In a significant decision that will impact both creditors and debtors alike, the Privy Council (on appeal from the British Virgin Islands, via the Eastern Caribbean Court of Appeal) has decided in Sian Participation Corp (In Liquidation) v Halimeda International Ltd that the English Court's former approach, to dismiss or stay any winding up petition where the underlying debt is subject to an arbitration agreement, was wrong.
The Privy Council's Decision
There has always been tension between the ability of a creditor to present a winding up petition against a debtor, and the negative effect of the 'compétence-compétence' principle of arbitration law; that a Court will not decide, before the arbitrators, a matter which is covered by an arbitration agreement. If a debtor does not admit a debt arising from a relationship which is subject to an arbitration agreement, but does not offer a substantial reason for disputing it, what does a court faced with a winding up petition do?
Before Sian, the English Courts followed The Court of Appeal's decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575. That decision directed the Courts to stay winding up proceedings where the disputed debt was not admitted and was subject to an arbitration agreement, and not to consider first whether the debt is shown to be genuinely disputed on substantial grounds.
In contrast, unlike many other common law jurisdictions, the BVI Courts refused to follow the decision in Salford Estates.
In Sian the Privy Council held that Salford Estates had been wrongly decided and that:
- A winding-up petition should only be stayed where the underlying debt is disputed on genuine and substantial grounds. The existence of an arbitration agreement is not enough, on its own, for a debtor to rely on to have a petition stayed or dismissed.
- The presentation of a winding-up petition does not offend against the obligations contained in an arbitration agreement to refer disputes to arbitration and not to refer them to any court process, because only undisputed debts should be relied on as grounds for a winding up petition.
- None of the general objectives of arbitration – efficiency, party autonomy, pacta servanda, and non-interference by the courts – are offended by winding up of a company where the debt in question is not genuinely disputed on substantial grounds. On the contrary, requiring a creditor to arbitrate where there is no genuine or substantial dispute adds delay and expense with no good purpose.
- Creditors are more likely to agree to including arbitration clauses if the Court does not allow the arbitration clause to impede a liquidation where there is no genuine or substantial dispute about a debt.
- Insolvent liquidation exists for the benefit of a class rather than just the individual applicant (or petitioner). A winding-up order should not involve resolution of any dispute about either the existence or amount of the petition debt.
The Privy Council took the unusual step of expressly directing that its decision was also one on English law, and directed that Salford Estates should no longer be followed in England and Wales.
In addition the decision in Sian also clarifies the position regarding generally worded exclusive jurisdiction clauses which indicate that another court would have jurisdiction over disputes. The Privy Council expressly said that an exclusive jurisdiction clause should not lead to the stay or dismissal of a winding up petition unless the debt is genuinely disputed on substantial grounds.
Discussion and future Impact
The decision in Sian will open up winding up proceedings to Creditors contemplating applying to wind up a debtor in England where there is an arbitration agreement or foreign exclusive jurisdiction clause. Of course, creditors should only seek to petition for winding up when there is no dispute regarding the debt.
Debtors who have previously been able to rely on the decision in Salford Estates to avoid being wound up will need to consider their position carefully, especially in circumstances where they are unable to identify a genuine and substantial defence to the debt.
As a result of the decision in Sian, winding up petitions will no longer be subject to an automatic stay where the debt is subject to an arbitration agreement or foreign exclusive jurisdiction clause. The correct test for the courts to apply is whether the debt is genuinely disputed on substantial grounds.
Arbitration lawyers may struggle to understand how the Court can make any assessment of whether the debt is genuinely disputed on substantial grounds, without trespassing on the arbitrators' territory. It is fair to say that the absolute protection for the sanctity of arbitration agreements provided by the Salford Estates approach has been compromised. In order for the approach espoused in Sian to continue to respect the negative effect of compétence-compétence, caution will need to be shown by English judges not to resolve any merits issue, even if the judge considers it to appear weak.
The Judicial Committee were keen to stress that there should be no dispute to resolve where a winding up petition is presented, because winding up petitions should not be used as a means to pressurize a debtor to pay who disputes a debt. Indeed, winding up petitions are not a claim to the debt at all.
However, experience indicates that disputes do arise when winding up petitions are presented, sometimes by creditors who feel the debtor's refusal to pay is without any good basis. It seems likely that, after Sian, first-instance judges will yet need to make difficult decisions as to where the line lies between a debt which is not disputed on substantial grounds, and a debt which must go to arbitration in order to be confirmed.
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