The Privy Council has handed down its judgment in Sian Participation Corp v Halimeda International , ruling that where the parties are subject to an arbitration agreement, the appropriate test for determining whether a creditor's winding up petition should be stayed in favour of arbitration is whether the debt is “genuinely disputed debts on substantial grounds”.
The Privy Council has handed down its judgment in Sian Participation Corp v Halimeda International1, ruling that where the parties are subject to an arbitration agreement, the appropriate test for determining whether a creditor's winding up petition should be stayed in favour of arbitration is whether the debt is “genuinely disputed debts on substantial grounds”.If it is not, the insolvency procedure is an appropriate mechanism. The decision overruled the Court of Appeal's longstanding seminal judgment in Salford Estates v Altomart2,
Although the Privy Council was considering an appeal from the BVI Supreme Court, the BVI inherited its insolvency jurisdiction from the UK meaning English law authorities are fully applicable.
The case raised two areas of public policy. On the one hand, there should be a simple and quick mechanism enabling a creditor to place a company that cannot pay its debts as and when they fall due into an insolvency process. At the same time, those who agree to be bound by an arbitration clause should be held to that agreement and it is not for the courts to intervene in the place of arbitration. However, the Privy Council ultimately decided that where there is no genuine dispute as to the debt, the insolvency mechanism is available to creditors in the place of arbitration notwithstanding the existence of an arbitration clause.
The Claim
Sian had failed to repay a loan, owing Halimeda over USD $225 million. Sian disputed that the debt was due and payable based on a crossclaim, which the BVI Court of Appeal determined had no prima facie basis. Therefore, the debt, although not admitted by Sian, was not genuinely disputed on substantial grounds. Halimeda therefore presented a winding up petition. However, Sian argued that the petition should be stayed pending arbitration and applied for such an order under Section 18 of the BVI Arbitration Act 2013.
Under English law, the equivalent provision is section 9(1) of the Arbitration Act 1996 (‘AA 1996') which provides the basis for a party to apply for a stay of court proceedings where the parties agreed to resolve disputes through arbitration.
In reaching its decision, the Privy Council conducted a detailed review of the seminal and longstanding English Court of Appeal decision in Salford Estates.
Reasoning in Salford Estates
Salford Estates held that, save in wholly exceptional circumstances, the Companies Court should grant a stay of a creditor's petition in favour of arbitration. This was on the basis that (i) the Companies Court should not be undertaking an analysis akin to summary judgment of a creditor's claim; and (ii) a decision to the contrary may encourage parties to bypass a mandatory arbitration agreement by presenting a winding up petition in court as a standard tactic.
In Salford Estates, the lessee did not admit a rent service charge was payable to the lessor in circumstances where the lessor had already obtained a detailed arbitration award in their favour in relation to an earlier service charge payment (which had since been settled). The lessee was nonetheless granted a stay pending arbitration to determine whether the second claim for rent service charge was payable.
The result of Salford Estates is that debtors were able to obtain a stay under section 9 AA 1996, and therefore delay any potential insolvency process, in circumstances where there was merely an insubstantial and/or non-genuine dispute as to the debt.
The correct test: reversal of Salford Estates
Reversing Salford Estates, the Privy Council held that the correct test is that a stay in favour of arbitration should only be granted where the debt is disputed on “genuine and substantial grounds”.
The Privy Council reasoned:
1. The contractual obligation embodied in a mandatory arbitration agreement is to refer disputes to arbitration. A creditor's winding up petition is not a dispute caught by section 9 AA 1996 because it does not resolve the petitioner's claim to money. The existence of, or the amount of the debt, is not an issue for resolution in such proceedings.
2. As such, a creditor's petition is not a “matter” that falls within section 9(1) AA 1996; a “matter” must be a substantial issue that is legally relevant to a claim or defence (FamilyMart3).
3. Should there be a genuine dispute on substantial grounds, the creditor must first establish his claim through arbitration (where there is an applicable arbitration agreement). There is a policy of insolvency legislation that liquidation should not be threatened or pursued against a company which genuinely disputes debts on substantial grounds, such that a creditor's petition should not be allowed to proceed in such circumstances.
The Privy Council concluded by making a so-called “Willers v Joyce direction”, establishing that its judgment overrules Salford Estates as a matter of English law.
Relevancy of decision
The decision of the Privy Council is to be welcomed by creditors faced with insolvent companies that are subject to arbitration agreements which, prior to the decision, precluded them from being able to pursue insolvency proceedings. The effect of Salford Estates was that lenders and other creditors could be put through very considerable delay and expense by debtors who had no genuine basis to dispute the debt, but nevertheless would not admit their liability.
Further, as the Privy Council noted, it is often the party that is most likely to become the creditor that has the “whip-hand” in choosing the terms of the contract, including whether to include an arbitration agreement. Such companies could refuse to agree to an arbitration clause if they knew it would impede initiating a liquidation process in relation to a debt owed to them, so there was a further public policy interest in reversing Salford Estates.
The decision also upholds some of the key general objectives of arbitration, including efficiency and reducing costs, by ensuring the process is reserved for genuine disputes.
Footnotes
1. [2014] EWCA Civ 1575.
2. [2023] UKPC 33.
3. [2023] UKPC 33.
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