Privy Council changes English law on the intersection of insolvency and arbitration

In Sian Participation Corporation (In Liquidation) v Halimeda International Ltd [2024] UKPC 16, the Privy Council considered an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court (BVI) as to whether a company should be wound up where the debt on which the winding up application is based is subject to an arbitration agreement and is said to be disputed and/or subject to a cross-claim.

The appeal concerned two competing areas of public policy: (1) insolvency, which seeks to ensure the fair distribution of assets to a company's creditors where a company cannot pay its debts; and (2) arbitration, which seeks to uphold the parties' agreement as to their chosen dispute resolution forum without any court interference. 

The Privy Council concluded that the correct test for the court to apply, regardless of whether the parties have agreed an exclusive jurisdiction or arbitration clause, is whether the debt is disputed on genuine and substantial grounds.  In doing so, it found that the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575, which was the leading authority on this issue up until now, was wrongly decided. The Privy Council directed that the decision reached in this appeal represents the law of England and Wales such that Salford Estates should no longer be followed (see here for our summary of the Salford Estates decision).

Position in England and Wales prior to this appeal

Salford Estates was the established authority in England and Wales on the test that should be applied to the court's exercise of discretion to order a stay of a winding up petition where the debt is subject to a dispute. 

In Salford Estates, the petitioner presented a winding up petition following the respondent's failure to pay the sums that fell due under a contract containing an arbitration agreement, where the respondent did not have any genuine defence on substantial grounds.  In determining whether the requirement for a mandatory stay under section 9 of the Arbitration Act 1996 (1996 Act) applied, the court found that while a creditor's winding up petition does not constitute a "claim" under section 9 of the 1996 Act, the court could exercise its discretion to order a stay in favour of arbitration where there is a mere "non-admission" of the debt.  The reasoning for this conclusion was as follows:

• It was consistent with the legislative policy embodied in the 1996 Act which extends to prohibit the continuation of proceedings to which the mandatory stay provided by section 9 does not apply.
• It should not be for the court to conduct a summary judgment type analysis of liability for an unadmitted debt when the creditor has agreed to refer any dispute relating to the debt to arbitration. 
• It avoided encouraging parties to arbitration agreements to bypass the arbitration agreement and the 1996 Act as a standard tactic by presenting a winding up petition.  This would lead creditors to threaten a petition to apply pressure even if the debt was disputed.

Salford Estates had, however, been subject to criticism, including for its differing analysis of an arbitration clause and an exclusive jurisdiction clause, and its adverse consequences for creditors forced to commence arbitration proceedings owing to a debtor's refusal to admit the debt.

Background to this appeal

The creditor applied to wind up the debtor company on the basis that it was both cash flow and balance sheet insolvent following the failure to pay the demanded debt that arose out of a facility agreement containing an arbitration clause.

At first instance and on appeal, the creditor was successful in its application to wind up the debtor company. Even though the debt was denied by the debtor company, it was held that the debtor company had failed to show that the debt was disputed on genuine and substantial grounds or that there were other reasons why the winding up petition ought to be dismissed or stayed.

The debtor appealed to the Privy Council arguing that the BVI courts should have followed the approach in Salford Estates and stayed the winding up petition.  In response, the creditor argued, amongst other things, that Salford Estates was wrongly decided.

Decision

The issue for the Privy Council to consider on appeal was therefore:  

"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 Privy Council held as follows:

• It was wrong to introduce a discretionary stay of creditors' petitions where an insubstantial dispute about the creditor's debt is raised between the parties to an arbitration agreement.  The presentation of a winding up petition does not offend the negative obligation not to have disputes resolved by any court process because this is not something which the creditor has agreed not to do by agreeing to arbitrate disputes.  
• To require the creditor to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation "just adds delay, trouble and expense for no good purpose".  None of the general objectives of arbitration legislation, including party autonomy and pacta sunt servanda (the principle that agreements must be kept), are offended because seeking a liquidation is not something the creditor has promised not to do.
• There is "nothing anti-arbitration in this conclusion".  In most agreements where one party is likely to be the creditor, that party will generally dictate the terms of the agreement.  On the contrary therefore, such a party would be much more likely to agree to include an arbitration clause if it does not impede a liquidation where there is no genuine or substantial dispute about the debt.  Where there is such a dispute, arbitration will prevail as the means of resolution. 

The Privy Council went on to conclude 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".  It clarified that this conclusion applies to a generally worded arbitration agreement or exclusive jurisdiction clause.  However, it noted that "different considerations would arise if the agreement or clause was framed in terms which applied to such a liquidation application". 

Finally, the Privy Council gave a direction pursuant to Willers v Joyce (No 2) [2016] UKSC 44 that Salford Estates should no longer be followed in England and Wales, and that the Privy Council's decision in this case now represents the law of England and Wales.

Comment  

This decision adopts a pragmatic approach to situations where parties dispute debts in the context of liquidation proceedings. It clarifies that it is for the court to decide whether a debt is genuinely disputed on substantive grounds and, if it is not, a creditor should be able to obtain a winding up order without having to first arbitrate (or litigate) the issue.

This decision should be of reassurance to creditors that their choice of dispute resolution forum will not impact their ability to engage the insolvency process where appropriate. It should also prevent creditors from having to participate in arbitration proceedings with respect to debts that are not genuinely disputed. For situations where a creditor brings a winding up petition in an attempt to bypass an arbitration agreement, as the Privy Council has noted, the court has other tools at its disposal, including the power to sanction them for abuse of process and order indemnity costs.