1. ) Dato' Ler Cheng Chye (Pelikuidasi-pelikuidasi Bagi Pustaka Efektif Sdn. Bhd. (Dalam Likuidasi)) 2. ) LUM TUCK CHEONG (PELIKUIDASI-PELIKUIDASI BAGI PUSTAKA EFEKTIF SDN. BHD. (DALAM LIKUIDASI)) v 1. ) ATURAN PRISMA SDN BHD 2. ) ABD RAHMAN BIN HARUN 3. ) MAZLAN BIN MD ZAIN 4. ) CHAI CHEE SENG 5. ) GOH LIK SIN 6. ) YAAKOB BIN NORDIN

Case Significance

Confirms that an arbitration agreement remains valid despite a party's insolvency, and that the mandatory stay under section 10 of the Arbitration Act 2005 applies even where the referring party is a liquidator — subject only to the limited exceptions that the agreement is null and void, inoperative or incapable of performance.

This High Court decision at Kuala Lumpur concerns whether a suit should be stayed and referred to arbitration where one party is insolvent and some co-defendants are not parties to the arbitration agreement. The plaintiffs, the liquidators of a company in liquidation, had sued a group of defendants, the first of which was a party to an arbitration agreement with the company while the remaining defendants, several individuals, were not. The defendant party to the arbitration agreement sought a stay of the proceedings so that the dispute could be referred to arbitration. The plaintiffs resisted, arguing that the arbitration agreement no longer bound them given the company's insolvency, that referring the matter to arbitration would be contrary to the objectives of the insolvency regime and against public interest, and that section 4 and/or section 10 of the Arbitration Act 2005 supported keeping the suit in court.

The court held that an arbitration agreement remains valid notwithstanding the insolvency of a party to it. It emphasised that, following the amendment of section 10 of the Arbitration Act 2005 and consistently with Article 8 of the UNCITRAL Model Law, the High Court is now under an obligation to refer parties to arbitration unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed. The insolvency of the company and the pursuit of the claim by its liquidators did not, of themselves, render the agreement inoperative or offend public policy so as to displace that obligation.

The court ordered that the proceedings against the first defendant — the party to the arbitration agreement — be stayed and the parties referred to arbitration, with costs of RM20,000 payable by the plaintiffs to the first defendant, while the claim could continue against the co-defendants who were not parties to the agreement. The judgment illustrates that a mandatory stay under section 10 of the Arbitration Act 2005 applies even where the referring party is a liquidator of an insolvent company, subject only to the limited exceptions in that section.