Winding up is "[a] type of external administration (also referred to as liquidation) in which a liquidator is appointed to a company to take control of the company and its property, and wind up its affairs in an orderly way for the benefit of creditors".1 This process can be initiated voluntarily by a company's shareholders or partners as a way to avoid bankruptcy, or it can be compulsory via a court order directing the company to appoint a liquidator.4 Compulsory winding up is often triggered by suits brought by the company's creditors or at the conclusion of bankruptcy proceedings.5
Once the winding-up process has begun, the company ceases to conduct business as usual, its assets are seized and sold, and the proceeds are used to pay off its debts and liabilities.2 Upon the completion of winding up, the company is dissolved and ceases to exist.3
While winding up may seem fairly straightforward, certain debts of a company undergoing the winding up may be subject to dispute under an arbitration agreement. Therefore, when a creditor seeks to wind up the company based on that debt, the existence of the arbitration agreement can complicate the winding-up process, as courts must decide whether to stay the winding-up process in favour of arbitration or proceed with the process.
This article explores recent developments in the legal relationship between winding up and arbitration agreements in Hong Kong, Singapore, Tanzania and the UK.
Hong Kong:
In Hong Kong, under s. 181 (Power to stay or restrain proceedings against company) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, when a winding up petition has been presented against an insolvent company, the company (or its creditors) may apply to a court for a stay of all proceedings against it – this includes arbitration proceedings:6
At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company or any creditor or contributory may— (Amended 6 of 2024 s. 125)
(a) where any action or proceeding against the company is pending in the Court of First Instance or the Court of Appeal, apply to the court in which the action or proceeding is pending for a stay of proceedings therein;
(b) where any action or proceeding against the company is pending in any court or tribunal other than the Court of First Instance or the Court of Appeal, apply to the Court of First Instance to restrain further proceedings in the action or proceeding,
and the court to which application is so made may, as the case may be, stay or restrain the proceedings accordingly on such terms as it thinks fit.
Further, under s. 186 (Actions stayed on winding-up order), once a winding-up order has been made, all pending proceedings against the company will be automatically stayed and no new actions may be commenced:7
When a winding-up order has been made, or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose. (Amended 6 of 2024 s. 126)
Traditionally, if a debtor wished to resist a winding-up petition before Hong Kong courts based on an arbitration agreement, it had to demonstrate a bona fide dispute of substance in relation to the debt that it is seeking to enforce, although a 2018 decision by the Court of First Instance diverged from this approach.8 This decision, in Re Southwest Pacific Bauxite, instead took what has become known as the Lasmos approach, which mirrors the English Court of Appeal's decision in Salford Estates (discussed below),9 whereby the court must generally dismiss a winding-up petition in favour of arbitration, absent exceptional circumstances, when the opposing debtor has taken steps required under the arbitration clause to commence the dispute resolution process and files an affirmation of these steps.10
The public policy implications of this decision in limiting a company's statutory right to wind up have since been questioned through obiter comments by the Court of Appeal, though it has not been overturned.11 It will thus be interesting to watch for developments to come.
Singapore:
Courts in Singapore, like Hong Kong, previously used a "general approach" in which courts would consider whether there was a bona fide dispute over the debt at issue.12 However, Singapore courts have since departed from this approach. According to the new standard established by the Singapore Court of Appeal in the 2020 case AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company), once an insolvency court is satisfied that there is a prima facie dispute governed by an arbitration agreement, which was not raised in abuse of the court's process, the court will ordinarily dismiss the winding-up petition.13
In AnAn, the Court stated that the adoption of this new standard "promotes coherence in the law, gives effect to the principle of party autonomy and helps to achieve cost savings and certainty in the law."14 According to the Court, this is due, inter alia, to the fact that the prima facie standard of review applies for stay applications in favour of arbitration in cases concerning ordinary claims for debt, and applying a higher standard to a winding-up application on the same debt would encourage parties to present a winding-up application as a tactic to bypass an arbitration agreement.15
This approach was confirmed by the Singapore High Court in the 2023 case, Europ Assistance Holding SA v ONB Technologies Pte Ltd (ONB Holdings Pte Ltd, non party).16
Tanzania:
In 2020, the Tanzanian High Court clarified its stance on the relationship between arbitration clauses and winding-up procedures in the 2020 case Queensway Tanzania (EPZ) Ltd v Tanzania Tooku Garments Co. Ltd.17 In its judgment, the High Court cited the British case Salford Estates (discussed below), agreeing that where a debt subject to an arbitration agreement is not admitted, courts should stay or dismiss the winding up proceedings absent "wholly exceptional circumstances".18 The Court agreed with the British court's reasoning for this approach, indicating that "courts should not encourage parties to use the draconian threat of liquidation as a method for bypassing an arbitration agreement" as it would be contrary to the parties' choice to use arbitration.19 The Court also recalled the AnAn case from Singapore (discussed above). It ultimately adopted "the English and Singaporean approach that seeks to uphold the party autonomy principle and the pro-arbitration policy approach".20
This approach was confirmed by the High Court on 14 July 2022 in Petrofuel v Market Insight.21
United Kingdom:
Interestingly, while courts in the countries above have proven keen to apply the arbitration-friendly approach of Salford Estates (No. 2) Ltd v Altomart Ltd, a 2014 decision by the Court of Appeal for England and Wales, to their domestic cases, the courts of the UK have very recently distanced themselves from this case.
In Salford Estates, the Court of Appeal determined that while a winding-up petition was not subject to an automatic stay under the Arbitration Act of 1996, a court should generally refrain from making a winding-up order, absent exceptional circumstances.22
On 19 June 2024, the Privy Council, the final court of appeal for cases from UK Commonwealth countries, issued a rare Willers v Joyce23 decision in Sian Participation Corp v Halimeda International Ltd, holding that Salford Estates should be overturned.24
In the opinion of the Council, the Salford Estates pro-arbitration approach resulted in a situation for petitioning creditors whereby unless the debtor admitted the debt, a debtor could easily get a winding-up petition dismissed or stayed pending the obtention of an arbitral award by the creditor.25 By overturning Salford Estates, the Privy Council sought to limit the use of arbitration as a delay tactic for winding up and instead established that winding-up petitions should be dismissed or stayed on where "the debt is disputed on genuine and substantial grounds."26
Conclusion
The interplay between winding-up proceedings and arbitration agreements illustrates a complex and evolving area of law that varies across jurisdictions. The fundamental objective of winding up is to facilitate an orderly resolution of a company's financial affairs for the benefit of creditors, yet the presence of an arbitration agreement can complicate this process.
In Hong Kong, Singapore, Tanzania, and the UK, we see a divergence in judicial approaches to balancing the right of creditors to initiate winding-up proceedings against the party autonomy principles embedded in arbitration agreements. While Hong Kong, Singapore, and Tanzania have generally leaned towards upholding arbitration agreements, reflecting a pro-arbitration stance, the UK's recent shift signals a move towards ensuring that winding-up petitions are not unduly delayed by arbitration clauses.
It will be worth watching to see whether these courts will follow suit, especially in Hong Kong, where courts have already expressed concerns about the negative impact of the former English approach on parties' rights to wind up.
Footnotes
1 Glossary: Winding up, https://uk.practicallaw.thomsonreuters.com/w-006-4196.
2 About Liquidation or Winding Up, https://io.mlaw.gov.sg/corporate-insolvency/about-liquidation-or-winding-up/.
3 Id.
4 Winding Up, https://www.law.cornell.edu/wex/winding_up.
5 W. Kenton, What Is Winding Up? How Does It Differ From Bankruptcy?, 12 February 2024, https://www.investopedia.com/terms/w/windingup.asp.
6 Companies (Winding Up and Miscellaneous Provisions) Ordinance, s. 181(1).
7 Companies (Winding Up and Miscellaneous Provisions) Ordinance, s. 186(1).
8 Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449; But Ka Chon v Interactive Brokers LLC [2019] HKCA 873.
9 P. Hanusch et al., Hong Kong Court of Appeal confirms that absent countervailing factors, insolvency petitions should be stayed or dismissed where a disputed debt or crossclaim exceeding the debt is subject to an arbitration agreement, 6 May 2024, https://www.globalarbitrationnews.com/2024/05/06/hong-kong-court-of-appeal-confirms-that-absent-countervailing-factors-insolvency-petitions-should-be-stayed-or-dismissed-where-a-disputed-debt-or-crossclaim-exceeding-the-debt-is-subject-to-an-arbitr/.
10 V. Tang, Winding up and Arbitration: A Guide to Claiming against Insolvent Companies, May 2023, https://www.hk-lawyer.org/content/lasmos-and-beyond-have-cake-and-eat-it-too.
11 But Ka Chon v. Interactive Brokers LLC (02/08/2019, CACV 611/2018) [2019] HKCA 873.
12 J. Kwan et al., AnAn affirmed – Singapore court confirms arbitration agreements trump winding-up applications, 11 October 2023, https://www.engage.hoganlovells.com/knowledgeservices/news/anan-affirmed-singapore-court-confirms-arbitration-agreements-trump-winding-up-applications.
13 Id.
14 AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SCGA 33, para. 57.
15 Id., paras. 60-63; 88.
16 Europ Assistance Holding SA v ONB Technologies Pte Ltd (ONB Holdings Pte Ltd, non party) [2023] SGHC 226; S. J. Cia et al., AnAn affirmed – Singapore court confirms arbitration agreements trump winding-up applications, 11 October 2023, https://www.jdsupra.com/legalnews/anan-affirmed-singapore-court-confirms-7557575/.
17 A. Kameja et al., Tanzania: Arbitration cannot be bypassed through liquidation (winding up), 29 April 2021, https://bowmanslaw.com/insights/tanzania-arbitration-cannot-be-bypassed-through-liquidation-winding-up/.
18 Queensway Tanzania (epz) Ltd vs Tanzania Tooku Garments Co. Ltd (Misc. Cause 43 of 2020) [2021] TZHCComD 3407 (29 March 2021), p. 21.
19 Id., p. 21.
20 Id., pp. 25-26.
21 Petrofuel (T) Limited v Market Insight Ltd (Misc. Cause 07 of 2022) [2022] ] TZHCComD 216 (14 July 2022).
22 Salford Estates (No. 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575.
23 In Willers v Joyce, the Supreme Court of England and Wales decided that "in an appropriate case", the Privy Council may "resolve what had previously been an unsatisfactory question for the English courts as to whether it was a foregone conclusion that the view of the [Privy Council] would, in due course, eventually prevail over an otherwise binding English decision." Willers v Joyce (No 2) [2016] UKSC 44; [2018] AC 843.
24 Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16, paras. 124-127.
25 P. Keddie & T. Bromley-White, Winding-up versus arbitration agreements: A victory for petitioning creditors, 26 June 2024, https://www.macfarlanes.com/what-we-think/102eli5/winding-up-versus-arbitration-agreements-a-victory-for-petitioning-creditors-102jb8m/.
26 Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16, para. 122.
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