Arbitration and insolvency

Sian Participation Corp (In Liquidation) (Appellant) v Halimeda International Ltd (Respondent) (Virgin Islands) [2024] UKPC 16

On 19 June the sun shone on the Supreme Court and brought a feel of the tropics to London. It was a suitable reflection of the judgment being handed down in the Judicial Committee of the Privy Council (JCPC), the court which serves the British Overseas Territories, Crown dependencies and some Commonwealth countries. Lord Briggs and Lord Hamblen sought to bring clarity to the previously cloudy judicial landscape of whether a company can be wound up for a debt due under a contract containing an arbitration agreement, or whether a creditor must first go through the arbitration procedure to determine whether the debt is disputed.  

The court held that the test to be applied is whether the debt is disputed on genuine and substantial grounds, and not merely a non-admission of the debt. It was held that the practice of the English courts of staying or dismissing a creditor’s winding-up petition based on a wide interpretation of a ‘disputed debt’ (that is, without the need to show that the debt is genuinely disputed on substantial grounds) is wrong and should stop.

Background

The general principle followed by the British Virgin Islands (BVI) (and England and Wales) is that a creditor cannot seek the winding-up of a company if the debt is disputed. The creditor must have an undisputed debt to commence insolvency proceedings. However, there has been inconsistent application of this principle between different countries as to how to interpret the meaning of a "disputed debt". Where the relevant debt is covered by an agreement to arbitrate, there has been uncertainty about whether the issue regarding the genuineness of a debt should be determined by the arbitrator before being passed to the insolvency process.

Salford Estates

In that specific context of a debt based on an agreement subject to an arbitration agreement, some countries (such as England and Wales) previously adopted a wide definition of a ‘disputed debt’. This meant that it was relatively easy for a debtor to apply for an adjournment or dismissal of a winding-up petition, on the basis that the debt was merely not admitted. This led to frustration on the part of creditors who would have to take the case to arbitration even if it seemed that the dispute was disingenuous or insubstantial.

This was the practice set out in the Court of Appeal decision of Salford Estates (No 2) Ltd v Altomart Ltd (No 2). This decision had far-reaching consequences, being the practice subsequently adopted by many other common law jurisdictions across the world.

Other countries (such as the BVI) adopted the narrower, more traditional position set out in the leading case of Jinpeng Group Ltd v Peak Hotels and Resorts Ltd. This favoured the appointment of a liquidator and required the debt to be genuinely disputed on substantial grounds before a creditor’s application could be dismissed or stayed because of an agreement to arbitration.

The JCPC was asked to decide which approach the BVI court should take, and whether the English courts should follow the same approach.

Facts of the case

In the appeal in question, the appellant company had incurred a very large unpaid debt (claimed to be roughly $226m). This fell into the grey area of being denied by the company on the basis of a cross-claim and/or set-off, but it was not genuinely disputed on substantial grounds.

The contract to which the debt related contained a widely drafted arbitration clause. This provided that ‘any claim, dispute or difference of whatever nature arising under, out of or in connection with this agreement’ shall be referred to arbitration at the London Court of International Arbitration (the ‘arbitration agreement’).

The respondent applied to have liquidators appointed in respect of the appellant company on the basis that it was insolvent. The liquidation application was heard by Wallbank J who held that the appellant had failed to show that the debt was disputed on genuine and substantial grounds, and ordered that the appellant company be put into liquidation. The appellant appealed against that decision and the appeal was dismissed by the Court of Appeal.

JCPC decision    

The JCPC decided that Salford Estates was wrong to introduce a discretionary stay of creditors’ petitions where an insubstantial dispute about the creditor’s debt is raised between parties to an arbitration agreement. The JCPC noted that the purpose of a typical arbitration agreement is to provide an alternative method of dispute resolution, so as to avoid a court process. However, an arbitration agreement is not typically designed to avoid a winding-up petition. The JCPC also noted that the same should apply in relation to exclusive jurisdiction clauses and that an exclusive jurisdiction clause applicable to the debt in question should not result in a stay or dismissal of the winding-up petition, unless the debt is genuinely disputed on substantial grounds.

As a result, the JCPC concluded that the BVI Court of Appeal had applied the correct test as set out in Jinpeng and upheld the appointment of liquidators.

The JCPC specifically ruled that this decision will be binding on the courts of England and Wales, overturning the Court of Appeal’s decision in Salford Estates.

The judgment will be welcomed by creditors and encourage them to continue to use arbitration agreements, safe in the knowledge that it will not harm their ability to issue insolvency proceedings if necessary. 

This article was first published in The Law Society Gazette and can be accessed here.