Key takeaways
- Where a debt is due under an agreement (and assuming there is no binding non-petition clause in effect), it is possible to take steps to wind up the company without first proceeding to arbitration, in accordance with the relevant procedure set out in the arbitration clause. A creditor could proceed by issuing a statutory demand for the debt, waiting for 21 days to pass (following which the entity would be deemed insolvent where the debt remains unpaid), and then present a winding up petition on the basis that the debtor company is insolvent (i.e. is unable to pay its debts). It is possible to present a winding up petition without having previously issued a statutory demand, but the presumption of insolvency will not apply.
- If the debtor company has not admitted or accepted that the debt the subject of a winding up petition is due, there remains a risk that the debtor company may raise a dispute in respect of the debt. Following the above cases, provided that there is no genuine or substantial dispute in respect of the subject debt, the Cayman and/or BVI Court are unlikely to stay or dismiss the winding up petition pending the resolution of that dispute in accordance with the arbitration agreement of the parties. Similarly, the debtor company may seek to restrain the creditor from presenting a winding up petition on the same basis following issuance of the statutory demand. Following the most recent decisions out of the Grand Court and the Privy Council, the dispute raised by the debtor must be genuine and substantial to justify dismissing a petition in favour of arbitration. The mere existence of a dispute will not be sufficient to stave off a winding up.
- Note that in the Cayman Islands, an agreement containing non-petition language may still prevent a creditor from issuing a winding up petition.
- As a first step, the provisions of the arbitration clause / agreement and the background should be carefully considered to determine the enforcement strategy offshore. The conduct of the parties, and correspondence exchanged, prior to enforcement is particularly important where the debtor company has not admitted the subject debt is payable.
Walkers' Insolvency and Dispute Resolution team in Dubai are often asked to assist with the enforcement of debts owed by Cayman Islands or BVI domiciled debtors by way of winding up petition, where such debts arise under foreign law governed agreements which include an arbitration clause.
There is a clear tension between two areas of public policy here, namely insolvency and arbitration. It is clearly in the public interest that if a company is unable to pay its debts as they fall due, there should be a simple process for placing it (without undue delay) into an insolvency process, in order that its assets may be collected in and realised and distributed pari passu between its creditors. At the same time, however, there is a public policy interest that parties who agree to resolve a dispute by arbitration should be held to that agreement without interference from the courts. In most jurisdictions, the Court must stay proceedings unless it finds that the arbitration clause is "null and void, inoperative, or incapable of being performed".
Until recently, the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd. was generally followed in the Cayman Islands and BVI (save for in Jinpeng) so that, put broadly, where an arbitration clause existed, a stay of winding up proceedings would be granted even if the creditor could satisfy the Court that the debtor company did not have an arguable defence. This exceedingly pro-arbitration stance has meant that in England, decisions have arisen where even a previous admission that a debt is owing does not constitute "exceptional circumstances", meaning that it needs to be arbitrated first, if winding up proceedings are to follow.
The position in both the Cayman Islands and the BVI has now shifted, following the recent decisions of the Cayman Court in Re BPGIC Holdings Limited (where Walkers' Dubai and Cayman teams were successful in acting for the petitioning creditor) and of the Privy Council in Sian Participation Corp v Halimeda International Ltd.
In Re BPGIC Holdings Limited [2023], the Grand Court had to determine whether it should only consider whether: (i) the debt is not admitted by the debtor; and (ii) the dispute falls within the scope of the arbitration provisions in the relevant agreement or instead undertake any inquiry as to whether the debt is bona fide disputed on substantial grounds. The Grand Court, agreeing with the submissions put forward on behalf of the Petitioner, held that the approach of the Cayman Court is "to determine the threshold question of whether the dispute is genuine and substantial before dismissing a petition in favour of arbitration". The Grand Court distinguished the English case law authorities relied on by the Company, including Salford Estates, which had developed in line with the policy objectives of the English Arbitration Act 1996.
In Sian Participation Corp [2024] UKPC 16, the Privy Council took a very similar line of reasoning to that of the Grand Court, finding that it was incorrect to hold that a petition founded on a disputed debt which was subject to arbitration should be dismissed without enquiry into the merits of the dispute. The Privy Council underlined a public policy consideration that had resulted from the previous line of reasoning from Salford Estates, namely that a creditor should not be expected "to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose".
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.