The Law on Security from an Arbitral Award pending a Setting Aside Application under the Section 37(7) Arbitration Act Regime

When an award has been granted following proceedings in arbitration, it is not uncommon to see applications being filed in the High Court for the arbitral award to be set aside pursuant to section 37 of the Arbitration Act 2005 ("AA 2005"). In this scenario, a party who had successfully obtained the award being challenged, may apply under section 37(7) of the Act for the monies to be secured, pending the determination of the section 37 challenge.

Section 37(7) of the AA 2005 provides for the following:

"Where an application is made to set aside an award, the High Court may order that any money made payable by the award shall be brought into the High Court or otherwise secured pending the determination of the application."

However, an application for security, post-arbitration is rarely utilised. The operation on of section 37(7) of the AA 2005 was unclear until the Kuala Lumpur High Court granted some possible guidance on such security applications in the unreported decision of Sharina binti Mohamed Sultan & Ors v Agensi Perkerjaan MIMS Sdn Bhd (unreported, 2 November 2021; Originating Summons No.: WA-24NCC(ARB)-9-02/2021) ("Sharina Case").

The Sharina Case involved a share sale agreement to acquire the majority of a private healthcare recruitment company (the "Recruitment Company") that was entered into between the Defendant company and the Plaintiffs who were the former majority shareholders and directors of that Recruitment Company. The share sale agreement required the Plaintiffs to make certain disclosures about the Recruitment Company to satisfy the warranties contained in the said share sale agreement. The Plaintiffs contended that they had made all necessary disclosures but this was disputed by the Defendant and the matter was referred to arbitration. The arbitrators eventually ruled in favour of the Defendant company and found that the Plaintiffs did not make the necessary disclosures that were required under the share sale agreement and were therefore in breach of the warranties contained therein. Dissatisfied by this decision, the Plaintiffs sought recourse to set aside the arbitral award pursuant to section 37 of the AA 2005. The Defendant also similarly sought recognition and enforcement of the award pursuant to section 38 of the AA 2005 and applied to to secure the monies made payable under the arbitral award pursuant to section 37(7) of the AA 2005 (the "Section 37(7) Application").

In the course of the hearing of the Section 37(7) Application, the High Court was faced with the onerous task of determining the applicable test to be used for a provision that was rarely utilised. During submissions in the Section 37(7) Application, the High Court was referred to the observations made in the case of Zenbay Sdn Bhd v Yong Choo Kui Shipyard Sdn Bhd [2015] 10 CLJ 924 where the High Court therein had heard a similar application pursuant to the now-repealed section 42(8)(b) of the AA 2005 ("Section 42(8)(b) Application"). 

Zenbay (supra) was a case that involved the purchase of a number of shipping vessels, and a dispute arose as to whether the Plaintiff in Zenbay (supra) could settle the balance purchase price as well as an issue relating to the refusal to return the deposit paid on those shipping vessels. A Section 42(8)(b) Application was made in the course of proceedings therein, and the High Court found that the applicable test for a Section 42(8)(b) Application was that "the applicant should satisfy the court that there will be prejudice to the applicant's ability to enforce the award under section 38."

In addressing how prejudice may be established, the High Court in Zenbay (supra) was referred to the English case of A v B [2010] 2 All ER (Comm) 935 where it was found that evidence of prejudice may be shown through evidence of a dissipation of assets that would affect the ability to pay the security sum. It was held that:

At para [47] "This point was considered further in the judgment of Mance LJ in Dardana Ltd v Yukos Oil Co [2002] EWCA Civ 543 at [37], [2002] 1 All ER (Comm) 819 at [37] from which it appears that any relevant prejudice would generally be based on a risk of dissipation of assets and the successful party applying for security would need to show such risk in a similar manner to that required for a freezing injunction."
 
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At para [50] "Thus, whilst it would not be advisable or appropriate to lay down hard and fast rules as to the circumstances in which it would be appropriate to order security under s 70(7), it seems to me that as a general principle the court should not order security unless the applicant can demonstrate that the challenge to the award (whether under s 67 or, indeed, either of the other sections) will prejudice its ability to enforce the award. Often this will entail the applicant demonstrating some risk of dissipation of assets, although there may be other ways in which enforcement could be prejudiced."

The High Court in Zenbay (supra) accepted the observation of, amongst others, A v B (supra) and made the following findings:

At para [35] "In construing s. 42(8)(b) AA, I accept A v. B (Arbitration: Security) and Konkola Copper Mines plc - for the court to order money payable in an award to be paid into court or to be "otherwise secured" under s. 42(8)(b) AA, the applicant should satisfy the court that there will be prejudice to the applicant's ability to enforce the award under s. 38 AA. Section 38 AA provides for the recognition and enforcement of the award by a successful party in the arbitration, namely the applicant. My view is premised on the following reasons:

(a) a party who is successful in an arbitration, has the right to enforce the award under s. 38 AA. If the award can be enforced under s. 38 AA, there is no need to apply under s. 42(8)(b) AA. The need to file an application pursuant to s. 42(8)(b) AA only arises when there may be prejudice to the applicant's right to enforce the award under s. 38 AA, such as dissipation of assets by the "losing" party in the arbitration (who is also the plaintiff who has filed the court reference) so as to defeat any enforcement of the award by the applicant …"

The High Court in Zenbay (supra) also observed that the operative wordings of section 42(8)(b) of the AA 2005 are similar to those of section 37(7) of the AA 2005. The High Court in Sharina's Case, having been referred to, amongst others, the case of Zenbay (supra), in order to determine the operation of the legal test under section 37(7) of the AA 2005, ultimately decided by way of its oral decision that the "Defendant had failed to demonstrate why an order for sums payable under the Arbitral Award should be granted. This stems from the inability to show prejudice in enforcing the award. While the Award is final and binding, it does not automatically mean payment of the sums must be furnished at this stage."

Whilst the High Court's oral decision in Sharina's Case did not make express reference to Zenbay (supra), it should be noted that its findings are similar to that ofthe jurisprudence set out in Zenbay (supra). It can therefore be surmised that the test for a Section 37(7) Application as well as a section 42(8)(b) Application relies on the same test and the same set of considerations as to the evidence of the prejudicethat would have occurred, in enforcing the arbitral award.