Arbitration agreements vs winding-up petitions

Key takeaways 

In a recent judgment^[1], the Privy Council has unanimously held that, both as a matter of English and BVI law, a "generally worded" arbitration or exclusive jurisdiction clause applicable to the debt relied on by a creditor bringing a winding up petition against a debtor should not lead to the stay or dismissal of the petition unless the debt is genuinely disputed on substantial grounds. 

This overturns the previous English authority on such matters - the Court of Appeal case of Salford Estates^[2] – and as such could have implications for certain other Commonwealth and common law jurisdictions whose jurisprudence has to date also followed the approach in Salford Estates. It has certainly had immediate implications for the English Courts.

The Privy Council took the further, highly unusual step of directing the English Companies Court not to follow Salford Estates and to cease its current practice of staying or dismissing winding up petitions where the petitioner's debt is covered by an arbitration clause regardless of whether the debt is genuinely disputed on substantial grounds. 

The Privy Council has, however, left open the possibility that an arbitration or exclusive jurisdiction clause could be specifically worded so as to avoid the outcome in Sian. For example, such a clause could have the effect of suspending a person's right to petition for the winding up of their counterparty until the relevant dispute is resolved by arbitration or court proceedings, whether or not the debt in question is genuinely disputed on substantial grounds.

Background 

Stays of legal proceedings where the dispute is subject to an arbitration agreement 

Section 9 of the UK Arbitration Act 1996 states that a person against whom any legal proceedings are brought in respect of a matter which is subject to an agreement that requires that such matter be referred to arbitration is entitled to apply to the court to stay those proceedings insofar as they concern that matter. 

A similar provision appears in section 18 of the BVI Arbitration Act 2013. Both sections give effect to Article 8 of the UNCITRAL Model Law on International Commercial Arbitration.

Salford Estates

In both the BVI and England, a court will normally dismiss or stay a winding up petition where the underlying debt is subject to a bona fide dispute on substantial grounds.

In the case of Salford Estates, the Court of Appeal approved a wide definition of "dispute" such that a simple non-admission of a debt owed by a party to an arbitration agreement was sufficient to create a "dispute" which would have to first be resolved by arbitration. The Court of Appeal held that the court should exercise its discretion to make a winding up order in respect of a company in a manner consistent with the legislative policy behind the Arbitration Act 1996, which included the facilitation of a fair and speedy resolution of disputes, in the forum agreed freely by the parties. As a result, a subsequent practice has developed in the English Companies Court typically to stay or dismiss winding up petitions where the underlying debt is subject to (a) an agreement to arbitrate and (b) a dispute, whether or not that dispute is raised on genuine and substantial grounds.

This was despite the fact that the Court of Appeal had also determined that a winding up petition did not fall within the scope of the mandatory stay provision of the Arbitration Act 1996, on the basis that a winding up petition was not an attempt to claim or resolve a dispute in respect of a particular debt, but instead constituted evidence of the company's inability to pay its debts.

Sian Participation Corp

In 2013, Halimeda International Ltd (HIL) provided a USD140 million term loan to Sian Participation Corp (SPC), a company incorporated in the BVI. The outstanding amounts under the loan were demanded in February 2020, and HIL applied to have liquidators appointed to SPC in September 2020. SPC disputed that the debt was due and payable on the basis of a cross-claim and/or set-off. 

The facility agreement contained an arbitration clause providing that "any claim, dispute or difference of whatever nature" arising under the agreement would be referred to the London Court of International Arbitration. The BVI courts to date had not followed the approach in Salford Estates. As such, notwithstanding the arbitration clause, the BVI court at first instance appointed liquidators to SPC on the basis that it had failed to show that the petition debt was disputed on genuine and substantial grounds. An appeal to the Eastern Caribbean Court of Appeal was dismissed - SPC at the appeal hearing did not contest the first instance finding that the petition debt was not disputed on genuine and substantial grounds.

The main issue on appeal to the Privy Council was the correct test for the BVI court to apply to the exercise of its discretion to make an order for the liquidation of a company where relevant debt is subject to an arbitration agreement and is said to be disputed and/or subject to a cross-claim (notwithstanding that dispute is not on genuine and substantial grounds). 

The Privy Council decision

The Privy Council held that, as a matter of BVI law, the correct test for a court to apply when exercising discretion to make a liquidation order where there is a dispute regarding a debt subject to an arbitration agreement is whether the debt is disputed on genuine and substantial grounds. A creditor that was required to go through an arbitration before seeking to commence liquidation proceedings where there is only an insubstantial dispute regarding the underlying debt would be subject to unnecessary additional delay and expense.

In reaching that conclusion, the Privy Council determined that:

1. The Court of Appeal in Salford Estates was correct to hold that a winding up petition did not [ordinarily] fall within the mandatory stay provisions of the relevant arbitration statutes. That is because winding up petitions do not seek to resolve the petitioner’s claim to be owed money by the company and therefore simply do not engage the negative obligation implied in arbitration clauses not to seek to resolve the claim in court; 

2. Further, a winding up petition / liquidation application based on a debt that is not genuinely disputed on substantial grounds and which is not expressly captured as a matter which is subject to the agreement to arbitrate would not contravene the underlying policy objectives of arbitration legislation because of the nature of winding up petitions and because the policy of insolvency legislation is that windings up/ liquidation should not be available against a company which genuinely disputes the debt on substantial grounds; and 

3. A winding-up / liquidation application did not in this case run contrary to the applicable arbitration clause because the clause did not contain any promise by HIL that it would not seek to commence liquidation proceedings in respect of SPC.

Whilst this case dealt with an arbitration clause in a facility agreement, the Privy Council opined that the same test and principles as noted above should also apply to exclusive jurisdiction clauses. An important point to note is that the Privy Council held that their conclusions applied to "generally worded" arbitration or exclusive jurisdiction clauses, and that different considerations may arise where the clause specifically seeks to cover winding-up petitions / liquidation applications.

Whilst the Privy Council in this case was considering a matter of BVI law, based on the conclusions summarised above it held that the Court of Appeal in Salford Estates had erred in exercising its discretion to stay the winding up proceedings in that case without it being determined whether the dispute was raised on genuine and substantial grounds.

The Privy Council therefore directed that its findings in this case were to be binding on English courts as well.^[3] In so doing, the effect of the Privy Council’s decision is to ensure that the normal approach to determining winding up petitions in the English Companies Court should apply regardless of the presence of any arbitration or exclusive jurisdiction clause (at least insofar as the clause is “generally worded”).

_Footnotes

1. Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16

2. Salford Estates (No. 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575

3. Although the ordinary position is that decisions of the Privy Council are not binding on English courts, the Privy Council can in an appropriate case direct that a decision it makes as to English law is to be binding on the English Courts (per Willers v Joyce (No. 2) [2016] UKSC 44).