Singapore Court of Appeal affirms arbitrability of minority oppression claims

In the recent decision of Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2015] SGCA 57, the Singapore Court of Appeal held that minority oppression claims are arbitrable. Where defendants are involved who are not parties to the arbitration agreement, the court’s role is to take the lead in ensuring the efficient and fair resolution of the dispute as a whole – this includes imposing conditions on any stay of court proceedings.

This article is contributed by JWS Asia Law Corporation, Singapore

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Mohammed Reza (JWS Asia Law Corporation, Singapore)
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The Singapore Court of Appeal has held that minority oppression claims are arbitrable. Where defendants are involved who are not parties to the arbitration agreement, the court’s role is to take the lead in ensuring the efficient and fair resolution of the dispute as a whole - this includes imposing conditions on any stay of court proceedings.

The dispute

In Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2015] SGCA 57, the plaintiff (and respondent in the appeal), Silica Investors Limited (Silica), was a minority shareholder in the 8th defendant, Auzminerals Resource Group Limited (AMRG). The majority and controlling shareholder of AMRG was the 1st Defendant, Tomolugen Holdings Limited. The 2nd to 7th defendants were the directors and/or shareholders of AMRG.

Silica had purchased its shares from the 2nd Defendant pursuant to a Share Sale Agreement dated 23 June 2010, which contained an SIAC arbitration clause.

Silica commenced a suit in the Singapore courts pursuant to s 216 of the Companies Act (Cap. 50) alleging minority oppression by several of the defendants. The Plaintiff’s four main allegations were that:

  1. The issuance of shares to Tomolugen Holdings Limited by AMRG as payment for an alleged debt had the effect of diluting the Plaintiff’s shareholding by over 50%.
  2. Silica was wrongfully excluded from participating in the management of AMRG (Management Participation Allegation).
  3. The board of directors of AMRG were under the control and/or influence of several of the defendants and executed corporate guarantees to further those defendants’ interest at the expense of AMRG.
  4. Several of the defendants had misused AMRG’s resources for their own benefit and had concealed information from AMRG.

One of the reliefs sought by the Plaintiff as a minority shareholder was the winding up/liquidation of AMRG pursuant to section 216(2)(f) of the Companies Act.

The High Court dismissed the stay application by the 1st, 2nd, 3rd, 5th and 8th defendant on the basis that the minority oppression claim was not arbitrable. In particular, the High Court held that most minority oppression claims will have the following characteristics and will thus not be arbitrable:

“…there are other shareholders who are not parties to the arbitration, or the arbitral award will directly affect third parties or the general public, or some claims fall within the scope of the arbitration clause and some do not, or there are overtones of insolvency, or the remedy or relief that is sought is one that an arbitral tribunal is unable to make.”

Arbitrability of minority oppression claim

No public policy against arbitrating minority oppression cases

In allowing the appeal, the Court of Appeal held that a distinction should be drawn between a minority oppression claim and those involving the liquidation of an insolvent company or avoidance claims arising out of insolvency, which were non-arbitrable (see Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] 3 SLR 414). The Court of Appeal held that there was nothing in the Companies Act “to suggest an express or implied preclusion of arbitration”. Similarly, neither the legislative history nor the statutory purpose of s 216 suggested that there were public policy reasons to disallow the arbitration of a minority oppression claim.

In this respect, the Court of Appeal considered that s 216 was to protect the legitimate expectations of the shareholders and that the provision was not introduced “to protect or further any public interest”. It noted that a s 216 application “almost always arises in the context of a solvent company” and that, until a winding up order is actually made, such an application need not be advertised pursuant to the Companies (Winding Up) Rules.

The Court of Appeal also noted that no adverse case in any jurisdiction holding that such disputes were non-arbitrable, had been drawn to its attention.

“Remedial inadequacy” is insufficient reason

The Court of Appeal held that a tribunal’s inability to make awards that would bind third parties, or the world at large, or to order the winding up of a company did not in itself address the question of whether a minority oppression claim is arbitrable. The Court of Appeal reasoned that parties remained “free to apply to the court for the grant of any specific relief which might be beyond the power of the arbitral tribunal to award”. Any findings made in the arbitration would be binding on the parties and cannot, as a general rule, be re-litigated in court.

Procedural complexity and inconvenience are insufficient reasons

The Court of Appeal also recognised there would be procedural complexity arising out of the fact that only part of the issues and some of the parties would be involved in the arbitration. However, any resulting inconvenience (even substantial ones) was not sufficient reason to justify a finding of non-arbitrability and a stay of proceedings.

Conditional stay of proceedings - Court is to manage procedural complexity

Of the four allegations, the Court of Appeal found that only the Management Participation Allegation was within the scope of the arbitration agreement. As such, this dispute between Silica and the 2nd Defendant was subject to a mandatory stay of proceedings pursuant to s 6(1) of the International Arbitration Act (IAA).

As a result, the Court was faced with an overlap but not an identity between the parties to the putative arbitration and the parties to the court proceedings. Concurrently, there was an overlap in the issues to be determined in the putative arbitration and the court proceedings. In contrast, there was an underlap in the remedies that the tribunal could grant as opposed to the court, which raised the prospect of Silica and/or the 2nd Defendant returning to court after the conclusion of their arbitration.

The Court of Appeal was therefore conscious of the possibility of the third party defendants “re-litigating” issues decided in the arbitration. As non-parties to the arbitration agreement, they would not have an opportunity to address the tribunal and would not be legally bound by the findings.

The Court of Appeal therefore ordered a conditional stay of proceedings (see s 6(2) of the IAA). The underlying rationale was that “the court, as the final arbiter, should take the lead in ensuring the efficient and fair resolution of the dispute as a whole”.

The details of the Court of Appeal’s order are worth highlighting. Silica was given two weeks to decide if it was willing to forego its claim against the 2nd Defendant on the Management Participation Allegation. If Silica chose to do so, the court proceedings would not be stayed but it would not be entitled to rely on the Management Participation Allegation against any of the defendants in the court proceedings.

If Silica chose not to forego its claim on the Management Participation Allegation, then the Court of Appeal would grant a stay on all 4 of the allegations pursuant to the IAA and its own inherent power of case management until the Management Participation Allegation were determined in arbitration. Furthermore, if Silica were to offer to arbitrate the Management Participation Allegation against the remaining defendants and if the other defendants did not accept that offer, then any attempt on the defendants’ part to “re-litigate” the Management Participation Allegation in court subsequent to the arbitration would provide “strong grounds” to be rejected as an abuse of process.

The Court of Appeal also imposed a further requirement that SIAC arbitration was to be an expedited arbitration because the Management Participation Allegation was considered a “narrow issue that is subsidiary in importance to the other issues and allegations”. Any undue delay also entitled the arbitrating parties to apply to the Court to have the stay lifted.

Comment

The decision of the Court of Appeal clarifies the law and reaffirms the pro-arbitration policy and stance taken by the Singapore judiciary. It demonstrates that the Singapore courts will not hesitate to extensively manage its own proceedings and impose various conditions on the parties and on the arbitration process itself in order to give effect to the commercial expectation of parties to have their disputes arbitrated.

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