between Pustaka and Aturan are governed by two Letters of Award and the Agreement and Conditions of PAM Contract 2006 (Without Quantities) ("PAM Contract"). [See encl 8 p 15 at paras 8 to 10].

Arbitration clause

[4] The PAM Contract has an arbitration clause in cls 34.1 and 34.5.

[See Enclosure 8 p 16 at para 12].

[5] Pustaka was wound up by a court order on 31 December 2020.

Suit

[6] The plaintiffs who are liquidators of Pustaka has filed a writ action against Aturan and five other defendants. In these Grounds of Judgment, I shall call the 1st defendant Aturan or the 1st defendant.

[7] The Second, Third, Fourth and Sixth defendants are the directors of Aturan at the material time. The Fifth defendant served as the Chief Financial Officer of Aturan from 2013 until November 2022. [See encl 21 para 33a and Statement of Claim from paras 1 to 7]. In these Grounds of Judgment, I shall call the plaintiffs the Liquidators or the plaintiffs.

[8] The reasons for the suit are as follows.

The Liquidators sue Aturan

[9] Aturan is retaining a total retention sum of RM 8,665,951.95 for the Projects ["Retention Sum"] on the ground that Pustaka owes Aturan an unpaid outstanding sum of RM 33,289,292.18 due under the Projects.

[10] Aturan claims it is entitled to a set-off of this Retention Sum against the unpaid sum of RM 33,289,292.18.

[11] The Liquidators refused to recognise Aturan's claim of RM 33,289,292.18 on the ground it was not proven. The Liquidators further took the position that the withholding of the Retention Sum to set off the claim of RM 33,289,292.18 is a void disposition of property pursuant to s 472(1) of the Companies Act 2016 . The Liquidators thus sued Aturan for the Retention Sum.

[See plaintiffs' written submissions in encl 21 at para 4].

The Liquidators Sue The 2nd To 6th Defendants

[12] The Liquidators also sued Aturan's two directors as the 2nd and 3rd defendant, as well as Aturan's Chief Financial Officer as the 5th defendant for not directing Aturan to release the Retention Sum to them.

[13] The Liquidators contend that the 2nd defendant, 3rd defendant and 5th defendant are jointly and severally liable for not directing Aturan to release the Retention Sum to them, without the need for an arbitrator's decision on the dispute. [See plaintiffs' written submissions in encl 21 para 33 a].

[14] To succeed, the Liquidators will have to overcome a trite principle of law, first stated in the century-old case of Said v. Butt [1920] 3 KB 497, that directors are exempted from personal liability for the contractual breaches of their company if their acts, in their capacity as directors, are not in themselves in breach of any fiduciary or

Click Here to Read the rest of this document

2025 MarsdenLR 5017

HIGH COURT MALAYA KUALA LUMPURDATO LER CHENG CHYE & ANOR – AppellantVersusATURAN PRISMA SDN BHD & ORS – Respondent[Writ Of Summons No: WA-22NCC-378-06/2024]

An arbitration agreement remains valid despite the insolvency of one party, and a stay of proceedings must be granted under Section 10 of the Arbitration Act 2005 if preconditions are met.

Cases Referred (2)

HIGH COURT MALAYA KUALA LUMPUR
DATO LER CHENG CHYE & ANOR – Appellant
Versus
ATURAN PRISMA SDN BHD & ORS – Respondent
[Writ Of Summons No: WA-22NCC-378-06/2024]