Arbitration and Insolvency: A departure from Salford Estates
Judgment was handed down by the Judicial Committee of the Privy Council (“the Board”) in Sian Participation Corp (in liquidation) v Halimeda International Ltd on 19 June 2024.
The judgment is interesting for two points. Primarily, because it resolves an important point of tension in the public policy considerations affecting arbitration and insolvency law; but also, because it includes what is reportedly the first use of a Willers v Joyce1 direction. In Willers v Joyce, where Laytons acted for the successful Respondents, a unanimous nine justice panel of the UK Supreme Court decided that in an appropriate case, the Board has jurisdiction to direct that a decision of the Board represents the law of England and Wales.
The appeal heard by the Board was from the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands (“BVI”)), and was brought by Sian Participation Corp (“SPC”). The dispute between SPC and Halimeda International Ltd (“HLI”) arose following HLI’s application to have liquidators appointed in respect of SPC on the basis that SPC was both cash flow and balance sheet insolvent, in circumstances where a Facility Agreement between the parties provided that any claim, dispute or difference of whatever nature arising under, out of or in connection with the Facility Agreement should be referred to arbitration at the London Court of International Arbitration.
The Main Issue
The Board’s judgment was concerned with the interplay between two areas of public policy in the areas of arbitration and insolvency.
Arbitration: it is public policy that where parties have agreed together to resolve their disputes by arbitration, they should be held to that agreement without the interference of the courts.
Insolvency: it is public policy that there should be a relatively simple mechanism to divide the assets of insolvent creditors fairly between its creditors.
In this case, SPC failed at first instance to satisfy the BVI court that the debt was disputed on genuine and substantial grounds or that there were other reasons why the liquidation application ought to be dismissed or stayed. Liquidators were accordingly appointed and SPC was ordered to be put into liquidation. SPC appealed and the appeal was dismissed by the BVI Court of Appeal. SPC did not argue before the BVI Court of Appeal that the debt itself was disputed on genuine and substantial grounds. SPC then applied for leave to appeal to the Privy Council, and permission was granted by the Board in November 2023.
For the purpose of this article, the relevant issue for determination on appeal was:
“As a matter of BVI law, what is the correct test for the court to apply to the exercise of its discretion 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 and/or subject to a cross-claim (notwithstanding that dispute is not on genuine and substantial grounds)?”
The Board considered the public policies in the BVI in respect of insolvency and arbitration before considering what it called ‘The Threshold Question: what is a Disputed Debt?’. Here, the Board noted that the courts of the UK and the BVI are aligned as to what is a disputed debt: the debt must be the subject of a genuine dispute on substantial grounds.
The Board then considered Salford Estates (No 2) Ltd v Altomart Ltd (No 2)2 (“Salford Estates”), a judgment from the English Court of Appeal. Following Salford Estates, it is the current practice of the Companies Court in England and Wales to exercise its discretion to stay or dismiss creditors’ petitions where disputes between the parties (including in respect of the disputed debt) are to be determined by arbitration, even where it could not be shown by the debtor that the debt was disputed on genuine or substantial grounds. Whilst the BVI courts have not followed Salford Estates, it has been followed in other jurisdictions, including Malaysia and Singapore.
The Decision
The Board considered that Salford Estates was wrong to introduce a discretionary stay where there was an insubstantial dispute about the creditor’s debt between parties to an arbitration agreement. The Board’s reasons are summarised as follows:
A creditor’s winding up petition does not trigger the mandatory stay provided for by Article 8 of the Model Law3, or the statutory provisions for a mandatory stay which implement it (section 18 of the Arbitration Act 2013 in the BVI and section 9 of the Arbitration Act 1996 in England and Wales). A winding up petition (or similar liquidation application) is not a claim for payment of a debt; it is evidence that the debtor cannot pay its debts. It is therefore not a type of claim caught by the provisions of those Acts.
Parties to an arbitration agreement are typically obliged to refer disputes to arbitration for resolution and so, it follows, that disputes must not be resolved by any other court process. As a winding up petition is not a process whereby a dispute will be resolved, the presentation of a winding up petition does not offend that obligation.
A party to an arbitration agreement seeking the liquidation of the other party for failure to pay a debt also does not offend the policies underlying the arbitration legislation which implement the Model Law. Where a debt is genuinely disputed on substantial grounds, the liquidation route should not be pursued – the dispute should first be determined by arbitration and if resolved in the creditor’s favour, the award enforced.
None of the general objectives of arbitration legislation, including efficiency, party autonomy, and non-interference by the courts, are offended by allowing a winding up to be ordered where there is not a genuine dispute on substantial grounds.
The Board concluded that, as a matter of BVI law: “the correct test for the court to apply to the exercise of its discretion 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 or an exclusive jurisdiction clause and is said to be disputed is whether the debt is disputed on genuine and substantial grounds”.
Additional Point
The Board then went one step further, making a Willers v Joyce direction. The effect of the direction is that Salford Estates should no longer be followed in England and Wales. If a debtor who is a party to an arbitration agreement (or to a contract where there is an exclusive jurisdiction clause) wants liquidation proceedings to be stayed or dismissed on the basis of that agreement (or clause), the court cannot exercise its discretion to order a stay unless the debt is genuinely disputed on substantial grounds.
If a party to an arbitration agreement or a contract that contains an exclusive jurisdiction clause wishes issues of insolvency, such as a creditors’ winding up petition, to be determined pursuant to that agreement or clause, the agreement or clause must be framed in such terms. Otherwise, the Companies Court will have jurisdiction and the petition will be granted unless the debt is genuinely disputed on substantial grounds.
Laytons ETL’s Commercial and Disputes Teams are on hand to advise you on the terms of, and disputes that arise out of, agreements that contain arbitration or exclusive jurisdiction clauses. Our Restructuring & Insolvency Team, led by John Harvey, are experts on all aspects of contentious and non-contentious corporate insolvency.