The Dawn of a New Day:

On 19 June 2024, the Judicial Committee of the Privy Council handed down its judgment in Sian Participation Corp (In Liquidation) v Halimeda International Ltd (on appeal from the British Virgin Islands).[1]  Although an appeal from the British Virgin Islands (“BVI”) regarding matters of BVI law, the Privy Council in this decision also reversed years of settled jurisprudence in England and Wales with respect to the treatment of winding-up petitions in circumstances where the underlying debt is subject to an agreement to arbitrate.

In the landmark decision in Salford Estates (No. 2) Limited v Altomart Limited,[2] the English Court of Appeal determined that a winding-up petition should be dismissed in favour of arbitration (as long as the debt is not admitted).  The Court held that save in wholly exceptional circumstances, a court should grant a stay of the creditor’s petition in favour of arbitration and defer to the relevant arbitration tribunal’s jurisdiction to determine the validity of the debt.  This was on the grounds that (i) the court should not conduct a summary judgment type analysis of liability in respect of the creditor’s claim and (ii) a contrary decision may encourage parties to tactically circumvent a mandatory agreement to arbitrate by presenting a winding up petition.

Salford Estates sparked a series of debates across several jurisdictions, including the BVI.  Notably, the BVI Court of Appeal in C-Mobile Services Ltd v Huawei Technologies Co Limited [3] and in Jinpeng Group Limited v Peak Hotels and Resorts Limited[4] had considered but specifically chose not to follow Salford Estates.  In Jinpeng, the Court of Appeal set out the requirements that must be satisfied for the BVI Court to exercise its wide discretionary powers to dismiss or stay a liquidation application in favour of arbitration: (i) the company must be able to demonstrate that a debt is subject to an arbitration agreement, and (ii) the debt is disputed on genuine and substantial grounds. The Court held that there is no need for a creditor to prove the existence of “wholly exceptional circumstances”.

In the Sian Participation judgment, the Board made a Willers v Joyce direction[5]  that Salford Estates which had been followed by English Courts for a decade was wrongly decided and should no longer be followed in England and Wales. It held that the English Court of Appeal erred in introducing “a discretionary stay of [winding up] petitions […] where an insubstantial dispute about the creditor’s debt is raised between parties to an arbitration agreement”. The Board considered the Court of Appeal’s reasoning in Salford to be “an impermissible and unexplained leap” as to the extent of the legislative policy behind the arbitration statute.

In overturning Salford Estates, the Board found that Salford Estates was “wrong to introduce a discretionary stay of creditors’ petitions (or, in the BVI, liquidation applications) where an insubstantial dispute about the creditor’s debt is raised between parties to an arbitration agreement”. In coming to its decision, the Board reasoned that:

1. The contractual obligation embodied by an arbitration agreement is to refer disputes to arbitration. Liquidation applications do not trigger the mandatory stay provisions contained in section 18 of the BVI Arbitration Act 2013, because such applications are not of the type caught by this provision as they do not resolve or determine the petitioner’s claim to be owed money by the company. The existence of, or the amount of the debt is not an issue for resolution in those proceedings.
2. Typically, an arbitration agreement contractually requires parties resolve disputes via arbitration, or, in the negative, to not to have disputes resolved by court processes. Liquidation applications do not seek to resolve any dispute or claim (insolvency being of a different character to dispute resolution), and therefore the presentation of liquidation application “is simply not something which the creditor has agreed not to do”.
3. The pro-arbitration policies underpinning the legislation are not offended by a party seeking liquidation of another which fails to pay a debt. Where a there is genuine dispute as to the debt, policy requires that the creditor should first establish his claim, by having that dispute resolved in its favour, either by a judgment in court or, if there is an applicable arbitration agreement, by an arbitral award.

The Board was accordingly of the view that where the debt is not genuinely disputed on substantial grounds, the court is not fettering the parties’ autonomy to have disputes determined by arbitration when it orders a liquidation, because “by ordering a liquidation the court is not resolving anything about the debt, nor interfering with the resolution of any dispute about it”. The Board consequently 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”. The Board stated that this conclusion equally applies exclusive jurisdiction clause and made it clear that “different considerations would arise if the agreement or clause was framed in terms which applied to such a liquidation application”.

The Privy Council’s decision in Sian Participation has reaffirmed the position of BVI Courts regarding the interplay of insolvency law and arbitration in the context of the Court’s exercise of its discretion to stay or dismiss liquidation applications in the face of an agreement to arbitrate disputes. The Privy Council has emphasised that its decision is not “anti-arbitration” but rather a reaffirmation of the requirement to demonstrate a “genuine and substantial dispute”. In reality, this decision lends support to the pro-arbitration agenda because, as the Board pointed out, a party is much more likely 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 such a dispute exists, then arbitration will prevail as the means of resolution.

[1] [2015] 1 Ch 589 (8 December 2014).

[2] BVIHCMAP 2014/0006 and 2014/0017, unreported, 15 September 2015.  A case decided under the (BVI) Arbitration Ordinance 1976.

[3] BVIHCMAP 2014/0025 and 2015/003, unreported, 8 December 2015.  The first BVI case decided under the (BVI) Arbitration Act 2014 which came into force in the BVI on 1 October 2014.

[4] BVIHCMAP 2014/0025 and 2015/003, unreported, 8 December 2015. The first BVI case decided under the (BVI) Arbitration Act 2014 which came into force in the BVI on 1 October 2014.

[5] [2016] UKSC 43 (20 July 2016).