Cayman Islands: Arbitration v Winding Up - Which Prevails?

A creditor petitions to wind up a company for non-payment of a contractual debt. The company disputes the debt. Not only that, but the company denies the court's jurisdiction to determine whether there is a genuine and substantial dispute over the existence of the debt - that being the usual test for dismissing the petition. Rather the company says that the presence of an arbitration clause in the contract means that the court must simply refer the matter to arbitration, without enquiring any further, and meanwhile must dismiss or stay the petition.

The court is faced with a tension between upholding the primacy of the arbitration agreement and the court's exclusive statutory jurisdiction to determine winding up petitions. How does the court respond?

There have been conflicting decisions over the years, but the trend is towards the court retaining its power to decide whether there is actually a genuine and substantial dispute, even though the court would not go on to resolve any such dispute. This runs counter to the trend towards giving absolute primacy to arbitration agreements via the UNCITRAL Model Law which has been adopted (subject to certain variations) in many jurisdictions, including the Cayman Islands.

In the Hong Kong case of Hollmet AG v Meridian Success Metal Supplies Ltd. [1997] HKLRD, the company submitted that, as long as one party alleged there was a dispute that was referable to arbitration, the court's jurisdiction was effectively ousted. The court disagreed and said it was concerned to wind up an insolvent company, not to enforce private rights. A winding up proceeding was not the subject of the arbitration clause – that clause simply applied to the underlying contract. Therefore, the court had a jurisdiction to determine, in the winding up, whether there was a genuine and substantial dispute. Unless it was satisfied that there was a genuine dispute, the money would be treated as due and payable.

Genuine Dispute

The court's reasoning in Hollmet has been applied in other decisions, although it contains an apparent flaw. Of course a winding up petition invokes the court's insolvency jurisdiction and of course the arbitration clause does not provide that this jurisdiction is subject to arbitration. But where the petition to wind up requires proof of an unpaid debt, and where the liability to pay that debt is disputed, then only if the court resolves the dispute (albeit by concluding that the dispute cannot be characterized as "genuine and substantial") can it go on to make a winding up order. However, the parties have agreed that the dispute can only be resolved by arbitration and the arbitration law of all these jurisdictions accords absolute primacy to the parties' agreement on this point; that reflects a public policy decision.

Public Policy Decision

That policy is not simply the policy of an individual national law. The national arbitration laws give effect to an UNCITRAL Model Law and the policy behind the law is reflected in a report to the UNCITRAL Commission, dealing with Article 8(1) of the Model Law, which explains the policy in these terms:

"Article 8(1) deals with an important negative effect of an arbitration agreement. The agreement to submit a certain matter to arbitration means that this matter shall not be heard and decided upon by any court, irrespective of whether this exclusion is expressed in the agreement."

In some later cases, the court has indeed upheld the primacy of an arbitration clause by declining to decide whether there was a genuine and substantial dispute. This happened in the BVI case of Pioneer Freight Futures Co Ltd v Worldlink Shipping Ltd, Samoa – 135/2009 and 152/2009. Bannister J held that, if the BVI court were to decide that there was no genuine or substantial dispute, this would effectively prevent the company from exercising its right to deploy its arguments in arbitration. It was not for the BVI court to deprive the company of that right. Pioneer was followed by the Cayman Islands court in Re Times Property Holdings Ltd 2011 (1) CILR, although in Times the court held that, on the facts, there was a genuine dispute - so the court would have reached the same conclusion in any event.

"... the court's power ... to control the winding up process will trump the primacy of arbitration agreements in determining whether a petition debt is disputed on genuine and substantial grounds."

Firm Trend

However, the firm trend is towards the court retaining its power to determine whether there is a genuine and substantial dispute, notwithstanding an arbitration clause or even an actual arbitration. In the BVI, Bannister J has expressly departed from his earlier decision in Pioneer, in Alexander Jacobus de Wit v Vascon Trading Ltd, 129/2011.

In correcting his earlier analysis, Bannister J said he had misinterpreted an earlier BVI Court of Appeal decision in Sparkasse Bergenz Bank AG v Associated Capital Corpn 10/2002, which he had regarded as analogous. Sparkasse concerned whether the court should decide whether there was a genuine and substantial dispute if the contract was governed by a foreign law and jurisdiction. The Court of Appeal said yes, it should, even though the Court could not go on to determine any such dispute.

In de Wit Bannister J also relied upon the English Court of Appeal decision in BST Properties Ltd v Reorg-Apport Penzugti rt [2001] EWCA Civ 1997; whether or not proceedings raising a dispute about the alleged debt could be stayed pursuant to an arbitration clause, that was irrelevant to the question before the court: namely, whether the debt is bona fide disputed on substantial grounds.

Bona Fide Debt

The Cayman Islands court has adopted this approach recently in The Matter of Ebullio Commodity Master Fund L.P. [1989 S9HC 4]. In Ebullio, the petitioner relied upon non-payment of sums under shipping contracts. The company disputed liability, on the basis that there was a separate oral contract that permitted the contracts to be rolled over such that the sums had not become payable.

The contracts contained an arbitration clause and the company brought an arbitration on the same day as the petition was presented. Jones J had to consider whether this meant that he had no jurisdiction to determine whether there was a bona fide dispute on substantial grounds. He rejected that submission, holding that the arbitration clause and/or the existence of the arbitration would come into play only if he concluded that there was a bona fide dispute on substantial grounds. Jones J decided that there was no genuine dispute.

In practice, it seems that the court's power (and desire) to control the winding up process will trump the primacy of arbitration agreements in determining whether a petition debt is disputed on genuine and substantial grounds. This approach certainly meets a practical concern that arbitration clauses could be invoked as a ruse to avoid a winding up. As a policy decision, it is probably sensible in preventing a debtor's charter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.