Public policy in debt disputes – when arbitration and insolvency collide

In Sian Participation Corp v Halimeda [2024] UKPC 16, the Judicial Committee of the Privy Council decided the test to be applied by courts hearing winding-up petitions where the underlying debt is subject to an arbitration agreement. The British Virgin Islands (BVI) courts are not required to dismiss or stay such petitions in favour of arbitration if there are no genuine and substantial grounds for disputing the debt. In reaching its decision, the Privy Council decided the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 was wrongly decided and invoked the Willers v Joyce discretion¹ for the first time. It follows that the judgment of the Privy Council in Sian Participation is now binding authority in England and Wales on this point. As such, insolvent debtors will not be able to rely on the mere existence of an underlying arbitration agreement to dismiss or delay winding-up proceedings, which will be welcomed by creditors in many industries and sectors.

 

Background

The appeal considered competing public policy interests regarding insolvency and arbitration, ie:

• the public policy that there should be straightforward insolvency rules where a company unable to pay its debts is promptly subjected to an insolvency process, allowing assets to be distributed among creditors; and
• the public policy that valid agreements to resolve disputes through arbitration should be upheld with minimal interference by national courts.

The BVI approaches the liquidation of insolvent companies in a similar way to other common law jurisdictions. Insolvency occurs when a company is unable to meet its financial obligations, either because admitted debts remain unpaid or because there is no substantial dispute over debts that have not been formally acknowledged². Additionally, the decision to liquidate an insolvent company is at the discretion of the court. The court may appoint a liquidator if the creditor demonstrates standing to apply and proves the company's insolvency³. A key legal challenge in cases like Sian Participation concerns applying these principles when debts are subject to arbitration agreements.

Arbitration in the BVI is governed by the Arbitration Act 2013 (the Act) and is based on the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). Section 18 of the Act gives effect to Article 8 of the Model Law which provides, in summary, that court before which an action is brought in a matter which is the subject of an arbitration agreement shall refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed. The equivalent provision in English law is Section 9 of the Arbitration Act 1996. Article 8 of the Model Law also creates a negative obligation on the parties to not have issues governed by an arbitration agreement resolved by any court process. As between some common law jurisdictions there has been a degree of inconsistency in the application of these principles and in balancing the interests of creditors and debtors.

The English courts have applied a broad test, dismissing or staying winding-up petitions when a debt was subject to an arbitration agreement. In Salford Estates, the English Court of Appeal took an expansive view of what constitutes a dispute about debt. The Court of Appeal held that if a debt was disputed and subject to an arbitration agreement, it was not the court’s role to determine if the dispute was genuine and substantial. As a result, creditors would likely see their winding-up petitions dismissed or stayed due to the presence of an underlying arbitration agreement.

However, the BVI courts rejected this broader test, favouring a narrower approach in which a debt must be disputed on substantial grounds before the existence of an arbitration agreement could operate to disrupt a liquidation application. Until Sian Participation, the leading authority in the BVI was Jinpeng Group Ltd v Peak Hotels and Resorts Ltd BVIHCMAP2014/0025 (8 December 2015), in which the BVI court refused to follow Salford Estates, holding that a liquidator should be appointed on the application of an unpaid creditor if there is no genuine dispute about the debt on substantial grounds.

In Hong Kong, the highest court (the Court of Final Appeal) has adopted an approach which originated from Salford Estates. In Guy Lam [2023] HKCFA 9, the court held that a “strong reason” must be present in order for a bankruptcy petition to proceed despite an exclusive jurisdiction clause, which approach has been applied to considering a winding-up petition in the presence of an arbitration clause in Re Simplicity & Vogue [2024] HKCA 299 and Re Shandong Chenming [2024] HKCA 352. These high authorities postdate previous case law which cast doubts on the Salford approach, including Dayang [2020] HKCFI 311 and But Ka Chon [2019] HKCA 873. Under the Guy Lam principles, the Hong Kong courts adopt a multi-factorial approach, which would take into account considerations including the nature and strength of the dispute to the debt, the existence or otherwise of other creditors, whether any other creditors are pursuing the debtor, and the wording of the jurisdiction clause.⁴  

 

Facts of Sian Participation

In December 2012, Halimeda International Ltd (the Respondent) advanced a loan of USD140 million to Sian Participation Corp (the Appellant). The loan agreement provided that any claim arising under or in connection with the agreement would be resolved by arbitration. The loan was not repaid, and by December 2020, the Respondent had demanded payment of approximately USD226 million.

In September 2020, the Respondent applied to have liquidators appointed. Upon hearing the liquidation application in May 2021, the BVI court held that the Appellant had failed to show that the debt was disputed on substantial grounds and granted a liquidation order. The Appellant’s appeal of that decision was dismissed. In December 2022, the Appellant was granted permission to appeal to the Privy Council. The principal issue for determination by the Privy Council was: what is the correct test under BVI law where the court is deciding on a liquidation order, the debt is subject to an arbitration agreement, and the dispute is not genuine and substantial? The Appellant argued that the correct test under BVI law was the one in Salford Estates, which should have been followed at first instance. The Respondent argued the debt was not genuinely disputed, and thus no stay should be granted.

 

Judgment of the Privy Council

The Privy Council unanimously dismissed the Appellant’s appeal, finding that Salford Estates was wrongly decided. The Board held:

• The starting point, as correctly identified in Salford Estates, is that “a creditor's winding-up petition (or similar liquidation application) does not trigger the mandatory stay” provided for by the relevant legislation [88].⁵
• When it comes to considering whether litigation proceedings should be stayed in favour of arbitration proceedings, a winding-up petition is not a claim within Section 18 of the BVI Arbitration Act. Therefore, the obligation for an arbitration agreement to hold precedence over court proceedings is not offended by the issuance of winding-up petitions.
• The general objectives of arbitration legislation and party autonomy are not offended by allowing winding-up orders. As insolvency legislation only promotes the pursuit of liquidation against a company with undisputed debts, winding-up petitions fall outside the negative obligation of creditors outlined in Article 8 of the Model Law, and the creditor has made no commitment to refrain from seeking liquidation, hence the arbitration agreement between the parties remains unaffected [89-92].
• Requiring a creditor to go through arbitration where there is an insubstantial dispute “just adds delay, trouble and expense for no good purpose” [92].

The Privy Council also invoked the Willers v Joyce direction for the first time, to the effect that the decision in Sian Participation will bind courts in England and Wales and Salford Estates should no longer be followed.

 

Concluding remarks

The ruling in Sian Participation seeks to balance principles of insolvency law – which seek efficient asset distribution among creditors – with the policy favouring arbitration and party autonomy in resolving disputes. It also provides clarity on when arbitration agreements can legitimately impact insolvency proceedings.

Sian Participation has overturned Salford Estates and is now binding in the BVI, England, and Wales. It is uncertain how the courts of other common law jurisdictions will react to the decision and whether aspects of the Salford Estates decision will continue to influence their approach to the issues determined in this case. However, we anticipate that the Privy Council’s decision will be highly influential in those jurisdictions where Salford Estates has previously been followed.

In Hong Kong, while the court’s multi-factorial approach already covers the nature and strength of the dispute among other factors, the persuasiveness of Sian Participation should encourage the court to place appropriate weight on the merits of the dispute. We anticipate the Hong Kong court will continue to examine the facts of each case holistically and consider all relevant factors including but not only the merits.

If you would like to discuss any of the issues raised by this article, please contact one of the authors or your usual DLA Piper contact.

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¹Willers v Joyce (No 2) [2016] UKSC 44; [2018] AC 843
²Mann v Goldstein [1968] 1 WLR 1091; Sparkasse Bregenz Bank AG v In the matter of Associated Capital Corporation BVIHCVAP2002/0010
³re Crigglestone Coal Co Ltd [1906] 2 Ch 3270
⁴See previous article: Put Off the Evil Day – When Can an Exclusive Jurisdiction Clause Stop a Bankruptcy Petition? | DLA Piper
⁵Bracketed references here on refer to clauses within the judgment.