Arbitration agreement does not prevent winding up petition

The Privy Council has recently delivered a landmark judgment on the interplay between arbitration agreements and winding up petitions. The Board held that the English case of Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; Ch 589, which had adopted a pro-arbitration approach to stay or dismiss winding up petitions based on debts covered by arbitration agreements, even if the debts were not genuinely disputed on substantial grounds was wrongly decided. The Board, although hearing an appeal from the British Virgin Islands (BVI)  also gave a direction that Salford Estates should no longer be followed in England and Wales, and that the same principle should apply to exclusive jurisdiction clauses.

Background

The case concerned a liquidation application brought by the respondent, Halimeda International Ltd, against the appellant, Sian Participation Corp (In Liquidation), on the basis of an unpaid debt of over US$226 million under a loan agreement that contained a widely drawn arbitration clause.  The appellant disputed the debt on various grounds, including a cross-claim and an allegation of a corporate raid, but the courts below found that the debt was not genuinely disputed on substantial grounds.  The appellant argued that the courts should have followed Salford Estates and stayed or dismissed the liquidation application, requiring the respondent to establish its debt by an arbitration award.

The Board rejected this argument and affirmed the appointment of liquidators over the appellant. 

Salford Estates

Below is a summary of the position of the English court in Salford Estates:

1. Although the mandatory stay provisions in section 9 of the Arbitration Act 1996 do not apply to the winding up petition that is not the end of the matter.
2. Section 122(1) of the Insolvency Act 1986 confers on the Court a discretionary power to wind up a company.
3. Save in wholly exceptional circumstances, it would not be appropriate for the Judge to inquire whether the debt is disputed in good faith on substantial grounds. The discretion must be exercised so as to (a) uphold the policy of the Arbitration Act, (b) discourage parties to an arbitration agreement from bypassing it as a tactic by presenting a winding up petition, (c) prevent one party applying pressure on an alleged debtor to pay up immediately or face the burden of satisfying the Court that the debt was bona fide disputed on substantial grounds, and (d) require the parties to adhere to their agreement as to the proper forum for the resolution of such an issue.
4. Where a debt mentioned in the winding up petition falls within the terms of the arbitration clause and the debt is not admitted, that is sufficient to constitute a dispute for the purposes of the Arbitration Act. This is irrespective of the substantive merits of any defence, and, whether or not proceedings were on foot to recover the debt that would trigger the automatic stay provision in section 9(1) of the Arbitration Act.
5. In those circumstances it was right for the Court either to dismiss or stay the winding up petition rather than investigate whether or not the debt is bona fide disputed on substantial grounds. This then prevents a creditor from bypassing the arbitration agreement and the Arbitration Act by presenting a winding up petition.

Decision

The Board conducted a detailed analysis of the nature and effect of the liquidation process, the interpretation and scope of arbitration agreements, and the relevant public policies in both the BVI and England and Wales. Having done so, it concluded that the decision in Salford Estates was based on an impermissible and unexplained leap in the reasoning of the Court of Appeal as to the extent of the legislative policy behind the Arbitration Act 1996 and that accordingly it was wrongly decided.

The Board held that a creditor's winding up petition (or a similar liquidation application) does not trigger the mandatory stay provision in section 18 of the BVI Arbitration Act 2013 (or section 9 of the English Arbitration Act 1996), which implements article 8 of the UNCITRAL Model Law on International Commercial Arbitration, because such a petition or application is not a claim of the type caught by those provisions.  The Board concluded that 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.

The Board also held that the contractual obligation embodied in a typical arbitration agreement is to refer disputes to arbitration for resolution, and the negative obligation is that they are not  resolved by any court process.  Thus, the presentation of a winding up petition (or a similar liquidation application) does not offend the negative obligation at all, as it is simply not something which the creditor has agreed not to do.  The Board further held that none of the general objectives of arbitration legislation (efficiency, party autonomy, and non-interference 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.

Conclusion

The Board's decision represents a significant departure from the approach adopted in Salford Estates and in some other common law jurisdictions.  It does however provide greater certainty in this area and also restores the traditional approach that a creditor should ordinarily be entitled to a winding up order (or the appointment of a liquidator) on the insolvency ground, unless the debt is genuinely disputed on substantial grounds, regardless of whether the debt is covered by an arbitration agreement or an exclusive jurisdiction clause. 

The interplay between the arbitration and insolvency, including the challenges caused by the decision in Salford Estates is explored in detail in a recent book edited by Richard Bamforth and Kushal Gandhi – Arbitration and Insolvency, available here.