The Privy Council has recently upheld a BVI judgment refusing stay of a winding up petition in favour of arbitration. The recent Sian Participation Corp (In Liquidation) v Halimeda International Ltd1 Privy Council decision provides much needed clarity on the exercise of the Court's discretion to wind up a company where the debt is not disputed on genuine and substantial grounds and is subject to an arbitration clause. In this ruling the Privy Council overturned the English Court of Appeal decision in Salford Estates (No.2) Ltd v Altomart Ltd ("Salford Estates")2 on the question whether a policy of a mandatory stay in favour of arbitration should be extended to a winding up petition where the debt is not disputed on genuine and substantial grounds. Additionally, a key issue considered and determined by the Privy Council in this decision was that a judgment of the Court of Appeal upholding an order appointing a liquidator does not engage a value threshold and is not a type of a judgment that the appellant could appeal as of right.
The Privy Council upheld the decision of the Honourable Mr Justice Wallbank (Ag.) and confirmed that as a matter of BVI law the test applicable to a winding up petition involving a disputed debt or a cross-claim arising out of a contract subject to arbitration is "whether the debt is disputed on genuine and substantial grounds" and does not encompass a requirement to consider a mandatory stay in favour of arbitration. The Privy Council observed that said test applies to generally worded arbitration and exclusive jurisdiction clauses, unless the parties frame their agreement to apply to a liquidation application.
First Instance and Eastern Caribbean the Court of Appeal Decision
In the case before the Privy Council, the respondent company initiated winding up proceedings in the BVI Commercial Court in connection with a loan advanced by it to the appellant company under the terms of a facility agreement which remain unpaid. The appellant denied that the debt was due and payable on the basis of a cross claim and/or set-off and sought to have the winding up proceedings dismissed or stayed on the basis that the parties were subject to the terms of an arbitration agreement provided in the facility agreement and the respondent company should have established the debt by an arbitration award.
At both first instance and in the Court of Appeal, it was determined that the debt was not disputed on genuine and substantial grands and that the winding up proceedings should prevail and not be stayed despite the parties being subject to an arbitration agreement. The BVI Courts adopted the approach taken in Jinpeng Group Limited v Peak Hotels and Resorts Limited ("Jinpeng")3 and Salford Estates that the respondent company's application did not concern a 'dispute' as contemplated by section 18 of the Arbitration Act, but did not follow Salford Estates in so far as it extended the mandatory stay or dismissal of the winding up proceedings in favour of arbitration.
Privy Council Decision
The Board handed down its decision on 19 June 2024 holding that as a matter of BVI law, the correct test to be applied in the exercise of the Court's discretion on whether to appoint liquidators over a company, where the debt arises out of a contract containing an arbitration agreement and is disputed, is whether the debt is disputed on genuine and substantial grounds. The Board did not agree that as a matter of policy the winding up proceedings should be stayed in favour of arbitration, and to that extent overturned the dicta in Salford Estates. The Board discussed that the effect of Salford Estates was to render the discretion of the court "illusory" in all winding up petitions involving a debt arising out of a contract containing an arbitration agreement. Extending the mandatory stay to the winding up petitions would be contrary to public policy because it is in the public interest that a company which is unable to pay its debts as they fall due is put into liquidation without undue delay and its assets are divided fairly between all its creditors.
The Board observed that there is no consistency amongst common law jurisdictions as to what constitutes a "disputed debt", as some jurisdictions apply a wider and others apply a narrower approach. In the BVI, whether the debt is disputed will be determined applying the criteria as set out in Sparkasse Bregenz Bank AG v In the matter of Associated Capital Corporation and as followed by the Eastern Caribbean Court of Appeal ("ECCA") in Jinpeng. The ECCA has adopted a more narrow approach to the threshold question and requires the Court to conduct a preliminary investigation of the facts to confirm whether the debt is disputed on genuine and substantial grounds. Once the creditor is able to show that the Company is insolvent within the meaning provided under the BVI Insolvency Act 2003, and that the unpaid debt is not disputed on genuine and substantial ground, the liquidation application will succeed. In Jinpeng, the ECCA did agree with the position taken in Salford Estates that a creditor's application to wind up a company did not fall within the mandatory stay provisions under section 18 of the BVI Arbitration Act, 2013, but disagreed with dicta in Salford Estates suggesting that the mandatory stay applies to the liquidation proceedings unless the petitioner is able to show exceptional circumstances.
The Board dismissed the appeal in its entirety, ultimately confirming that Jinpeng remained good law and condemning Salford Estates as no longer good law on the applicable test. This decision provides much needed closure on the important issue concerning creditors' rights in insolvencies and balancing those rights within the context of pro-arbitration jurisdiction such as the BVI.
No Appeal as of Right
The Board was asked to consider whether a judgment of the ECCA upholding Justice Wallbank's order to appoint liquidators was a type of a judgment that affected the appellant's interests to the extent of at least GBP 300, being the requirement under section 3(1)(a) of the Virgin Islands (Appeals to Privy Council) Order 1967. It was held that since the process of seeking and obtaining a winding up order does not involve adjudication of the applicant's claim as to liability or quantum, the order does not engage the value threshold and does not affect the appellant's financial interest at all.
The judgment can be found here.
Footnotes
1 [2024] UKPC 16
2 [2014] EWCA Civ 1575; [2015] Ch 589
3 BVIHCMAP2014/0025 (8 December 2015)
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