Adam Cole
Partner
Guernsey
After much anticipation, the Judicial Committee of the Privy Council ("JCPC") has handed down its judgment in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 ("Sian") on appeal from the British Virgin Islands ("BVI"). The decision finally determines the issue of whether a winding up petition should be stayed where the agreement out of which the debt arises contains an arbitration agreement.
This article considers the JCPC decision in Sian and its impact in the BVI and in the other jurisdictions in which Walkers practises: the Cayman Islands, Bermuda, Jersey, Guernsey and Ireland.
Background
The appeal in Sian concerned the test to be applied by courts in the BVI when exercising their discretion to dismiss or stay insolvency proceedings in circumstances where the parties have agreed to resolve their disputes by arbitration.
In December 2012, Halimeda International Ltd ("Halimeda") advanced USD 140m to Sian Participation Corp (the "Company") by way of loan. The relevant facility agreement included an arbitration clause which provided that: “… any claim, dispute or difference of whatever nature arising under, out of or in connection with…” the facility agreement would be referred to arbitration. The loan was not repaid, and in February 2020, Halimeda sent a letter of demand to the Company. However, the Company disputed that the debt was due and payable on the basis of a cross-claim and/or set-off.
In September 2020, Halimeda filed its application seeking an Order ("Order") appointing liquidators to the Company (the "Application") and, in May 2021, following a hearing of the Application, the Hon. Justice Wallbank granted the Application and appointed liquidators. Amongst the grounds for his judgment, Wallbank J held that, as a matter of BVI law, the mere existence of an arbitration agreement does not preclude a creditor from applying for a winding up order. Rather, if the BVI Court is to grant a stay, the company must satisfy the BVI Court that the debt is disputed on genuine and substantial grounds. In the case before him, the Judge held that the Company had failed to satisfy him that the debt was disputed on genuine and substantial grounds, and, accordingly, he would make the Order on the Application.
The Company appealed but that appeal was dismissed by the Court of Appeal of the Eastern Caribbean Supreme Court. The Company was ultimately granted permission to appeal to the JCPC in November 2023. The hearing before the JCPC took place on 19 March 2024.
The principal question before the JCPC was this: What test should the court apply when exercising its discretion to make a liquidation order where the debt on which the application is based is subject to an arbitration agreement and is said to be disputed (notwithstanding that dispute is not on genuine and substantial grounds)? 1
Decision of the JCPC
The JCPC (Lords Reed, Lloyd-Jones, Briggs, Hamblen and Burrows) unanimously dismissed the Company's appeal. In so doing, the Privy Council held that 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 a generally worded arbitration or exclusive jurisdiction clause and is said to be disputed, is whether the debt is disputed on genuine and substantial grounds.
The starting point, in the JCPC's analysis, is that a creditor's winding up petition is not an "action" within the meaning of section 18 of the BVI Arbitration Act (Revised 2020) (the "Arbitration Act") (or a "Claim" within the meaning of section 9 of the English Arbitration Act 1996). A winding up application does not seek to, and does not, resolve or determine anything about the petitioner’s claim to be owed money by the company. Neither is the existence or amount of the debt an issue for resolution in those proceedings. That being the case, the mandatory stay provisions of the Arbitration Act do not apply. If the mandatory stay provisions do not apply, then the policy underlying them equally does not apply. Those are only engaged, however, in respect of a “matter” which is subject to the arbitration agreement. The clearest legislative signal about the boundary of the policy that a party to an arbitration agreement should arbitrate is the extent of the mandatory stay provision: a winding up petition or similar application lies outside both that boundary and therefore the extent of the underlying policy. Unless an arbitration agreement provides otherwise, it is not the policy of the Arbitration Act, or its English equivalent, to require a creditor to obtain an arbitration award before enforcing a debt which is completely undisputed, by a claim in court. The same reasoning applies to the court’s exercise of its discretion to dismiss or stay insolvency proceedings. A winding up or liquidation order based on a debt not disputed on substantial grounds does not offend the general objectives of arbitration legislation because it does not seek to resolve anything about the underlying debt or interfere with the resolution of any dispute about the debt. Nor does it offend the parties’ arbitration agreement because it is not a “matter” subject to that agreement; seeking a liquidation is simply not something the creditor has promised not to do. To require the creditor to go through an arbitration where there is an insubstantial dispute simply adds delay, trouble and expense for no good purpose.
In reaching this decision, the JCPC concluded that Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 ("Salford Estates"), a decision of the English Court of Appeal, was wrongly decided and should no longer be followed, either in the BVI or in England and Wales. The JCPC noted that its findings in respect of the Salford Approach constituted not only a determination of the position as a matter of BVI law, but also English law. Accordingly, the decision in Sian represented the law of England and Wales so far as it holds that Salford Estates was wrongly decided. The JCPC accordingly directed that Salford Estates should no longer be followed in England and Wales2.
Salford Estates
Until the decision in Sian, Salford Estates had stood for the proposition in English law that, save in exceptional circumstances, the court should stay or dismiss a winding up petition where the debt was subject to an arbitration agreement and was not-admitted or disputed, whether or not the nonadmission or dispute is genuine or based on any grounds at all, substantial or otherwise (the "Salford Approach").
British Virgin Islands
The BVI Courts had historically declined to follow the Salford Approach: rather, the BVI Court continued to require that the debt be genuinely disputed on substantial grounds before a creditor’s application to wind up would be dismissed or stayed because of an agreement to arbitrate. In Jinpeng v Peak Hotels BVIHCMAPP 2014/0025 ("Jingpeng"), the Eastern Caribbean Court of Appeal noted that this test was "… too firmly part of BVI law to now require a creditor exercising the statutory right belonging to all the creditors of the company to apply to wind up the company, to prove exceptional circumstances to establish his status to apply. The statutory jurisdiction under section 162(1) (b) [of the BVI Business Companies Act] is satisfied once the creditor is applying on the basis of a debt that is not disputed on genuine and substantial grounds…".
Following the JCPC's finding that the Salford Approach was wrong and should not be followed, the issue is now settled as a matter of BVI law: an insubstantial dispute as to a debt the subject of an arbitration agreement will not suffice as grounds to stay or dismiss an application to wind up. Such a stay will be granted only where the BVI Court is satisfied that the debt is disputed on genuine and substantial grounds. Jingpeng was correctly decided.
The remainder of this article compares the positions in the other jurisdictions in which Walkers practises in light of the Sian decision.
Cayman Islands
Like the BVI, the Cayman Islands had departed from the Salford Approach before Sian.
In the recent case, In the matter of BPGIC Holdings Limited FSD 0248 OF 2023 (unreported, 20 November 2023), the Chief Justice was asked to determine as a preliminary issue, whether the winding up petition should be stayed or dismissed pending resolution of the disputed debt by a foreign arbitral tribunal without an inquiry by the Cayman Islands Grand Court as to whether the debt was genuinely disputed on substantial grounds.
In dismissing the application to stay or dismiss the winding up petition on the basis of the arbitration clause, the Chief Justice distinguished Salford Estates, observing that "[i] n contradistinction to the position in the UK, the approach of the Cayman Courts, which is to determine the threshold question of whether the dispute is genuine and substantial before dismissing a petition in favour of arbitration, is entirely consistent with the legislative policy in of the [Cayman Foreign Arbitral Awards Enforcement Act]."
Given the high authority of Sian3 and its extension to English law, together with the Cayman Islands' earlier departure from the Salford Approach pre-Sian, it is very likely that Sian will be treated as the de facto position under Cayman Islands law until a superior Cayman Islands court confirms it as the de jure position.
Bermuda
The Salford Approach has not been considered in Bermuda. Nonetheless, in 2022 the Court of Appeal for Bermuda in Titan Petrochemicals Group Ltd v Sino Charm International Ltd BM 2022 CA 13 ("Titan") held that if the debt asserted by the petitioner is bona fide disputed on substantial grounds, Bermuda courts have the power to dismiss, adjourn, or stay the petition. In the ordinary case, the general rule is that, if the court is satisfied the debt is bona fide disputed on substantial grounds, and in the absence of special circumstances, the court would ordinarily dismiss the petition. This would apply even where the dispute would be subject to arbitration or some other contractually agreed forum. Whether a debt is disputed on substantial grounds is a question of judgment based on the facts of each case.
As with the Cayman Islands, Sian will be highly persuasive and is likely to be followed in Bermuda, particularly because it is in line with the decision in Titan.
Jersey
In Jersey, the issue of the relevance of the existence of an arbitration clause when the claiming party had commenced court proceedings for recovery arose in the case of Urbania International Management Consultancy v Petrofac International Limited [2018 (1) JLR 355].
In Urbania, the plaintiff, Urbania International Management Consultancy ("Urbania"), brought a claim on an invoice for consultancy fees which had not been paid. No dispute had been raised by the debtor, Petrofac International Limited ("Petrofac") as to the nature of the work nor the correctness of the invoice. Rather, due to an SFO investigation of the defendant, Petrofac's lawyers had merely indicated that payment of the invoices was not appropriate.
Petrofac indicated to the Royal Court that it wished to defend the claim on the basis that there was an arbitration clause in the contract with Urbania, the effect of which was that the Jersey proceedings had to be stayed under Article 5 of the Arbitration (Jersey) Law 1998.
The Royal Court held that it had the discretion to decline to stay a matter for arbitration when it was satisfied that there was no real dispute between the parties. This discretion derives from the express wording of Article 5 which provides for a mandatory stay save where the court is satisfied that "… the arbitration agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings." (emphasis added).
The Royal Court considered the English law position but recognised that the provisions in the equivalent English statutory provision had been revised so that the exception provision relating to the presence of a dispute no longer appear. The Royal Court held that, on the facts, since no explanation of any substantive defence to the debt claim having been given by Petrofac, there was no dispute between the parties sufficient to require the proceedings to be stayed in favour of arbitration.
Urbania did not involve an application for the winding up of Petrofac and it is worth noting that the creditors' winding up regime in Jersey is relatively new in terms of the ability of a creditor to apply for a winding up of a debtor company (Article 157A of the Companies (Jersey) Law 1991 having been introduced in March 2022). Interestingly, the relevant Practice Direction (RC22/01) which applies to winding up applications requires the affidavit in support of the application to state that the claim on which the application is based, "… to the best of the creditor’s knowledge is not subject to a genuine dispute and arguable defence or counterclaim". As yet there have been no decided cases exploring the meaning of "genuine dispute" or "arguable defence or counterclaim" in the context of Article 157A and RC22/01 and what will and will not constitute a genuine dispute and arguable defence or counterclaim for this purpose remains to be explored.
However, the Jersey Courts will also consider Sian to be of high authority (see fn 4 above) so it is highly likely that a similar outcome would ensue in Jersey if a defendant corporate debtor sought to resist an application for a creditors' winding up merely by reference to an arbitration agreement, in the absence of a genuine dispute.
Guernsey
The approaches taken in Salford Estates and Sian have not been considered before the Guernsey courts. As a preliminary point, Guernsey is not bound to follow the approach of the English courts, although English law and that of other common law jurisdictions such as the BVI, may be generally persuasive.
Guernsey has its own arbitration law (the Arbitration (Guernsey) Law, 2016) which recognises that parties that have entered into a valid arbitration agreement can apply to stay any court proceedings that are brought in favour of arbitration. Notwithstanding that, similarly to England and the BVI, the Guernsey insolvency process provides a debtor with a route to seek to set aside a statutory demand or to oppose an application for compulsory liquidation where the debt is disputed on genuine and substantial grounds.
Given the similarities between Guernsey's insolvency process and those of England and the BVI, and the persuasiveness of Privy Council decisions on the Guernsey courts, it is likely that, if faced with a similar scenario, the Guernsey courts would follow the approach taken in Sian.
Ireland
The decision of the JCPC in Sian aligns with the prevailing, well-settled jurisprudence in Ireland – namely, that there is no automatic dismissal or stay on a winding up petition merely due to the existence of an arbitration clause within the underlying contract between the petitioner and the company. The Irish courts focus instead on whether there is a substantial dispute as to the alleged debt. In Ireland, it is well settled that if a company, in good faith and on substantial ground, disputes any liability with regards to the alleged debt, the petition to wind up the company will be dismissed (Truck and Machinery Sales Limited [1996] 1 IR 12, Keane J).
Miss Justice Laffoy in Abbey Trinity Retail Limited [2010] IEHC 5 noted that in the context of a winding up petition, there is no distinction under Irish law between one being entitled to litigate or arbitrate the alleged debt – the applicable test is that as set out in Truck and Machinery Sales: Does the company, in good faith and on substantial ground, dispute any liability with regards to the alleged debt?
Conclusion
It is clear that the JCPC's decision in Sian Participation Corp (In Liquidation) v Halimeda International Ltd, as well as definitively deciding the law of the BVI, and of England and Wales, is likely to be treated as highly persuasive in other offshore jurisdictions. We will await with interest developing caselaw in those jurisdictions and also further afield.
- The other issues were: 1) Did the Judge conclude that the court should refuse to consider the impact of the Arbitration Agreement because it had been raised too late and, if he did so
find, was he wrong to do so and 2) does "the appeal [involve] directly or indirectly a claim to or question respecting property or a right of the value of £300 sterling or upwards” so as
to entitle the appellant to an appeal as of right under section 3(1)(a) of the 1967 Order? - A Willers v Joyce direction. In Willers v Joyce (No 2) [2016] UKSC 44, the Supreme Court held that in an appeal to the JCPC that involves an issue of English law on which a previous
decision of the House of Lords, Supreme Court or Court of Appeal is challenged, the members of the JCPC can, if they think it appropriate, not only decide that the previous decision
was wrong, but also can expressly direct that domestic courts should treat their decision as representing the law of England and Wales. - While Sian is not binding on the Cayman Islands courts (as it is an appeal from the BVI), it will be highly persuasive.
This article was first published in INSOL World Q3 2024 edition.
