Singapore Case Update: Arbitrability of Shareholder Disputes (Tomolugen Holdings v Silica Investors Ltd [2015] SGCA 57)

I.  INTRODUCTION

Is a dispute regarding shareholder minority oppression under s.216 of the Companies Act^[2] (“CA”) arbitrable? This was one of the issues the Singapore Court of Appeal had to contend with in Tomolugen Holdings v Silica Investors Ltd. The Court eventually delivered a judgment which injected much-required clarity into two important areas of international arbitration law – the standard for a stay application under the International Arbitration Act^[3] (“IAA”), and the test for arbitrability under the IAA.

The Parties

The first appellant (“Tomolugen Holdings”) is the majority shareholder in Auzminerals Resource Group Limited (“AMRG”), the eighth appellant. Tomolugen Holdings also wholly owns the second appellant in the case (“Lionsgate”). The third to eighth appellants are shareholdings and current or former directors of Lionsgate, AMRG or Solar Silicon Resources Group Pte Ltd (“SSRG”), a wholly-owned subsidiary of AMRG.

The Respondent (“Silica Investors”) is a minority shareholder in AMRG.

Background

Lionsgate and Silica Investors entered into a share sale agreement (“Share Sale Agreement”) for the sale of up to 2.5m AMRG shares. The Share Sale agreement contained terms and warranties which included:

1. that one nominee of Silica Investors would be nominated as a director on AMRG’s board
2. that AMRG’s accounts (and those of its related companies) gave a true and fair view of the state of affairs of those companies
3. that AMRG and its related companies would have settled or discharged all current liabilities, inter-company loans and shareholders’ advances and all obligations of AMRG by the date of the completion of the sale.

The Share Sale Agreement also contained a widely-drafted arbitration clause,^[4] which was at the centre of this dispute.

In 2013, Silica Investors commenced a suit complaining that AMRG’s affairs had been conducted in a manner which was oppressive or unfairly prejudicial towards it as a minority shareholder. This complaint was buttressed by 4 separate allegations; namely that:

1. the Appellants have diluted Silica Investors’ shareholding by more than 50% (the “Share Issuance Allegation”);
2. the Appellants have denied Silica Investors its rights to participate in the management of AMRG (the “Management Participation Allegation”);
3. AMRG, under the control of the Appellants, has executed certain guarantees for the benefit of an unrelated party (the “Guarantees Allegation”); and
4. AMRG has been incurring financial liabilities for the benefit of Tomolugen Holdings (the “Asset Exploitation Allegation”).

Proceedings

Lionsgate applied, under section 6 of the IAA, for a stay of court proceedings citing that a part of the dispute in the suit fell within the scope of the arbitration clause in the Share Sale Agreement. It further averred that the remainder of the proceedings should be stayed pending the resolution of the arbitration. The other defendants in the suit also filed stay applications which were contingent on Lionsgate’s successful application. The High Court dismissed all the stay applications.

II. KEY ISSUES

The Court of Appeal deliberated on four key issues, namely:

1. the threshold issue of what the standard of review in a stay application under the IAA is;
2. whether a dispute regarding minority oppression or unfairly prejudicial conduct under s.216 of the CA is arbitrable;
3. whether the current dispute falls within the scope of the arbitration clause in the Share Sale Agreement; and
4. in the event that the dispute falls within the scope of the arbitration clause and court proceedings are stayed in favour of arbitration, whether the remainder of the court proceedings should also be stayed pending the resolution of the arbitration.

III. THE COURT’S DECISION

The standard of review in an application for stay under the IAA

The Court of Appeal started out by noting that an arbitral tribunal has the jurisdiction to determine its own jurisdiction under the principle of kompetenz-kompetenz. This is statutorily enshrined in section 3 of the IAA which provides that an arbitral tribunal has the jurisdiction to “rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement”.

At the same time, under section 6(2) of the IAA, a court may stay court proceedings in favour of arbitration if the court is satisfied that the arbitral agreement is “null and void”, “inoperative” or “incapable of being performed” (section 6(2) of the IAA). The Court thus noted that any court which is hearing a stay application under section 6 of the IAA will have to “take a view on the existence and scope of the arbitration in question”.^[5] This may substantially overlap with the powers of an arbitral tribunal’s kompetenz-kompetenz. The question thus arises as to what the standard of review should be, such that it strikes a balance between the powers of the court and arbitral tribunal.

The court then reviewed s.6 of the IAA, the travaux preparatoires of the Model Law^[6] and the positions in multiple jurisdictions: namely, the United Kingdom, Canada and Hong Kong. It came to the conclusion that when faced with an application for a stay, a Singapore court should only undertake a prima facie review of the existence and scope of the arbitration clause. A court should grant a stay so long as any applicant can show a prima facie case that:

1. there is a valid arbitration agreement between the parties to the court proceedings;
2. the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
3. the arbitration agreement is not null and void, inoperative or incapable of being performed.”^[7]

Once this burden has been discharged by the applicant, the court is obliged to grant a stay and “defer the actual determination of the arbitral tribunal’s jurisdiction to the tribunal itself.”

The Court explained that, among other things, adopting this prima facie standard of review would uphold the principle of kompetenz-kompetenz and that this approach would manifest the principle envisaged by the IAA’s drafters, that is, for “the arbitral tribunal… to be the first arbiter of its own jurisdiction, with the court having the final say”.^[8]

Whether a dispute over minority oppression or unfairly prejudicial conduct is arbitrable

Turning to the second issue, the Court first explained that certain classes of disputes cannot be settled by arbitration because they touch on public or third party interests.  It followed by stating that arbitrability of a matter would be presumed so long as it fell within the scope of an arbitration clause. However, this presumption may be rebutted if it can be shown that Parliament intended to exclude a particular type of dispute from being arbitrated or if permitting the arbitration of a type of dispute would be contrary to public policy. Such non-arbitrable matters include claims arising upon insolvency or the liquidation of an insolvent company.

However, the Court noted that disputes involving section 216 of the CA does not, generally, engage public policy considerations because they are management disputes between shareholders of a private company and that such disputes are essentially contractual in nature.

At the High Court level, the judge held that the matter was not arbitrable because of remedial inadequacy and procedural complexity. However, these reasons were rejected by the Court of Appeal on two grounds. First, the arbitrability of a matter is not determined by the jurisdictional limitations on the type of relief that an arbitral tribunal may grant. In fact, parties may arbitrate a dispute (and be bound by the decision) before applying to court for the grant of the specific relief which the arbitral tribunal did not have the power to grant. Second, this procedural complexity does not detract from the matter’s arbitrability as such inconvenience does not fall within the statutory criterion of non-arbitrability. Hence, disputes involving section 216 of the CA are arbitrable.

Whether the current Court proceedings or any part thereof fall within the ambit of the arbitration clause

In order to establish whether the dispute fell within the ambit of the arbitration clause, two steps must be taken. First, the Court would determine what the matters are in the court proceedings. Second, it would determine if the matter is covered by the scope of an arbitration clause on its true construction.

With regards to the first stage, the Court held that when determining what the matters are in the current court proceedings,  it would take a practical and commonsensical approach. Turning to the second stage, the Court reaffirmed the principle that arbitration clauses would be construed according to parties’ intention. Further, whether the ambit of the clause covers the matter in dispute would be determined by the true nature of the issue rather than by its pleaded form.

In the case, the dispute centered over whether the Share Issuance Allegation and the Management Participation Allegation fell within the ambit of the arbitration clause. To that end, the Court of Appeal held that the former could not be said to arise out of the Share Sale Agreement because the issue centered around whether AMRG had any commercial justifications in issuing the shares and that any such justification cannot be provided or negated by the Share Sale Agreement. Hence, the Share Issuance Allegation was not within the ambit of the arbitration clause.

On the other hand, the Court held that the Management Participation Allegation fell squarely within the ambit of the arbitration clause because the allegation could only be sustained by reference to the Share Sale Agreement.

Whether the remainder of the court proceedings should also be stayed

The Court then moved on to the final issue of whether to stay the remainder of the court proceedings in order to prevent duplicity of court and arbitral proceedings. It clarified that just because part of a dispute is being arbitrated, this does not mean that any court proceedings regarding the rest of the dispute will also be “stayed as a matter of course”.^[9]

Ultimately, the Court reasoned that this was a fact-centric analysis and it would take into account three concerns: first, the plaintiff’s right to choose whom he wants to sue; second, the court’s desire to prevent the plaintiff from circumventing the operation of an arbitration clause and third, the court’s inherent power to manage its processes to prevent an abuse of process and to ensure the efficient and fair resolution of disputes.

Applying the above principles to the facts, the Court then ordered that should the Respondents decide to proceed with the arbitration, the rest of the court proceedings, whether against Lionsgate or other parties which are not involved in the arbitration, will all be stayed in the interests of case management.

IV. COMMENTARY

Unequivocal pro-arbitration decision by the Court

Tomolugen Holdings should be read as an pro-arbitration ruling that shows the Court’s commitment towards upholding the kompetenz-kompetenz principle. The Court’s adoption of a prima facie approach when deciding whether to order a stay of proceedings essentially means that it will defer the actual determination of an arbitral tribunal’s jurisdiction to the tribunal itself. This definitively aligns the Singapore position to the Hong Kong^[10] and Canadian^[11] position.

This case should not be seen as a stand-alone. Together with the recent decisions of Sim Chay Koon^[12] and Malini Ventura^[13], the Supreme Court has in 2015 alone issued three successive judgments which held that the standard of review for a stay of proceedings is a prima facie one. In all three cases, the proceedings were stayed for arbitration. When read together, it can be inferred that the threshold for passing the prima facie test is set at a relatively low level. In subsequent cases, it should be very difficult for parties to an arbitral agreement to persuade the courts not to stay the proceedings in favour of arbitration.

Limiting the scope of non-arbitrability in Singapore

Where arbitrability is concerned, the court broke new ground in holding that procedural complexity and remedial inadequacy are not enough to render a particular dispute non-arbitrable. The Court also analysed the express wording, legislative history and statutory purpose of s.216 of the CA in determining that none of the above suggests that it is against public policy for a s.216 dispute to be adjudicated by an arbitration tribunal. The rigourous analysis adopted by the Court showed the high threshold for a dispute to be rendered non-arbitrable, and potentially limits the scope of non-arbitrable grounds under s.11 of the IAA. Even if an arbitral tribunal does not have the power to award a remedy, such as ordering a winding up under s.216(2)(f) of the CA, parties can still go to arbitration to have the underlying dispute arbitrated, and then to apply to court for the grant of a specific relief.

Lawyers should be careful in drafting arbitration clauses

The Court also found that the arbitration clause was drafted in a way which was wide enough to include the Management Participation Allegation. This finding was made despite the fact that doing so could cause additional procedural complexity, since some of the parties will now have to turn to arbitration to resolve a “narrow issue that is subsidiary in importance” before all of the parties go back to court to litigate the remaining issues.^[14] The Court’s willingness to give full effect to widely-drafted arbitration clauses, even if it prolongs the dispute resolution process, should serve as a warning signal to lawyers to draft arbitration clauses with great care. Careless drafting can easily add procedural complexity and lengthen proceedings.

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This article may be cited as follows: Royston Tan and Aloysius Liu, “Singapore Case Update: Arbitrability of Shareholder Disputes (Tomolugen Holdings v Silica Investors Ltd [2015] SGCA 57) International Arbitration Asia (9 November 2015) <http://www.internationalarbitrationasia.com/arbitrability-of-shareholder-disputes-tomolugen>.