Case Spotlight: Test for Fortuna Injunction where there is an Arbitration Agreement
Recently the High Court in PRPC Utilities and Facilities Sdn. Bhd. v PBJV Group Sdn. Bhd. & Anor [2022] 2 CLJ 276 held that the existence of an arbitration agreement does not stop a party from presenting a winding-up petition against the other party.
Here, the Defendant presented a winding-up petition against the Plaintiff to recover a debt arising from a construction payment claim. The Plaintiff sought to restrain the presentation of the winding-up petition, arguing it falls within the scope of the arbitration agreement between parties, and therefore arbitration should have been a proper forum to hear the dispute, not the Courts.
Brief Facts
- The Plaintiff and Defendant entered into a construction agreement where the value of the contract is at RM84,148,028 (“Contract Price”).
- The Defendant commenced a separate suit against the Plaintiff for RM42,696,538.56 (“Suit”). This sum includes the Defendant’s Progress Claim No. 9, amounting to RM6,579,806.74 of the Contract.
- The Plaintiff applied to stay the Suit pending reference of the dispute to arbitration where in the arbitration, the Plaintiff is claiming for a sum of RM85,203,274.96 (“Arbitration”).
- On 23.9.2020, the Defendant issued a payment claim under Section 5 of the Construction Industry Payment and Adjudication 2012 (“CIPAA”) to claim a sum of RM6,579,806.74 from Progress Claim No. 9, to be paid as Progress Claim No. 10 under the Contract.
- The Defendants also issued the Plaintiff a statutory notice of demand under Section 466 of the Companies Act (“Notice”) where the Defendants demanded from the Plaintiff the sum of RM6,579,806.74.
- The Plaintiff disputed the demand and applied for a Fortuna Injunction to restrain the presentation of the Defendant’s Winding-up Petition.
Key Issues
The key issues to be determined by the Court were:
- whether winding-up proceedings are subject to or caught by the arbitral proceeding or an arbitration agreement/clause;
- Whether the arbitral proceeding is the proper forum for the parties’ dispute herein to be determined; and
- the impact the arbitral proceeding and parties’ arbitration agreement will have on the tests for a Fortuna injunction and the proper test that should be applied.
Court’s Findings
The Court applied the principles in NFC Labuan Shipleasing I Ltd v. Semua Chemical Shipping Sdn Bhd [2017] 1 LNS 943 and held that winding-up proceedings are not subject to or caught by an arbitration agreement. An arbitration does not prohibit the defendants from presenting and proceeding with a winding-up petition.
However, the Court still allowed a Fortuna Injunction to restrain the presentation of the winding-up petition because where there is an arbitration agreement, the Plaintiff only needs to satisfy a lower threshold prima facie test – i.e., is there a prima facie dispute that the debt fell within the arbitration agreement.
Here, the Court held that the Plaintiff met this lower threshold prima facie test. Not only did the Plaintiff dispute the Defendant’s claim under the statutory demand based on the argument it falls under the arbitration agreement, the Plaintiff provided detailed reasons for their dispute. This went above and beyond what they needed to show. The Plaintiff not only met the lower threshold prima facie test, the Plaintiff also passed the usual standard requirement for a Fortuna Injunction of showing that the debt is bona fide disputed on substantial grounds.
The Court also held that the steps taken by the Defendants (the Suit and the CIPAA payment claim) were in themselves evident that the Defendants had considered there were other processes that could be taken to claim the sum under Progress Claim No. 9. That would affect the suitability of proceeding with a winding-up petition to resolve the Defendant’s claim for the sum.
Key Takeaways
Although an arbitration does not prevent a winding-up petition from being presented, it does not mean a Fortuna injunction will never be granted where there is an arbitration agreement.
To restrain the presentation of a winding-up, the applicant must normally be able to show there is a bona fide dispute of the debt. However, where there is an arbitration agreement between the parties, the applicant need only need to meet a lower threshold of showing there is a “prima facie” dispute that the debt fell within the arbitration agreement.
Based on PRPC Utilities, parties applying for a Fortuna Injunction based on an arbitration agreement are well advised to go beyond the lower threshold test and show how the debt is disputed on bona fide grounds. If they can do that, they are more likely succeed in the Fortuna Injunction rather than just relying on the lower threshold test.
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This article was written by Zi-Han Lim, Senior Associate from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.
