Pump Court Chambers

What’s the matter? Insolvency and arbitration following Sian Participation

News, Blog 2nd July 2024
Christopher Stead

The presence of a generally worded arbitration agreement or exclusive jurisdiction clause applicable to the debt relied upon by a creditor bringing a winding-up petition should not lead to the stay or dismissal of the petition unless the debt is genuinely disputed on substantial grounds.

The above sentence is the principle which now stands as the law of England and Wales. It is the decision of the Privy Council in Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16, which handed down judgment in June 2024 following an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court. Unusually, the Board decided that because the reasons given for their decision involved a direct contradiction of Court of Appeal (England and Wales) authority, it would issue a direction pursuant to Willers v Joyce (No.2) [2016] UKSC 44; [2018] AC 843 that its decision should prevail in English law.

Introduction

The crux of the decision in Sian Participation involved recognition of the principle that insolvency proceedings do not resolve a ‘matter’ which would be covered by an ordinary arbitration agreement in a commercial contract; instead, they are a collective process by which an insolvent debtor’s assets are distributed pari passu amongst its unsecured creditors, and the decision of the court in ordering the winding up is not a determination of the debt, either as to liability or quantum, that exists between the parties.

The usual creditor’s petition must be founded on a debt in relation to which there is no bona fide dispute. If there is a genuine dispute on substantial grounds then the winding up petition (if it has not already been restrained) will be dismissed (Mann v Goldstein [1968] 1 WLR 1091).

An arbitration agreement, in a generally worded variant, tends to oblige the parties to the agreement (which is often found in a larger commercial contract) to submit any claim, dispute, or difference arising out of the wider contract to a binding arbitration in a particular place according to particular rules. The ‘positive’ aspect of this agreement is to resolve disputes by arbitration. The ‘negative’ obligation is not to litigate (see Sian Participation at [43]).

Section 9 of the Arbitration Act 1996 (in England and Wales) and section 18 of the Arbitration Act 2013 (British Virgin Islands, the context for this case) allow either party to apply to the court in their respective jurisdictions for a stay of any proceedings (whether by way of claim or counterclaim) brought in breach of the parties’ obligations under that (valid) arbitration agreement to refer a ‘matter’ to arbitration.

Such is the commitment of English courts to the pro-arbitral policy which underlies the statutory provisions, and indeed the freedom of parties to agree to be bound by such clauses, that a party can obtain from an English court an anti-suit injunction against its contractual counterparty when the latter tries to issue proceedings in another jurisdiction in an attempt to resolve a claim, dispute, or difference arising out of the contractual relationship.

Salford Estates (No.2)

This commitment to arbitration had led English and Welsh courts to stay or even dismiss winding up petitions brought against companies on the basis of a debt which arose out of a relationship which involved an arbitration agreement. This was subject to a (not uncontentious, on the authorities) low threshold whereby the mere non-admission of a debt of a party to an arbitration agreement was sufficient to the finding of a ‘dispute’ which needed to be resolved by arbitration.

This usual practice followed the decision of the Court of Appeal in Salford Estates (No.2) Ltd v Altomart Ltd (No.2) [2014] EWCA Civ 1575; [2015] Ch. 589. In that case, which involved non-payment of service charges pursuant to a lease containing an arbitration clause, the Court of Appeal held, first, that a debt specified in a winding up petition was not a claim for payment of that particular debt (as the liquidation of the company did not mean that the debt would actually be paid), but simply evidence of the company’s inability to pay its debts. Accordingly, section 9 of the (English) Arbitration Act 1996 did not apply, and so did not remove the court’s jurisdiction and discretionary power to wind up a company deemed unable to pay its debts.

However, secondly, the Court held that despite the mandatory provisions of section 9 being inapplicable, the court’s discretion under section 122 of the Insolvency Act 1986 should be exercised consistently with the legislative policy embodied in the Arbitration Act, which in the absence of “wholly exceptional circumstances” should mean that the petition will be stayed or dismissed ([39]). In that case, the non-admission by the debtor of the debt resulted in a ‘dispute’ which should be compelled by the court to be resolved in the parties’ contractually chosen forum of arbitration, rather than holding the debtor to the higher threshold of showing that the debt was genuinely disputed on substantial grounds (which it was not) ([41]).

Sian Participation – the Privy Council

Giving the judgment of the Board in Sian Participation, Lord Briggs and Lord Hamblen held, and directed English and Welsh courts to accept, that “Salford Estates, and the cases which have followed it, were 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” ([88]).

In the case on appeal, the respondent creditor had loaned $140m to the appellant debtor. The loan facility was subject to an arbitration agreement which provided that “any claim, dispute, or difference of whatever nature arising under, out of or in connection with this Agreement (including a claim, dispute, or difference regarding its existence, termination or validity or any noncontractual obligations arising out of or in connection with Page 16 of this Agreement)(a ‘Dispute’), shall be referred to and finally settled by arbitration in accordance with [the specified Rules] [etc]”.

It was found in the domestic courts, and not disputed on appeal to the Privy Council, that the appellant did not have a genuine dispute on substantial grounds concerning the debt (even taking into account an alleged cross-claim). The first issue the Board was asked to determine (and the one which was subject to the Willers Joyce direction) was to determine the correct test for making a liquidation order (ordering a winding-up) where the debt is subject to an arbitration agreement and is said to be disputed and/or subject to a cross-claim (notwithstanding that the dispute is not on genuine and substantial grounds).

As set out above, the Board held that the test should be the ‘genuine dispute on substantial grounds’ test, and that Salford Estates was wrongly decided. The reasoning was as follows:

  • A ‘matter’ is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. It is therefore something in dispute between the parties in respect of which legal proceedings could be brought. A ‘matter’ requiring a stay does not extend to an issue that is peripheral or tangential to the subject of legal proceedings ([58-64]). The Board relied on its previous findings in FamilyMart China Holding Co Ltd v Ting Chuan [2023] UKPC 33, echoing the Supreme Court in Republic of Mozambique v Privinvest Shipbuilding SAL (Holding) [2023] UKSC 32 on this point.
  • A creditor’s winding-up petition does not trigger the statutory mandatory stay provided for in arbitration legislation. This is “because a winding-up petition (or similar liquidation application) is simply not a claim of the type caught by these provisions…such a petition or application does not seek to, and does not, resolve or determine anything about the petitioner’s claim to be owed money by the company” ([88]).
  • Put simply, then, the obligation to which the contracting parties bound themselves by entering an arbitration agreement only relates to the resolution of disputes or claims, and to have them resolved through arbitration, not litigation. A winding up petition does not seek to resolve any dispute or claim (insolvency being of a different character to dispute resolution), and therefore the presentation of winding-up petition “is simply not something which the creditor has agreed not to do” ([89]). The Board had earlier noted that a winding-up order does not create a res judicata between petitioner and company, because the insolvency court is not making any determination or adjudication on the underlying claim to a debt ([33]).
  • Furthermore, the pro-arbitral policies underlying the legislation are not offended by a party seeking liquidation of another which fails to pay a debt. Insolvency proceedings themselves should not be used as a means to pressure another to pay a disputed debt, and mechanisms are already in place (the usual test) to ensure that a creditor has an established debt, whether by (e.g.) court order or arbitral award. The legislative policy is best inferred from the boundary of the wording of the statute itself, which is not to seek dispute resolution in court ([90-91]).
  • Accordingly, where the debt is not genuinely disputed on substantial grounds, the court is not trespassing on the parties’ agreement to have disputes determined by arbitration when it orders a company’s winding-up, precisely because “by ordering a liquidation the court is not resolving anything about the debt, nor interfering with the resolution of any dispute about it” ([92]).
  • The Board also observed that, in fact, the pro-arbitration agenda is potentially weakened if creditors believe that by signing up to an arbitration agreement they also forego their ability to pursue liquidation; such a creditor might (and indeed, in the past ten years may well have) refuse to sign up to any arbitration agreement at all – “Such a party is much more likely to agree to include an arbitration clause if it does not impede a liquidation where there is no genuine or substantial dispute about the debt. And where there is such a dispute, then arbitration will prevail as the means of resolution” ([93]).

The Board also determined that the same would apply to exclusive jurisdiction clauses.

Conclusion

The immediate result of this decision will be that winding up petitions (in England and Wales) will no longer be subject to automatic stays or dismissal where the debt arises out of a contract subject to an arbitration agreement or exclusive jurisdiction clause. It will no longer be enough to ‘not admit’ such a debt, for the debtor to avoid being wound up. The proper test will be whether the debt is genuinely disputed on substantial grounds.

And what about arbitration agreements/exclusive jurisdiction clauses drafted to include insolvency proceedings as one of the ‘matters’ which should be submitted to arbitration? One would expect to see more of these clauses included in commercial agreements moving forward, but the Board in Sian Participation expressly reserved its opinion as to how much such clauses will achieve.

The full judgment can be found here.

Nothing in this blog post is intended to provide legal advice or assistance. All cases turn on their facts, and none of the above is intended to be a substitute for formal legal advice.

 

Christopher Stead

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