It’s well established that a creditor cannot use a winding up petition as a means of recovering a debt that is subject to a dispute. In such cases, the creditor runs the risk of the petition being dismissed or stayed.
Until recently, the courts in England and Wales adopted a wide definition of ‘dispute’ in respect of any petition debt. As a result it was not difficult for debtors to obtain a dismissal or stay of a winding up petition, where the debt was subject to an arbitration agreement, on the basis that the debt was simply not admitted.
This article looks at the impact of the recent case of Sian Participation Corp v Halimeda International Ltd (the Sian Participation case). In this case, the Privy Council considered an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court in relation to the interpretation of a ‘disputed debt’, in cases where the petition debt was subject to an arbitration clause. We also reveal the Privy Council’s decision and the impact the decision will have on applications to set aside winding up petitions in England and Wales.
The Arbitration Act 1996, which mirrors the Arbitration Act 2013 in the British Virgin Islands, provides that when a dispute arises between parties which is subject to an arbitration agreement, either party may apply to court to stay any legal proceedings brought against them to allow the matter to be referred to arbitration in accordance with the contractual agreement.
The act further provides that the court ‘shall’ grant a stay of the proceedings unless it’s satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed. How this provision was applied in respect of insolvency applications varied across the Commonwealth members.
Prior to the Sian Participation case, the position in England and Wales was that, where a debt was subject to an agreement to arbitrate and was merely not admitted, regardless of whether the debt was disputed on substantial or genuine grounds, the petition would be stayed or dismissed on the basis that there was a ‘dispute’ which was required to be resolved by arbitration. This was the decision of the Court of Appeal in the Salford Estates (No.2) Ltd v Altomart Ltd case and was the approach followed by the courts in England and Wales until recently.
Other countries, including the British Virgin Islands, adopted a narrower interpretation of ‘dispute’, as was set out in the British Virgin Islands case of Jinpeng Group Ltd v Peak Hotels and Resorts Ltd. This required a debtor to demonstrate that the debt subject to an arbitration agreement was genuinely disputed on substantial grounds, before the court would consider whether to exercise its discretionary powers to dismiss or stay the petition, to allow the disputed debt to be resolved by arbitration.
In December 2012, Halimeda International Ltd provided a loan of $140m to Sian Participation Corp. The facility agreement governing the terms of the loan included a clause providing that “any claim, dispute or difference of whatever nature arising under, out of or in connection with” the agreement would be referred to arbitration.
Sian Participation Corp failed to repay the loan in accordance with the terms of the agreement and Halimeda International Ltd demanded repayment of the outstanding debt totalling $226m, as at December 2020. Payment was not forthcoming and as a result Halimeda International Ltd applied to have liquidators appointed pursuant to the British Virgin Islands Insolvency Act 2003, but Sian Participation Corp disputed the debt on the basis of a cross-claim and/or that set off applied.
Mr Justice Wallbank found that Sian Participation Corp had failed to show that the debt was disputed on genuine and substantial grounds and ordered that the company be placed into liquidation. Sian Participation Corp appealed to the Court of Appeal of the Eastern Caribbean Supreme Court on the basis that the Salford Estates case approach should have been followed by the British Virgin Islands courts, but the appeal was dismissed. Sian Participation Corp was granted permission to appeal to the Judicial Committee of the Privy Council in November 2023.
The Privy Council dismissed the appeal. It concluded that the Salford Estates case approach was wrongly decided and that the correct test, where a debt is subject to an arbitration agreement, is whether the debt is disputed on genuine and substantial grounds.
The Privy Council found that, where a creditor has presented a winding up petition against a debtor in respect of a debt which is subject to a general arbitration clause, or exclusive jurisdiction clause, the winding up petition should not be stayed or dismissed on those grounds alone, unless there is also a genuine and substantial dispute in respect of the debt.
The Privy Council further found that its conclusion that the Salford Estates case was wrongly decided didn’t only apply to the law of the British Virgin Islands. It directed that its decision should also be binding in the courts of England and Wales pursuant to the Willers v Joyce case.
The Privy Council stated that “the Board is aware that it is the current practice of the Companies Court in England and Wales to follow Salford Estates in exercising a supposed discretion to stay or dismiss 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. The Board's view is that this should cease and it so directs.”
The Privy Council also concluded that the same approach and reasoning should be applied to exclusive jurisdiction clauses such that “the presence of an exclusive jurisdiction clause applicable to the debt relied upon by the petitioner should not lead to the stay or dismissal of the petition unless the debt is genuinely disputed on substantial grounds.”
As a result, winding up petitions in England and Wales will no longer be at risk of a stay or dismissal, merely as a result of the disputed debt being subject to an arbitration agreement or exclusive jurisdiction clause. Debtors will now need to demonstrate that the debt is genuinely disputed on substantial grounds.
The Privy Council specifically stated that its findings were exclusively in relation to generally worded arbitration agreement or exclusive jurisdiction clauses. The Privy Council also stated that different considerations would apply if the agreement or clause was framed in terms which specifically applied to a winding up petition. Perhaps we will see an increase in clauses being more cautiously drafted to include provisions for insolvency proceedings to submit to arbitration.
For more information or further advice, please contact Cathryn Butler or another member of the commercial litigation or restructuring and insolvency team.
