Winding Up Petitions and Arbitration Agreements - Sian Participation

Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 ('Sian') has, in part, overruled, Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] BCC 306 (‘Salford Estates’). The part overruled is in respect to section 122(1) of the Insolvency Act 1986 and whether the Companies Court can, on a creditors winding up petition, determine whether or not the petition debt is genuinely disputed on substantial grounds. Salford Estates was not overruled in respect to whether section 9 of the Arbitration Act 1996 applies to creditors winding up petitions.

Sian was an appeal in the Privy Council, in respect to a liquidation application in the BVI (the equivalent to a creditors winding up petition in England). Lord Briggs and Lord Hamblen said that 'The BVI inherited its insolvency jurisdiction from the United Kingdom.' (paragraph 27) and, after setting out aspects of BVI liquidation law, that 'The UK's Insolvency Act 1986 achieves substantially the same outcomes in relation to a creditor's petition, albeit by the use of slightly different language and structure:' (paragraph 30), and before setting out '...aspects of the nature and effect of the process for the initiation of an insolvent liquidation may be said to be common to both the UK and the BVI.' (paragraph 32)[1].

Key Passages

In Sian, Lord Briggs and Lord Hamblen, giving the advice of the Board stated, at paragraph 88:

'The Board considers that Salford Estates, and the cases which have followed it, were wrong to introduce a discretionary stay of creditors' petitions (or, in the BVI, liquidation applications) where an insubstantial dispute about the creditor's debt is raised between parties to an arbitration agreement.'

Provided their reasoning, Lord Briggs and Lord Hamblen then said, at paragraphs 88 to 93:

'88....The starting point is the perception, rightly arrived at in almost all the relevant cases including Salford Estates, that a creditor's winding up petition (or similar liquidation application) does not trigger the mandatory stay provided for by article 8 of the Model Law, or by the various statutory provisions for a mandatory stay which implement it, such as section 9 of the 1996 Act or section 18 of the Arbitration Act. This is because a winding up petition (or similar liquidation application) is simply not a claim of the type caught by those provisions. This is not just a matter of language. It is because such a petition or application does not seek to, and does not, resolve or determine anything about the petitioner's claim to be owed money by the company. Nor is the existence or amount of the debt a matter or issue for resolution in those proceedings.

89. The contractual obligation embodied in the typical arbitration agreement is to refer disputes to arbitration for resolution. The negative obligation is not to have them resolved by any court process. Thus the presentation of a winding up petition (or similar liquidation application) does not offend the negative obligation at all. It is simply not something which the creditor has agreed not to do.

90. Nor are the policies underlying the arbitration legislation which implement the Model Law in any way offended or infringed by a party to an arbitration agreement seeking the liquidation of a debtor party which fails to pay the debt. There is a policy of insolvency legislation that the liquidation route should not be pursued, or even threatened, against a company which genuinely disputes the debt on substantial grounds. Where there is such a dispute, the policy is that the creditor should first establish his claim, by having that dispute resolved in its favour, either by a judgment in court or, if there is an applicable arbitration agreement, by an arbitral award.

91. The clearest legislative signal about the boundary of the policy that a party to an arbitration agreement should arbitrate is the extent of the mandatory stay provision which implements article 8 of the Model Law. That identifies the extent of the negative obligation: not to seek resolution of a dispute in court. A winding up petition or similar application lies outside both that boundary and therefore the extent of the underlying policy.

92. None of the general objectives of arbitration legislation (efficiency, party autonomy, pacta sunt servanda and noninterference by the courts) are offended by allowing a winding up to be ordered where the creditor's unpaid debt is not genuinely disputed on substantial grounds. To require the creditor 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. Party autonomy and pacta sunt servanda are not offended because seeking a liquidation is not something which the creditor has promised not to do. And by ordering a liquidation the court is not resolving anything about the debt, nor interfering with the resolution of any dispute about it.

93. Above all there is nothing anti-arbitration in this conclusion. In most agreements where one party is likely to be the creditor, (such as any typical loan agreement), it is that party which will generally have the whip-hand in choosing or vetoing the detailed terms of the agreement. Such a party is much more likely to agree to include an arbitration clause if it does not impede a liquidation where there is no genuine or substantial dispute about the debt. And where there is such a dispute, then arbitration will prevail as the means of resolution.'

Turning to Salford Estates, Lord Briggs and Lord Hamblen said, at paragraphs 94 to 99:

94. The reasoning in Salford Estates calls for review against those considerations. The Board has already observed that the Court of Appeal arrived correctly at first base: namely by concluding that a creditor's winding up petition is not subject to a mandatory stay under section 9. But the Chancellor then just assumed, without further analysis, that the policy inherent in the 1996 Act went further into the prohibition of court proceedings than did section 9 itself. He simply said:

"It is entirely appropriate that the court should, save in wholly exceptional circumstances which I presently find difficult to envisage, exercise its discretion consistently with the legislative policy embodied in the 1996 Act."

With great respect the Board considers that assumption to have been wrong, at least in relation to winding up (or liquidation) proceedings on the insolvency ground, for the reasons already given. The legislative policy embodied in the 1996 Act, and in all similar legislation founded upon the Model Law, is that claims or matters within the scope of an arbitration agreement should be resolved in arbitration and not resolved in court. But nothing about a debt covered by an arbitration agreement is resolved in winding up or liquidation proceedings in court. The legislative policy therefore stops short of such proceedings.

95. [FamilyMart China Holding Co Ltd v Ting Chuan [2023] UKPC 33; [2024] Bus LR 190] confirms rather than undermines that analysis. Although there is a superficial family likeness between a creditor's winding up petition and a contributory's petition for winding up on the just and equitable ground, the two types of proceedings are in substance quite different. A contributory's petition has to show circumstances, usually inequitable conduct by other shareholders, which make it just and equitable to wind up the company, and that conduct has to be pleaded in detail and, if disputed, proved bell, book and candle at a trial. Any dispute about it has to be resolved in the winding up proceedings. Even though the proceedings are not, viewed as a whole, a claim which can be arbitrated, those disputes are likely to raise distinct matters which can be resolved by a declaratory arbitral award, while the winding up proceedings are stayed, whether under an applicable provision for a mandatory stay (not applicable here) or (possibly) as a matter of case management discretion.

96. Nothing in the remainder of the reasoning in Salford Estates remedies what the Board considers to be an impermissible and unexplained leap in the reasoning of the Court of Appeal as to the extent of the legislative policy behind the 1996 Act. The first point made by the Chancellor was the apparent anomaly between the clear legislative policy to outlaw summary judgment of claims covered by an arbitration clause and the similar summary process undertaken by the Companies Court in assessing whether the petitioner's debt is genuinely disputed on substantial grounds. It is true that both have a common element of summary process - ie one which looks to see whether there is an issue which needs to be tried. But there the similarity ends. Summary judgment is, as its name implies, a means of resolving a claim by final resolution in a judgment. But the light touch used by the Companies Court resolves nothing either way, and does not lead to a judgment or anything similar.

97. The remaining reasoning advanced by the Court of Appeal concerns the temptation to bypass an applicable arbitration agreement, or the use of an improper threat to present a petition as a means of applying pressure on a company to pay the debt, or to have to establish a genuine and substantial dispute to the debt in an inappropriate forum. In the Board's view neither of these concerns does anything to bridge the gap in the reasoning about the supposed extent of the legislative policy. They are concerns well-known in the Companies Court, in relation to bypassing the need for litigation about disputed debts in ordinary claims in court, and applying improper pressure otherwise than by threatening an ordinary claim to recover the debt. They are treated by the Companies Court (or similar insolvency court) as types of abuse of process, and orders for indemnity costs are commonly visited upon the perpetrators. There is nothing peculiarly "anti-arbitration" about such conduct.

98. It has already been noted that there is nothing in the decisions around the common law world which have followed Salford Estates which adds significantly to the reasoning given by the Chancellor. The Board broadly shares the concerns expressed by Deputy Judge Wong SC in the Dayang case and in the academic articles which have developed those concerns.'

99. Accordingly, the Board concludes that, as a matter of BVI law, the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement or an exclusive jurisdiction clause and is said to be disputed is whether the debt is disputed on genuine and substantial grounds. This conclusion applies to a generally worded arbitration agreement or exclusive jurisdiction clause. Different considerations would arise if the agreement or clause was framed in terms which applied to such a liquidation application.'

Direction that Sian represents the law of England and Wales

Sian is a Privy Council case. As a matter of English law, without more, the Board's advice in Sian would not change the law in England and Wales and, in England and Wales, Salford Estates would remain the law (unless and until the UK Supreme Court overruled it). But the Board in Sian did go further:

(1) The Board considered whether to issue a Willers v Joyce direction. Lord Briggs and Lord Hamblen in Sian stated, at paragraph 124:

'There remains the question whether the Board should make a Willers v Joyce direction, namely that Salford Estates should no longer be followed in England and Wales, and that this decision of the Board, so far as it holds that Salford Estates was wrongly decided, now represents the law of England and Wales. In Willers v Joyce (No 2) [2016] UKSC 44; [2018] AC 843 a unanimous nine justice panel of the Supreme Court decided that, in an appropriate case, this is something which the Board has jurisdiction to do, so as to 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 Board would, in due course, eventually prevail over an otherwise binding English decision.'

(2) determined to make a Willers v Joyce direction. Lord Briggs and Lord Hamblen in Sian stated, at paragraph 125:

'The Board considers that such a direction should be given. Our conclusion that Salford Estates was wrongly decided was not merely a conclusion about the law of the BVI. It was a conclusion about English law, even though informed in its reasoning by the study of overseas decisions and academic writings, as decisions about English law often are. The Board is aware that it is the current practice of the Companies Court in England and Wales to follow Salford Estates in exercising a supposed discretion to stay or dismiss a creditors' winding up petition on the ground that the petitioner's debt is covered by an arbitration clause, without being shown to be genuinely disputed on substantial grounds. The Board's view is that this should cease and it so directs.'

Exclusive Jurisdiction Clause

For good measure, Lord Briggs and Lord Hamblen in Sian resolved 'the parallel issue' - whether the presence of an exclusive jurisdiction clause rendered it impermissible for the Companies Court to determine whether or not petition debt was genuinely disputed on substantial grounds. Lord Briggs and Lord Hamblen in Sian stated, at paragraph 126:

'This direction will also resolve the parallel issue whether an exclusive jurisdiction clause should have the same effect. In the Board's view the underlying policy in relation to arbitration clauses and exclusive jurisdiction clauses is the same. The presence of an exclusive jurisdiction clause applicable to the debt relied upon by the petitioner should not lead to the stay or dismissal of the petition unless the debt is genuinely disputed on substantial grounds.'

General Arbitration Agreement or Exclusive Jurisdiction Clause vs Specifically Framed

Sian applies to 'generally worded arbitration agreement or exclusive jurisdiction clause'. However, Lord Briggs and Lord Hamblen in Sian said, at paragraph 127, that 'Different considerations would arise if the agreement or clause was framed in terms which applied to a creditor's winding up petition.'

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[1] In Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 ('Sian'), Lord Briggs and Lord Hamblen, under the heading 'Issue (1): as a matter of BVI law, what is the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement and is said to be disputed and/or subject to a cross-claim (notwithstanding that dispute is not on genuine and substantial grounds)?' - subheading 'The relevant public policies' and sub-subheading 'Insolvency' said, at paragraphs 27 to 35:

'The BVI inherited its insolvency jurisdiction from the United Kingdom. Its jurisdiction to bring about the liquidation of a company on the ground of insolvency is now to be found in the Insolvency Act 2003 ("the 2003 Act "). Section 162(1) provides that the court may appoint a liquidator of a company if:

"(a) the company is insolvent".

The other two grounds are that it is just and equitable, or in the public interest, that a liquidator should be appointed. Although section 162(2) (now) lists some eight classes of person who may apply under subsection (1) for the appointment of a liquidator, overwhelmingly the main class of applicant under the insolvency ground is that of creditor. For that reason, petitions for winding up and liquidation applications on the insolvency ground are generally called creditors' petitions or applications, both in the UK and in the BVI.

A creditor is defined by section 9 of the 2003 Act as a person who has a claim against the debtor which would be an admissible claim in the debtor's liquidation (if a company). Insolvency is defined in section 8 of the 2003 Act as including both balance sheet and commercial insolvency, the latter meaning an inability of the company to pay its debts as they fall due (see section 8(1)(c)(ii) ). A company is by section 8(1)(a) deemed to be insolvent if it fails to comply with the requirements of a statutory demand which has not been set aside under section 157 of the 2003 Act. Section 157(1)(a) provides that the court must set aside a statutory demand if (inter alia) it is satisfied that there is a substantial dispute as to whether the debt is owing or due.

Section 167 of the 2003 Act gives the court a range of discretionary powers on the hearing of a liquidation application, including making the appointment, adjourning or dismissing the application (even if a ground for appointment has been proved) and making such interim or other order as it thinks fit. Section 168 requires a liquidation application to be determined within six months after filing, subject to a power to extend. An application which has been neither determined nor extended is deemed to have been dismissed.

The UK's Insolvency Act 1986 achieves substantially the same outcomes in relation to a creditor's petition, albeit by the use of slightly different language and structure: see in particular sections 122 (grounds for winding up); 123 (inability to pay debts); 124 (application for winding up) and 125 (powers of court on hearing of petition). Nothing in the differences between the two statutory structures points to any difference in underlying policy, and the English authorities about the essential nature and effect of the winding up petition are in the Board's view in principle fully applicable to the equivalent process in the BVI.

In both jurisdictions the date of the presentation of the winding-up petition (or, in the BVI the issue of the liquidation application) plays an important part in the liquidation process that follows, as marking the date of the commencement of the liquidation with important statutory consequences for the admissibility of debts and claims and the setting aside of transactions.

For present purposes the following aspects of the nature and effect of the process for the initiation of an insolvent liquidation may be said to be common to both the UK and the BVI. First and foremost it is a process which exists for the benefit of a class rather than just the individual applicant (or petitioner). The liquidation that it triggers is a statutory process designed and evolved over more than a century to bring about an efficient realisation of the company's assets and their fair distribution among all its stakeholders, generally pari passu as between unsecured creditors. For that purpose it is accompanied by a stay of individual claims, so as to avoid a rush to judgment or a race by competing creditors to seize or attach assets for payment of their own debts. For the same reason, payment in full of an applicant creditor's debt by the company while the application (or petition) is pending does not necessarily bring it to an end. The court may permit another unpaid creditor to be substituted as applicant or petitioner: see section 166 of the 2003 Act. Nor is it a private procedure. The rules provide for an application or petition to be advertised before it is heard, so that any stakeholder in the company can attend to support or oppose it: see section 165 of the 2003 Act.

Secondly the process of seeking and obtaining an order for the appointment of a liquidator (or a winding up order in the UK) does not require or involve any pursuit or adjudication of the applicant's claim to be a creditor, either as to liability or quantum. Thus for example the court's order creates no res judicata as between the applicant and the company: see In re Vitoria [1894] 2 QB 387, p 392 (a bankruptcy case, but reflecting the applicable general principle). The successful outcome of a winding up petition is not a judgment which can be executed: In re A Company (No 000928 of 1991), Ex p City Electrical Factors Ltd [1991] BCLC 514, 517. The liquidator is free to reject the applicant's proof of debt, in part or in whole: In re Menastar Finance Ltd [2002] EWHC 2610 (Ch); [2003] BCC 404, paras 44 to 45. If the debt is disputed by the liquidator that dispute may be referred to court or to arbitration: Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; (1990) 169 CLR 332, pp 342–343.

Thirdly the court proceeds to appoint a liquidator (or to make a winding up order) only on a provisional assumption that the company is insolvent, which may turn out to be untrue, without that invalidating the liquidation process. Probably the most spectacular recent example of such an outcome is the distributing administration (which is akin to a modern form of liquidation) of Lehman Brothers International Europe Ltd, which turned out to have a substantial net surplus for distribution to members after all its creditors had been paid in full, with interest.

Fourthly, and in sharp contrast with the role of the court (or arbitrator) in proceedings for the enforcement of a debt, the court's powers on the hearing of a liquidation application (or winding up petition) are discretionary. That is not to say that the court's discretion is entirely unfettered. In principle, a petitioning creditor with an unpaid debt which is not genuinely disputed on substantial grounds is often described as being in substance entitled to an order, as a statutory right, ex debito justitiae: see Bryanston Finance Ltd v de Vries [1976] Ch 63, 78 ; In re Crigglestone Coal Co Ltd [1906] 2 Ch 327, p 337 ; and In re Southard & Co Ltd [1979] 1 WLR 1198, 1203 , approved in Ebbvale Ltd v Hosking [2013] UKPC 1, para 25.'