Landmark decision on the tension between arbitration and insolvency extends BVI law to England & Wales

The Judicial Committee of the Privy Council (the JCPC) recently handed down a landmark decision dealing with a tension, which courts across common law jurisdictions have struggled to reconcile, namely: when deciding whether to stay a winding-up petition in favour of arbitration, to what extent should the court examine the merits on which the debt is disputed?

The significant case of Sian Participation Corp (In Liquidation) v. Halimeda International Ltd (Sian),¹ means that the English courts will no longer stay or dismiss a winding- up petition where the underlying debt is subject to a generally- worded arbitration agreement, unless the debt is genuinely disputed on substantial grounds.

Whilst Sian arose from an earlier decision of the Eastern Caribbean Court of Appeal (the ECCA) on appeal from a finding of the BVI High Court, and as such would not automatically be binding on the English courts – the JCPC gave a direction pursuant to Willers v Joyce² that the approach adopted and subsequently followed by the English courts since the 2014 case of Salford Estates (No 2) Ltd v Altomart Ltd (No 2)³ (Salford Estates) should no longer be followed.⁴ This means that the current practice of the English courts in exercising their discretion to stay a creditors’ winding up petition on the ground that the petitioner’s debt is covered by an arbitration clause, without being shown to be genuinely disputed on substantial grounds, will cease.

As to the impact of Sian on other jurisdictions, perhaps unsurprisingly (given it was bound by the Court of Appeal’s decision in Re Simplicity& Vogue Retailing (HK) Co Ltd⁵ (Re Simplicity) the Hong Kong Court of First Instance in Re Mega Gold and Man Chun Sing Matthew v New Deal Trading Limited (Mega Gold) declined to follow the decision in Sian. It will be interesting to see whether this remains the case when the issue inevitably comes before the Hong Kong Court of Appeal.

Jurisdictional comparison: England & Wales, Hong Kong, Singapore, and the BVI

In Salford Estates the English Court of Appeal held that the English courts should, unless there are exceptional circumstances, exercise their discretion in favour of a stay when the debt underlying a winding-up petition is subject to an arbitration agreement, even if the debt is not shown to be genuinely disputed.

This is a departure from the previous position under English law, whereby a winding up petition based on a debt would only be dismissed or stayed if the debtor could show that it disputed the debt “bona fide and on substantial grounds”.

Salford Estates has been followed by the English courts, who have adopted a wide definition of what amounts to a dispute about a debt. If the debt is simply not admitted by the debtor, and in the absence of genuine and substantial grounds for doing so, the winding-up petition will be dismissed or stayed on the basis that the dispute is covered by the parties’ agreement to arbitrate. That position could only be displaced by “wholly exceptional” circumstances.

The Salford Estates “exceptional circumstances” approach had a significant impact on other common law jurisdictions, and a similar approach is followed in Hong Kong and Singapore:

Hong Kong

Historically the courts in Hong Kong required the party seeking to stay the winding-up petition to bear the burden of evidencing a bona fide dispute on substantial grounds, despite the presence of an arbitration clause.

However, in 2018 Hong Kong adopted the Salford Estates approach in the first instance decision of Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd, (Lasmos)⁶ but tweaked that approach to require that the debtor must have taken steps to commence arbitration under the agreement. The court did however comment that in exceptional circumstances it might be necessary for action to wind-up the debtor to be taken immediately (e.g. where the petitioner can show a risk of a dissipation of the company’s assets).⁷

Following this decision the Court of Appeal confirmed the approach in in Re Simplicity that the parties’ arbitration agreement should be respected and upheld. However, it also noted that the court has the discretion to assume jurisdiction over the dispute based on a “multi-factorial” approach, but the court will generally only do so where there are “strong reasons”, such as where the dispute is frivolous or an abuse of process, or possibly where there are supporting creditors, or where there is evidence of a creditor community at risk.⁸

More recently the Court of First Instance had the opportunity in Mega Gold to consider whether to depart from the approach taken in Lasmos and Re Simplicity in light of the more recent decision in Sian. However, it declined to do so on the basis that it was bound by those decisions as a matter of precedent. In its judgment, the court confirmed that there is a high threshold to overcome in order to establish instances which are “frivolous” or amount to “an abuse of process”, and noted that the usual approach of the Hong Kong courts is to require the petitioner to show that the company’s defence/claim is bound to fail and hence does not warrant being investigated at trial.

Singapore

In Singapore, the Salford Estates approach was first adopted in BDG v BDH.⁹ The court in BDG held that, where a petition concerns a debt subject to an arbitration agreement, it will be stayed if the debtor can show that the debt is disputed and that it has complied with the relevant arbitration agreement.

More recently the Court of Appeal in AnAn Group (Singapore) LTE Ltd v VTB Bank¹⁰ held that winding- up proceedings will be stayed or dismissed where there is a valid arbitration agreement between the parties and there is a dispute that falls within the scope of the arbitration agreement.

In this case, the court expressed reluctance to examine the merits of the dispute because to do so would require an examination of the evidence in contravention of the parties’ choice of arbitration for resolving their disputes. The court did however recognise a very limited exception to this approach namely, in circumstances where the dispute raised by the debtor amounted to an abuse of process.

The BVI

Conversely the decisions emerging from the BVI courts favour a test which requires the debt to be genuinely disputed on substantial grounds before a creditor’s application will be dismissed or stayed on the basis of an arbitration agreement covering the dispute.

In particular, the ECCA in Jinpeng Group Limited v Peak Hotels and Resorts Limited¹¹ (Jinpeng) considered and chose not to follow the same approach as the English courts in Salford Estates, and held that the existence of an arbitration agreement was just one of the factors that the court would take into account when deciding whether to exercise its discretion to make a winding-up order.

Commenting on the decision in Salford Estates, the ECCA in Jinpeng held that the principle that a company may be wound-up based on its inability to pay its debts as they fall due, unless the debt is disputed on genuine and substantial grounds, is too firmly entrenched in BVI law to now require a creditor exercising its statutory right to wind-up the company to also prove that exceptional circumstances justify the winding-up.¹²

Sian has confirmed the position under BVI law: the correct test for the court to apply to the exercise of its discretion whether to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement and is said to be disputed is whether the debt is disputed on genuine and substantial grounds.

Commentary

The position under English law has fundamentally changed and is now similar to that in the BVI. However:

• stays in favour of arbitration will still be available if it can be shown that there was a genuine dispute as to the underlying debt on substantial grounds; and
• different considerations may arise if the arbitration agreement applied expressly to creditors’ winding-up petitions.

Given the Privy Council’s helpful review of a wide range of decisions in other common law jurisdictions, it will be interesting to see how the laws of those jurisdictions, which follow a similar approach to that set out in Salford Estates (e.g. Hong Kong, Singapore) develop in light of this decision.

Footnotes

1. [2024] UKPC 16.
2. [2016] UKSC 44.
3. [2014] EWCA Civ 1575.
4. [124]-[126].
5. [2024] HKCA 299.
6. [2018] 2 HKLRD 449
7. [29]-[30].
8. [39].
9. [2016] 5 SLR 977.
10. [2020] SGCA 33).
11. [BVIHCMAP2014/0025].
12. [47].