[From Singapore Office] Case Update: Leave of Court Required to Commence Proceedings on Private Agreements with Insolvency Administrators?

The facts of Kardachi

Mr. Rajesh Bothra, a businessman, was adjudged bankrupt in Singapore on 21 February 2021, but fled the country to avoid the consequences of bankruptcy in Singapore. The private trustees of Mr. Bothra’s estate in bankruptcy reached out to a former business associate of Mr. Bothra, Mr. Deepak Mishra, for his help in investigating the pre-bankruptcy affairs and dealings of Mr. Bothra. As part of this investigation, the private trustees and Mr. Mishra signed a waiver agreement, which contained an arbitration clause.

Subsequently, the private trustees commenced court proceedings to reverse a number of transactions Mr. Bothra had carried out to Mr. Mishra, his wife, and their alleged companies. The grounds for unwinding these transactions were that, among others, they were at an undervalue, were unauthorised, or constituted an unfair preference.

Mr. Mishra subsequently commenced an arbitration against the private trustees under the waiver agreement, though he did not seek the prior leave of Court to do so. He alleged that by commencing the court proceedings, the private trustees had breached the waiver agreement in the following ways: (1) breach of an implied duty to act in good faith, by using the documents Mr. Mishra had provided to commence legal proceedings against him; and (2) breach of an implied agreement that the documents provided by Mr. Mishra could only be used for the private trustees’ investigation into the affairs and dealings of Mr. Bothra.

The private trustees then applied to Court for a declaration that Mr. Mishra had not sought leave of Court to commence the arbitration proceedings, and to restrain Mr. Mishra from taking further steps in the arbitration.

Court’s permission required

The Court found in favour of the private trustees, holding that the Court’s permission must be sought before commencing proceedings, including arbitration proceedings, against private trustees in bankruptcy. The fact that Mr. Mishra’s claim had arisen out of a separate, post-bankruptcy agreement signed with the private trustees did not constitute an exception to this rule.

In so finding, the Court highlighted that the rationale behind requiring the Court’s permission is to “avoid unnecessary and expensive legal proceedings arising from frivolous claims so as to avoid additional expense to the general body of creditors”. The policy interest in protecting the insolvent party’s estate remained relevant where the private trustees had entered into a private agreement with a third party.

Further, Mr. Mishra had sought to rely on Section 420(2) of the IRDA (which states that arbitration agreements entered into by the bankrupt party before their bankruptcy, which are adopted by the private trustee administering the bankruptcy, shall be “enforceable”) to argue that arbitration proceedings are an exception to the rule that the Court’s permission is required. However, the Court also disagreed with this argument. Whether the arbitration agreement is enforceable, and whether the Court’s permission is required, are two separate matters.

Retrospective application for permission

Mr. Mishra had also applied to retrospectively seek the Court’s permission to commence the arbitration proceedings. Retrospectively requesting the Court’s leave is generally allowed, as this better serves the objective of sieving out claims which are frivolous, or which may delay the liquidation process.

However, the Court declined to retrospectively permit Mr. Mishra to commence the arbitration against the private trustees in Kardachi because the requirement of a “prima facie arguable case” was not satisfied in this case. This was because the waiver agreement between Mr. Mishra and the private trustees contained an entire agreement clause, which provided very clearly that no other terms shall be implied into the agreement. As such, Mr. Mishra failed to prove his case on the implication of terms into the agreement.

Conclusion

Given the prevalence of arbitration agreements in business contracts, it would be important for parties to keep in mind the strong public policy interest upheld by the Singapore Courts in bankruptcy situations, and to ensure the relevant pre-requisites are met before commencing arbitration.