The Privy Council clarifies the interplay between company winding up petitions and arbitration agreements in historic sitting in the Cayman Islands

The eagerly awaited decision of the Judicial Committee of the Privy Council in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation [2023] UKPC 33 was handed down on 20 September 2023. The case is important as it represents the first consideration at  final appellate level of the interaction between the statutory winding up provisions of the Cayman Islands' Companies Act (2023 Revision) (the "Companies Act") and the pro-arbitration provisions of the Cayman Islands Arbitration Act and the Foreign Arbitral Awards Enforcement Act (the "FAAEA").

The principal question considered by the Privy Council was to what extent could, or should, a winding up petition be stayed for arbitration where the disputes which grounded the petition fell within the scope of an arbitration agreement and, in particular, whether the matters before the Grand Court in respect of the just and equitable winding up petition were capable of being determined by arbitration.

 

Overview of the Case

The appellant, Ting Chuan owned a majority holding (59.65%) of the shares in a Cayman Islands incorporated company, CVS Holding Corp (the "Company"), and the respondent, FamilyMart, owned the remainder. FamilyMart had petitioned to wind up the Company on the just and equitable basis, complaining about the conduct and management of the Company and a breakdown of the relationship between the shareholders.

The shareholders' agreement in respect of the Company provided for "any and all disputes" in connection with the agreement to be dealt with by arbitration, and the Grand Court granted an application by Ting Chuan under section 4 of the FAAEA for a stay of the winding up proceedings pending arbitration. However, that decision was overturned by the Court of Appeal, who took the view that the Grand Court had exclusive jurisdiction to determine whether a company should be wound up on the just and equitable ground, and that as such, the dispute between the shareholders was not susceptible to arbitration regardless of whether it fell within the scope of the arbitration agreement.

However, the Privy Council reversed that decision and reinstated the stay originally ordered by the Grand Court.

The Privy Council held that there were two broad circumstances in which an arbitration agreement may be inoperative (or "non-arbitrable"):

  • "subject matter non-arbitrability", where the dispute was "excluded by statute or public policy from determination by an arbitral tribunal"; and
  • "remedial non-arbitrability", where "the award of certain remedies is beyond the jurisdiction which the parties can confer through their agreement on an arbitral tribunal".

It was accepted that a winding up order could only be made by the court (having regard to the jurisdiction granted expressly to the courts in the Companies Act), and thus an arbitral tribunal does not have the power to make a winding up order on a just and equitable (or any) basis nor to grant the remedy of a share buy-out. This was an example of "remedial non-arbitrability".

However, it was also necessary to consider the question of what amounted to a "matter" within the meaning of section 4 of the FAAEA such as to mandate the enforcement of an arbitration agreement, and following a detailed review of the authorities, the Privy Council took the view that a matter was "any substantial issue that is legally relevant to a claim, or a defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the 'matter is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which legal proceedings are brought". Whilst courts should approach applications for stays in a practical and common-sense way, they should also respect the agreement of the parties to arbitrate their disputes, and the fact that referral to arbitration might result in fragmentation of a dispute, with some issues being determined by an arbitral tribunal and others by the court, was not in itself a reason to decline a stay.

Whilst it was made clear that the Court should be astute to ensure that stays were not granted for an improper purpose or which would amount to an abuse of process (for example, because there was no desire to progress an arbitration), the fact that the tribunal could not itself make a winding up order was no bar to arbitration in relation to the factual disputes underpinning the petition.

In the circumstances of the case, the Privy Council held that whilst it was correct that the arbitral tribunal could not decide whether it was just and equitable that the Company should be wound up, or whether an alternative remedy of a share buy-out should be granted, it was nevertheless competent to decide whether there had been a loss of trust and confidence in the management of the Company's affairs, and whether the relationship between Ting Chuan and FamilyMart had irretrievably broken down. Accordingly, a stay pending arbitration of those issues was required.

 

Practical Implications

The bifurcated approach taken by the Privy Council is, at least on its face, an attractive one in terms of certainty between parties, as a party contracting for dispute resolution through arbitration can now have some confidence that the provision will be enforceable, at least insofar as factual matters are concerned, regardless of the context in which the dispute arises. Parties entering into shareholders agreements containing arbitration clauses should now be fully aware that, provided they are sufficiently certain as to their terms, in the vast majority of cases those clauses will be binding, even when dealing with matters which may pose an existential threat to a company.

However, there remain potential practical and conceptual difficulties, not least of which is the extent to which the Court truly retains an exclusive jurisdiction in respect of winding up where the effect of arbitration of any underlying disputes may well be to present the court with an fait accompli, constraining the court's ability to exercise any meaningful discretion in relation to the orders flowing from it. It would be regrettable and problematic if the role of the Grand Court was reduced to little more than that of a rubber stamp.

In practice, there may be circumstances in which the arbitration itself may be paused where important matters falling outside the arbitration agreement are ready to be addressed by the Court, perhaps following a Partial Final Award (with the tribunal expressly reserving the possibility of further issues being determined) rather than a more definitively labelled "Final Award" (which would risk the tribunal being rendered functus officio). The rendering of a Partial Final Award would leave open the possibility of further factual issues being determined or considered by the tribunal where the court determines that other factual issues require consideration prior to the Court exercising its powers.

The efficiency and effectiveness of the process might also be seen to be at risk where proceedings are fragmented, and whilst the Privy Council expressed the view that this could be mitigated by effective case management by both the tribunal and the Court, the extent of that mitigation, and the effectiveness of the court's powers where matters are sent to a tribunal, remain to be seen. That, however, may need to be balanced against the potential savings of time and expense which may accrue from having factual issues determined once and for all in a forum generally not susceptible to appeal.

Nevertheless, the decision in FamilyMart is consistent with the pro-arbitration policy of the Cayman Islands courts, and confirms an important expansion in the scope of matters which may be determined by arbitration. In light of the increased use of arbitration clauses, the Privy Council's decision is likely to have a marked effect on Cayman Islands commercial litigation. Finally, whilst not binding, it is also likely to represent highly persuasive authority in other common law jurisdictions, including Bermuda and the British Virgin Islands.


CAYMAN ISLANDS
Nick DunnePartnerT +1 345 814 4548nick.dunne@walkersglobal.com
Sam HallAssociateT +1 345 914 6334 sam.hall@walkersglobal.com

HONG KONG
John CrookPartnerT +852 2596 3344john.crook@walkersglobal.com
Victoria RaymondPartnerT +852 2596 3367victoria.raymond@walkersglobal.com
Christina LoSenior AssociateT +852 2596 3416christina.lo@walkersglobal.com

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