1. Introduction
The courts in a number of common law jurisdictions have, over the course of the last two decades, considered how to resolve the jurisdictional conflict that exists between party autonomy and public policy in insolvency proceedings involving a disputed debt arising under an agreement containing an arbitration clause.Footnote 1 A consensus appeared to have been reached by the courts of England and Wales (in the decision known as Salford Estates),Footnote 2 Singapore,Footnote 3 MalaysiaFootnote 4 and Hong Kong.Footnote 5 Put broadly, the courts agreed that a dispute over the debt relied on by the creditor, as establishing locus (the creditor’s standing) to present a winding-up petition, should generally be determined not by the court before whom the petition would be presented, but in accordance with the agreed contractual dispute resolution mechanism: arbitration.
This emerging consensus has been broken by the decision of the Privy Council in Sian Participation Corp (in liq) v Halimeda International Ltd (Virgin Islands) (Sian),Footnote 6 which determined that: an arbitration clause in standard wording does not cover the relevant issue to be determined by a court hearing a winding-up petition; primacy is to be given to the insolvency process; and a dispute about a creditor’s locus to present a petition is to be determined by the court in accordance with the principle that a debt, which a company demonstrates is bona fide disputed on substantial grounds, does not give a putative creditor locus to present a petition. The principal difference between Sian and the earlier decisionsFootnote 7 is that the latter proceed on the basis (the alternative not having been argued) that the arbitration clause does cover a dispute about locus. It is implicit in the earlier decisions that a dispute as to whether a debt is bona fide disputed on substantial grounds is covered by a conventionally drafted arbitration clause. This divergence causes problems both across and within jurisdictions.Footnote 8
The principal questions explored in this article are whether Sian is correct and, if not, which principles the courts should apply in resolving the conflict between party autonomy and a court’s insolvency jurisdiction. This article critically examines whether the approaches explained in the earlier decisions and Sian appropriately balance party autonomy with the public policy objective of maintaining a uniform insolvency procedure. Through a detailed analysis of whether the respective courts correctly interpreted the relevant statutory provisions in arbitration and insolvency legislation, this article argues that a modified version of the test found in the Hong Kong decision Re Southwest Pacific Bauxite (HK) Ltd, commonly known as Lasmos,Footnote 9 provides a more principled and balanced accommodation of the principle of party autonomy and public policy considerations engaged in insolvency proceedings, whilst also providing room for the court to address practical difficulties generated by the facts of individual cases.
2. Current landscape in the common law world
Where there is no arbitration agreement, the courts have regarded a substantial dispute about the existence or amount of a petitioner’s debt as a matter that goes to the creditor’s locus which should be determined before the court decides to wind up the company. The usual practice is to dismiss or stay the petition if the debtor demonstrates that it has a defence based on substantial grounds for disputing the debt.Footnote 10 The rationale is that a creditor must establish the existence of an undisputed debt to have standing to seek a winding-up order and a substantial dispute about whether the petitioner is a creditor of the company is not appropriate for adjudication in winding-up proceedings.Footnote 11 It is also an abuse of the process of the court to issue a statutory demand or file a winding-up petition based on a claim to which there is a ‘triable defence’.Footnote 12 However, the presence in the agreement pursuant to which a debt is alleged to arise of an arbitration clause that is conventionally worded to cover all disputes arising under the agreement intrudes into this analysis because, on its face, such a clause seems to require any dispute over a claim to payment to be determined by arbitration, if one of the parties so requests. Whether this agreed process must be used to determine a disputed debt before that debt can be relied upon to establish insolvency is the first question that requires detailed consideration.
The question concerns the interpretation of relevant arbitration law provisions that implement or are analogous to Article 8 of the United Nations (UN) Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (Model Law) and Article II.3 of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Such provisions typically stipulate that a court, when seized of an ‘action’ or ‘legal proceedings’ concerning a matter subject to an arbitration agreement, shall, at the request of a party, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed (mandatory stay provision).Footnote 13
The relevant issues are: (i) whether the proceedings initiated by a winding-up petition constitute an ‘action’ or ‘legal proceedings’ within the meaning of the mandatory stay provision; (ii) whether the winding-up proceedings are brought in a ‘matter’ covered by an arbitration agreement; and (iii) even if the answers to questions (i) and (ii) are negative (i.e. the winding-up proceedings are not subject to the mandatory stay provision), whether the court should nevertheless exercise its discretion to wind up a company in a manner that respects the arbitration agreement. These questions were answered differently in Salford Estates and Sian.
2.1. Salford Estates
In Salford Estates, the court was asked to determine whether, and if so in what way, the stay provisions in section 9 of the Arbitration Act 1996 (UK)Footnote 14 apply to a petition to wind up a company on the ground of its inability to pay its debts where the debt on which the petition is based arises out of a contract containing an arbitration agreement. Section 9 provides, inter alia, that:
(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
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(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.Footnote 15
If the proceedings commenced by a winding-up petition are, within the meaning of section 9, ‘legal proceedings (whether by way of claim or counterclaim)’, and the liability or quantum of the debt which is subject to the arbitration agreement is a ‘matter’ in winding-up proceedings, the mandatory stay provision in section 9(4) would be engaged.
Salford Estates and Altomart were lessor and lessee, respectively, under a lease of commercial premises, which contained a broadly drafted arbitration clause: ‘[a]ny dispute or difference arising between the Lessor and the Lessee as to their respective rights duties or obligations or as to any other matter arising out of or in connection with this Underlease shall be referred to a single arbitrator …’.
Salford Estates and Altomart referred a number of disputes to arbitration, including a dispute over the service charge and insurance rent payable by Altomart under the lease. The arbitrator determined that Altomart was liable to pay Salford Estates the sum for the service charge and insurance rent up to 31 March 2013, which Altomart failed to pay. Salford Estates subsequently presented a winding-up petition, contending that Altomart owed the amount awarded, along with further sums arising from the award. Altomart opposed the petition on the ground that, aside from the sum due under the award, the additional sums were disputed and required referral to arbitration. Altomart argued that Salford Estates’ petition constituted an abuse of the court’s process, that it was not unable to pay its debts and that the matters forming the basis of the petition were the subject of a genuine dispute.
The Court of Appeal first found that, although the proceedings commenced by a winding-up petition are considered ‘legal proceedings’ under the definition in section 82 of the of the Arbitration Act 1996, section 9(1) of the Act does not apply to a winding-up petition where the ground of the petition is that the company is unable to pay its debts, where the subject of the dispute is ‘that issue generally or, more specifically, whether there is outstanding and due a particular debt mentioned in the petition’.Footnote 16 The Court held that, given Salford Estates’ reliance on the insolvency ground set out in section 123(1)(e) of the Insolvency Act 1986 (UK) (that Altomart is proved to the satisfaction of the court unable to pay its debt), the petition cannot be characterised as ‘a claim’ under section 9 of the Arbitration Act 1996.Footnote 17 However, the Court further noted that it is appropriate, ‘save in wholly exceptional circumstances’, to exercise the discretion to wind up a company by section 122(1) of the Insolvency Act 1986 in a manner consistent with the legislative policy expressed in the Arbitration Act 1996.Footnote 18
It stated that ‘it would be anomalous, in the circumstances, for the companies’ court to conduct a summary judgment type analysis of liability for an unadmitted debt, on which a winding-up petition is grounded, when the creditor has agreed to refer any dispute relating to the debt to arbitration’.Footnote 19 As the debt mentioned in the petition fell within the terms of the arbitration clause in the lease and the debt was not admitted, in accordance with the decision in Halki Shipping Corp v Sopex Oils Ltd (Halki Shipping),Footnote 20 that was sufficient to constitute a ‘dispute’ within the meaning of the Arbitration Act 1996, irrespective of the substantive merits of the defence. Consequently, where there are proceedings on foot to recover the debt, this would trigger the mandatory stay provision in section 9(1) of the Arbitration Act 1996.Footnote 21 The Court concluded that, in exercising its discretion under section 122(1)(f) of the Insolvency Act 1986, it was appropriate for the first instance court either to dismiss or to stay the petition. This would compel the parties to resolve their dispute over the debt through their chosen method of dispute resolution, rather than require the court to determine whether the debt is bona fide disputed on substantial grounds.Footnote 22
This decision is noteworthy in two respects. First, it was held that section 9 of the Arbitration Act 1996 does not apply to winding-up petitions because a winding-up petition is not a ‘claim’ within the wording of section 9(1).Footnote 23 Etherton C disagreed with Warren J’s interpretation expressed in Rusant Ltd v Traxys Far East Ltd Footnote 24 which suggested that, in respect of an allegedly due but unpaid debt, an issue raised in a winding-up petition that is essential to the foundation of the petition constitutes a ‘claim’ under section 9 of the Arbitration Act 1996.Footnote 25 Nevertheless, the judge acknowledged that the disputed debt fell within the terms of the arbitration clause,Footnote 26 suggesting that a winding-up petition could involve a ‘matter’ under section 9, specifically, a disputed debt subject to an arbitration agreement.
Second, this decision made it clear that respect for party autonomy is not confined to the boundaries of the application of the mandatory stay provision. Even when a winding-up petition is not subject to a mandatory stay order, in respect of a matter covered by an arbitration agreement, the court’s discretion to decline jurisdiction should be exercised in a manner that respects the policy of upholding party autonomy as expressed in the Arbitration Act 1996 and the New York Convention.
The approach set out in Salford Estates has generally been endorsed at first instance by the courts of England and Wales,Footnote 27 Singapore,Footnote 28 MalaysiaFootnote 29 and Hong Kong.Footnote 30
2.2. Sian
However, the Privy Council departed from Salford Estates in Sian. The Privy Council established, in interpreting the British Virgin Islands (BVI) law, a conclusive test for the court in determining whether to make a liquidation order for a company in cases where the debt on which the petition relies is subject to an arbitration agreement: ‘whether the debt is disputed on genuine and substantial grounds’.Footnote 31
In Sian, the respondent advanced a term loan to the appellant pursuant to a Facility Agreement, which contained a provision stating that ‘any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement’ shall be referred to arbitration in London. The loan was not repaid, and the respondent applied for liquidation in the BVI court on the basis that the appellant was both cash-flow and balance-sheet insolvent. The application was granted on the basis that the appellant failed to show that the debt was disputed on genuine and substantial grounds. The appellant appealed the decision. The BVI Court of Appeal dismissed the appeal and, upon a further appeal by the appellant, the case was heard by the Privy Council.
The Privy Council interpreted section 18 of the Arbitration Act 2013 (BVI), which implemented Article 8 Model Law and Article II.3 New York Convention. Section 18(1) of the Arbitration Act 2013 provides that ‘a court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests … refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed’.Footnote 32 Section 18(4) states that ‘where the Court refers the parties in an action to arbitration, it shall make an order staying the legal proceedings in that action’.
Again, as was the case in Salford Estates, the relevant issue was the interpretation of the terms ‘action’ and ‘matter’ in section 18(1) of the Arbitration Act 2013. On the basis that it was common ground that a creditor’s winding-up petition was not an ‘action’ (or a ‘claim’ under section 9 of the Arbitration Act 1996), the Privy Council found that the mandatory stay provisions did not apply to the liquidation application (or winding-up petition in the United Kingdom (UK)).Footnote 33 However, the Privy Council explored whether the liquidation application (or winding-up petition in the UK) involved the determination of a claim which was subject to the arbitration agreement and, therefore, whether it needed to construe the meaning of a ‘matter’.
Considering the ‘international origin’ of section 18, the Privy Council referred to the interpretation of the term ‘matter’ in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corp (FamilyMart),Footnote 34 a case concerning the Foreign Arbitral Awards Enforcement Act (1997 Revision) (FAAEA) in the Cayman Islands, which implemented Article II.3 New York Convention. The Privy Council endorsed the principles articulated by Lord Hodge in FamilyMart for determining a ‘matter’:Footnote 35
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(i) The court in considering such an application adopts a two-stage process. First, the court must determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings, and, secondly, the court must determine in relation to each such matter whether it falls within the scope of the arbitration agreement.Footnote 36
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(ii) The court must ascertain the substance of the dispute or disputes between the parties. This involves looking at the claimant’s pleadings but not being overly respectful to the formulations in those pleadings, which may be aimed at avoiding a reference to arbitration. It involves also a consideration of the defences, if any, which may be skeletal as the defendant seeks a reference to arbitration, and the court should also take into account all reasonably foreseeable defences to the claim or part of the claim.Footnote 37
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(iii) A “matter” is a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. If the “matter” is not an essential element of the claim or of a relevant defence, it is not a matter in respect of which the legal proceedings are brought. The Board agrees with the statement of Sundaresh Menon CJ in paragraph 113 of Tomolugen Footnote 38 that a “matter” requiring a stay does not extend to an issue that is peripheral or tangential to the subject matter of the legal proceedings. The Board agrees with Foster J’s third proposition in WDR Delaware Footnote 39 that a “matter” is something more than a mere issue or question that might fall for decision in the court proceedings or in the arbitral proceedings.Footnote 40
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(iv) The exercise involving a judicial evaluation of the substance and relevance of the ‘matter’ entails a matter of judgment and the application of common sense. It is not a mechanistic exercise. It is not sufficient merely to identify that an issue is capable of constituting a dispute or difference within the scope of an arbitration agreement without carrying out an evaluation of whether the issue is reasonably substantial and whether it is relevant to the outcome of the legal proceedings of which a party seeks a stay.Footnote 41
The Privy Council pointed out that a ‘matter’ should be interpreted in the context of the claim or a defence.Footnote 42 The policy of allowing parties to freely agree on the venue for dispute resolution applies where there is a substantive claim before the court, and in respect of a matter that is subject to the arbitration agreement.Footnote 43 While an arbitration agreement refers disputes to arbitration for resolution, a winding-up petition does not resolve or determine anything about the petitioner’s claim for the debt. Nor is the existence or amount of the debt a matter or issue for resolution in those proceedings.Footnote 44 Therefore, a creditor’s winding-up petition does not engage the mandatory stay provision in section 18 of the Arbitration Act 2013, or other statutory provisions implementing Article 8 Model Law.Footnote 45 This means that the policy considerations underlying arbitration law do not apply to a winding-up petition, which lies outside the boundaries of arbitration law.Footnote 46 Allowing the creditor’s winding-up petition, where the debt is not genuinely disputed on substantial grounds, does not offend the general objectives of arbitration legislation.Footnote 47
Although there are slight differences in the use of statutory language and structure, the Privy Council held that, since the Insolvency Act 1986 (UK) achieves the same outcomes in relation to a creditor’s petition, the English authorities regarding the essential nature and effect of the winding-up petition were, in its view, in principle fully applicable to the equivalent process in the BVI.Footnote 48 It was held that Salford Estates was incorrectly decided in allowing a discretionary stay of a creditor’s winding-up petition where only an insubstantial dispute regarding the creditor’s debt is raised between the parties to an arbitration agreement.Footnote 49 This conclusion applies not only to BVI law, but also to English law.Footnote 50 The Privy Council directed that the practice of the English Companies Court (now the Insolvency and Companies List) to stay or dismiss a creditor’s winding-up petition solely on the basis that the petitioner’s debt is subject to an arbitration clause, without being shown to be genuinely disputed on substantial grounds, should cease.Footnote 51
This raises an important question regarding the desirable approach in other common law jurisdictions, where similar statutory language and structure are adopted in their respective insolvency and arbitration laws. The decision in Sian is noteworthy in three respects. First, it confirmed that, under the language of section 18(1) of the Arbitration Act 2013, an ‘action’ does not include a liquidation application (or winding-up petition) and, therefore, the mandatory stay provisions in section 18 do not apply.
Second, it took a different view from Salford Estates, holding that the dispute over a debt in a liquidation application does not constitute a ‘matter’, as this is not to be ‘resolved’ in the proceedings. Salford Estates acknowledged that a winding-up petition based on a disputed debt could involve a ‘matter’ covered by the arbitration agreement. In contrast, Sian took the view that the existence or amount of the debt is not a ‘matter’ or issue for resolution during winding-up proceedings and, therefore, the negative obligation imposed by an arbitration agreement does not have a role to play.Footnote 52 This interpretation led the Privy Council to conclude that there is no scope for a discretionary stay in favour of arbitration where the applicant’s debt is disputed, as the boundaries of the mandatory stay provisions under arbitration law define the extent of the policy favouring party autonomy.
Third, Sian adopted the same test for cases where the petition debt is disputed and does not differentiate between scenarios where there is an arbitration agreement and those where no arbitration agreement exists between the petitioner and the debtor. This contrasts with Salford Estates, where the threshold is substantially lower in the presence of an arbitration agreement. In Salford Estates, it was held that if the debtor denies the debt, then, ‘save in wholly exceptional circumstances’, the petition will be stayed or dismissed, as the denial by the debtor constitutes a ‘dispute’ covered by the arbitration agreement, and the court is expected to exercise its discretion to decline jurisdiction in favour of arbitration without inquiring into the merits of the defence. In contrast, under the test in Sian, merely raising a rejection of the debt will not automatically lead to a stay or dismissal of the petition in favour of arbitration. The debtor must still demonstrate a ‘genuine and substantial dispute’ regarding the debt. A similar approach had been taken by the Hong Kong courts before Lasmos. Footnote 53
3. Critical assessment of Sian
The reasoning in Sian raises several questions for the following reasons.
3.1. Sian overlooked the commercial purpose of a creditor’s winding-up petition and misinterpreted the meaning of a ‘matter’
The central flaw in the reasoning in Sian is its failure to recognise that the proceedings initiated by a winding-up petition engage a substantial ‘matter’ that falls within the scope of an arbitration agreement. The Privy Council held that a winding-up petition does not aim to ‘resolve’ or determine the petitioner’s claim against the company and, therefore, the disputed debt is not a ‘matter’ in the winding-up petition. This holding contains two errors.
First, a creditor’s winding-up petition serves a dual purpose: it is both an individual remedy for enforcing payment of the petitioner’s debts and a collective remedy that enables all unsecured creditors to share in the distribution of the debtor’s assets equally.Footnote 54 While the winding-up of an insolvent company does not constitute ‘execution’ in the sense of advancing the interests of a particular creditor, it is analogous to execution because its ultimate purpose is to enforce the payment of debts.Footnote 55 The success of a winding-up order in securing payment for the petitioning creditor depends on various factors, including the value of the company’s assets, the priority ranking of creditors and the debts owed to other unsecured creditors. Nonetheless, this uncertainty does not diminish the creditor’s primary purpose in filing the petition. The creditor’s motive is neither altruistic nor driven by a desire to benefit all unsecured creditors. Rather, it focuses on recovering as much as possible through the proceedings. Once the winding-up proceedings are completed, the creditor’s claim is ‘resolved’ in the sense that the creditor recovers on a pari passu basis as much of his claim as is proved in the liquidation.
The second error relates to the character of the issue a court has to determine if a company disputes a debt and a claimant’s right to present a petition. A dispute over the petition debt concerns the locus of the claimant in a winding-up petition,Footnote 56 which is a different issue from the question of whether the company should be wound up. The court must determine whether a dispute over locus (i.e. the debt) constitutes a ‘matter’ subject to a broadly drafted arbitration agreement.
Insolvency legislation gives a judge a discretionary power to wind up a company on the petition of a creditor, who has demonstrated that the company is unable to pay its debts; in other words, it is insolvent.Footnote 57 In order to establish locus to present a petition (a ‘creditor’), it is necessary to demonstrate that the company is indebted to the claimant.Footnote 58 If the creditor has established that he has locus, the claimant will have the necessary class right (a member of the class of unsecured creditors of the company) to seek a winding-up order on behalf of that class, to which the court may or may not give effect depending on any other considerations relevant to the interests of the class that are proved before the court.Footnote 59 When the company disputes the debt, it is not asserting that it is solvent. A determination of the locus of a claimant to present a petition, if disputed, addresses a separate issue: namely, whether the claimant is a member of the class with a right to seek, for the benefit of the class, a winding-up order.Footnote 60 Ungoed Thomas J described this in Mann v Goldstein as a precondition, that is, a prerequisite of presentation of the petition unlike the insolvency requirement, which is a prerequisite of a winding-up order.Footnote 61 How the class right is to be exercised once the precondition and the requirement that the company is shown to be unable to pay its debts are satisfied, is a matter for the class and the court’s discretion.
Thus, where the petition debt is disputed by the company, the issue for the court to ‘resolve’ is whether the claimant is a creditor. The Privy Council in Sian mischaracterised the issue when stating that ‘a [winding-up] 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’.Footnote 62
By the early twentieth century, following determination of disputed locus, the practice became to dismiss the petition if the company demonstrated that it had ‘some substantial ground for defending the action’.Footnote 63 In the authors’ view, a fair and sensible reading of a conventionally drafted arbitration clause points strongly to the conclusion that it covers any dispute about the existence of a debt, necessarily including the preliminary question of whether or not there is a substantial defence to it, said to arise from the terms of the underlying commercial agreement and any such dispute is ‘a matter in respect of which the parties have made’Footnote 64 an agreement to arbitrate. The present context concerns cases in which a claimant asserts that it is due payment of a sum pursuant to an agreement, which contains an arbitration clause drafted in conventional terms. The agreement in Sian contained such a clause, which was in the following terms:
The Parties agree that any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement (including a claim, dispute or difference regarding its existence, termination or validity or any non-contractual obligation arising out of or in connection with this Agreement) (a “Dispute”), shall be referred to and finally be settled by arbitration …Footnote 65
An arbitration agreement in these terms would appear to cover a dispute about whether a sum is payable pursuant to the underlying agreement, or any variant of that dispute, such as the narrower but no less significant question of whether the claim is disputed on substantial grounds. Sian acknowledged that ‘if the agreement or clause was framed in terms which applied to a creditor’s winding-up petition’, the petition may be stayed or dismissed in favour of arbitration.Footnote 66 Given the broad language of the arbitration agreement,Footnote 67 it is difficult to envisage how the parties to such an agreement would not have intended it to apply to a winding-up petition.
There is another criticism that can be levelled at Sian’s reasoning. The Privy Council in paragraph 127 of its decision noted that:
[t]his direction [that Salford Estates should no longer be followed by the English and Welsh Companies Court] applies where there is 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 a creditor’s winding-up petition.Footnote 68
What those considerations might be is unstated, but it seems implicit that if the arbitration agreement covers a dispute about whether or not there is a defence to a debt, a creditor may not be able to instigate winding-up proceedings until it is resolved in accordance with the contractually agreed mechanism, in which case the court’s insolvency jurisdiction would be made to yield to party autonomy.
However, this appears to be logically inconsistent with the reasoning set out in the earlier paragraphs of Sian. First, in paragraph 47, it is correctly stated—citing the ‘two-stage test’ in FamilyMart—that, for the mandatory stay provisions to apply, the court must first determine which matters the parties have raised or foreseeably will raise in the court proceedings; second, the court must decide for each such matter whether it falls within the scope of the arbitration agreement. The Privy Council stated that winding up proceedings do not resolve or determine anything about the petitioner’s claim to be owed money by the company.Footnote 69 The analysis of what is resolved or determined in the winding up proceedings is not changed by the language of the arbitration clause.
Second, in paragraph 91, the Privy Council in Sian stated that the boundary of the policy of respecting arbitration agreements is defined by the scope of the mandatory stay provisions and, that since these provisions are not engaged, the underlying policy concern does not apply. If the first and second conclusions are correct, it would appear to follow that regardless of the wording of the arbitration clause the principle of party autonomy would never be engaged.
Paragraph 127 is also problematic in another respect. If it envisages an arbitration agreement drafted broadly enough to cover winding-up proceedings with the consequence that the court should defer to arbitration, this approach fails to give due weight to any insolvency considerations which may be engaged.
The Privy Council’s reasoning conflates the fact that the winding-up petition does not finally determine whether or not the debt is payable with the determination that the court has to make when the debt (and thus locus) is disputed, namely, whether or not the debt is disputed on substantial grounds. This error becomes more obvious when considered in light of the Privy Council’s reasoning in FamilyMart.
3.2. Sian is inconsistent with the reasoning in FamilyMart on the interpretation of a ‘matter’
Although Sian referenced FamilyMart, its reasoning is inconsistent with the interpretation of a ‘matter’ as applied to the relevant mandatory stay provisions in FamilyMart. In FamilyMart, the Privy Council addressed the question of whether an arbitration agreement contained within a shareholders’ agreement prevented a party to that agreement from filing a winding-up petition.
The shareholders’ agreement between FamilyMart China Holding Co Ltd (FMCH) and Ting Chuan, both shareholders of China CVS (Company), included a broadly drafted arbitration clause stating:
[a]ny and all disputes in connection with or arising out of this Agreement shall, insofar as is possible, first be settled amicably by the Parties hereto … If the Parties cannot come to an amicable settlement within twenty days of the onset of any dispute, any and all disputes in connection with or arising out of this Agreement [shall be] submitted for arbitration.
FMCH subsequently presented a petition to wind up the Company, alleging that it had lost trust and confidence in the Company’s management and conduct of its affairs and further asserting that its relationship with Ting Chuan had been irretrievably damaged. Alternatively, FMCH sought an order requiring Ting Chuan to sell its majority stake in the Company to FMCH.
Ting Chuan applied to strike out the winding-up petition or, alternatively, sought an order to dismiss or stay the petition under section 4 of the FAAEA or the inherent jurisdiction of the court, until the disputes underlying the petition had been arbitrated. Section 4 of the FAAEA provides:
If any party to an arbitration agreement … commences any legal proceedings in any court against any other party to the agreement … in respect of any matter agreed to be referred, any party to the proceedings may … apply to the court to stay the proceedings; and the court, unless satisfied that the arbitration agreement is … inoperative … shall make an order staying the proceedings.
The Privy Council stated that the term ‘legal proceedings’ in section 4 of the FAAEA includes a petition to wind up a company where the parties to the arbitration agreement are shareholders.Footnote 70 The Privy Council confirmed that ‘any substantial matter in the legal proceedings, which is relevant to the claim or foreseeable defence, and which is within the scope of the arbitration agreement, will give rise to a mandatory stay of the legal proceedings pro tanto’.Footnote 71 In proceedings to wind up a company on just and equitable grounds, certain issues such as breaches of a shareholders’ agreement can be determined by an arbitral tribunal,Footnote 72 despite the tribunal’s lack of authority to make a winding-up order.Footnote 73
The winding-up petition contained five key issues, four of which Ting Chuan argued were arbitrable: (i) whether FMCH had lost trust and confidence in Ting Chuan and in the conduct and management of the Company’s affairs; (ii) whether the fundamental relationship between FMCH and Ting Chuan had irretrievably broken down; (iii) whether it was just and equitable to wind up the Company; (iv) whether FMCH should be granted the alternative relief it prefers, under section 95(3)(d) of the Companies Act, namely, an order requiring Ting Chuan to sell its shares in the Company to FMCH and, if so, how the value of those shares should be determined; and (v) whether, if such alternative relief is not appropriate, an order winding up the Company should be made and whether the persons identified by FMCH should be appointed as joint official liquidators.Footnote 74
The Privy Council reasoned that the court, in determining the petition, could rely on an agreed statement of facts between the parties, such as acknowledgments of FMCH losing trust and confidence in Ting Chuan or a breakdown in their relationship. These facts could also be informed by the findings and reasoning of an arbitral tribunal, which the court could then recognise when exercising its jurisdiction under section 92 of the Companies Act (Cayman Islands).Footnote 75 The matters identified in issues (i) and (ii) were deemed arbitrable and considered an ‘essential precursor’ to the court’s decision on whether it was just and equitable to wind up the company. Consequently, the Privy Council granted a mandatory stay of the winding-up petition with respect to issues (i) and (ii). For issues (iii)–(v), the Privy Council granted a discretionary stay.Footnote 76
An issue that the court is required to decide in order to exercise its discretion in a winding-up petition, whether based on the partial application of a mandatory provision or the court’s inherent discretion, constitutes a ‘matter’ within the winding-up proceedings. If such a ‘matter’ falls within the scope of an arbitration agreement, it may be referred to arbitration. Applying this principle to a creditor’s winding-up petition, the dispute over the petition debt constitutes an issue that the court must address while determining whether the creditor has locus and whether the company is unable to pay the debt. To decide whether to grant a creditor’s winding-up petition, the court must determine, although not finally or conclusively, whether the debt exists or whether there is a genuine dispute regarding it.Footnote 77
The Insolvency Act 1986 (UK), the Insolvency Act 2003 (BVI) and the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap 32) (Hong Kong) provide that one of the grounds for a winding-up petition is a company’s inability to pay its debts (or insolvency).Footnote 78 This type of statutory regime also specifies the circumstances under which a company is deemed unable to pay its debts, such as a failure to comply with a statutory demand. The existence of a debt owed by the company to the claimant and the company’s inability to pay it is a precondition of both the claimant having locus to present a petition and a prerequisite of the court having the discretion to order the winding-up of a company.
The reasoning in FamilyMart Footnote 79 demonstrates that the existence of the petitioner’s debt or a dispute over that debt constitutes a substantial issue that is legally relevant to the winding-up petition and is capable of determination by an arbitrator. This issue is material to the outcome of the winding-up petition and is neither peripheral nor tangential to it. If issues (i) and (ii) in FamilyMart are regarded as ‘an essential precursor to the court’s formation of its opinion whether it is just and equitable to wind up the Company, which in turn is the threshold for giving a remedy’,Footnote 80 it is difficult to see how a dispute over the petition debt does not constitute a ‘matter’ within the context of winding-up proceedings initiated by a creditor. The dispute over the petition debt is integral to the court’s determination of whether the company is unable to pay its debts and, consequently, whether it satisfies the threshold for winding-up the company. This mirrors issues (i) and (ii) in FamilyMart, which were central to the petitioner’s complaint.Footnote 81
Although this point was not expressly considered in FamilyMart or Sian, it is worth examining whether the different nature of a winding-up petition based on unfair prejudice and a creditor’s winding-up petition justifies a differing construction of a ‘matter’ in those cases. The notable distinction between these two proceedings lies in their underlying disputes: the former involves a disagreement between shareholders of a solvent company, while the latter concerns a dispute over a debt between a creditor and a potentially insolvent company. It is true that a creditor’s winding-up petition may be relevant to non-parties, i.e. other creditors and that, if the company is insolvent, public policy requires its assets to be distributed fairly between them. However, the dispute over the petition debt involves only the creditor and the company and is directed to the narrow issue of whether a particular claimant has locus to present a petition. In substance, that is a dispute between the claimant and the company.
Sian ought to have concluded that the dispute over the debt qualifies as a ‘matter’ within the meaning of section 18 of the Arbitration Act 2013. By failing to do so, the Privy Coucil in Sian erred in its analysis. Its reasoning—that the dispute over debt in a winding-up petition falls outside the policies expressed in the Model Law and the New York Convention—is consequently unconvincing.
This is not to suggest that the Privy Council should have determined that the liquidation application (or winding-up petition) is subject to a mandatory stay or a pro tanto stay under the relevant provisions of arbitration law. It is generally accepted that a winding-up order is not subject to the mandatory stay provisions in arbitration laws that implement Article 8 Model Law, particularly where such laws use the term ‘action’.Footnote 82 As correctly observed in Salford Estates, such an interpretation would effectively undermine the discretionary nature of a winding-up order.Footnote 83
However, the fact that a winding-up petition is not included within the meaning of ‘action’ does not necessarily mean that courts in such proceedings are free to disregard party autonomy. A winding-up order involves a multifactorial analysis, at the core of which lies the court’s discretion. While the court is not required to stay or dismiss a winding-up petition solely because the disputed debt is subject to an arbitration agreement, it still can respect the arbitration agreement by exercising its inherent discretion in a principled manner, which will be examined in Section 4.
3.3. Sian does not give due weight to party autonomy
The test in Sian fails to give due weight to party autonomy by applying the same standard—namely, whether there is a genuine dispute over the debt on substantial grounds—to cases where there is an arbitration agreement and those without.
Notably, the Privy Council in Sian took the view that ‘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’.Footnote 84 It followed that, since the mandatory stay provisions in section 18 of the Arbitration Act 2013 do not apply to winding-up petitions, the Privy Council in Sian concluded that allowing a winding-up order where the petition debt is not genuinely disputed on substantial grounds does not offend the general policy objectives of the Model Law, nor does it undermine the principles of party autonomy or pacta sunt servanda.Footnote 85
However, there is no evidence in the travaux préparatoires of the Model Law or the New York Convention to suggest that party autonomy should not be respected outside the scope of application of Article 8 Model Law or Article II New York Convention. These provisions appear to set a minimum consensus by the adopting States regarding the extent to which arbitration should be respected, as is often the case with international instruments.Footnote 86
It is not inconsistent with these provisions for a national court to respect party autonomy when the mandatory stay provisions do not apply. Respecting party autonomy remains appropriate even outside the scope of such provisions. It was, therefore, incorrect for the Privy Council to assert that the boundary of the mandatory stay provision defines the point where the underlying policy ceases to operate. In this regard, Sian seems more policy-driven than grounded in rigorous legal analysis. It does not follow that because the court is not required to refer a matter to arbitration, it should have no regard to the parties’ express agreement if that agreement does not conflict with public policy concerns engaged in the insolvency context when determining how an issue arising in winding-up proceedings should be resolved. A uniform and mechanical application of the same principle irrespective of the presence of an arbitration agreement, as seen in the test applied in Sian, is inconsistent with the legislative spirit and international consensus reflected in the Model Law and the New York Convention.
3.4. Risk of abuse by the creditors and debtor companies
The test proposed in Sian does not align with the test used in cases of summary judgment and is open to abuse by creditors. In assessing whether there is a ‘genuine dispute on substantial grounds’, the court in winding-up proceedings conducts an analysis akin to that used in summary judgment applications.Footnote 87 However, if a creditor applies for summary judgment for a debt disputed by the company said to arise under an agreement containing an applicable arbitration clause, the court will refer the dispute to arbitration under the mandatory stay provisions implementing Article 8 Model Law. Consequently, a creditor seeking to pressure a debtor for payment can do so by issuing a winding-up petition in circumstances where issuing a writ would achieve nothing as the proceedings would obviously be futile.
There are aspects of winding-up proceedings that may or may not justify an analysis akin to summary judgment. First, the threat of winding-up proceedings, or their commencement, has far more severe consequences for a company than a summary judgment application. The need to uphold party autonomy to ensure that disputes are resolved in the agreed forum becomes even more pronounced when the proceedings threatened have serious adverse consequences for one of the parties.
Second, unlike summary judgment proceedings, winding-up proceedings, if pursued, ultimately affect third parties, such as other creditors, and the company’s assets. As such, the court must also account for broader public policy concerns and this must include the adverse effect on a company and, consequently, on those who might be impacted, such as other creditors or employees. A proper test should take these competing interests and policies into consideration, ensuring a balanced approach. The test in Sian fails to do so.
On the other hand, a similar type of criticism can be levelled against the Salford Estates approach. If the petition debt arises from a contract containing an arbitration agreement, the company’s mere non-admission of the debt is sufficient for the court to dismiss the winding-up petition, ‘save in wholly exceptional circumstances’.Footnote 88 Of course there will be cases in which a debt is clearly payable, the debtor is likely insolvent and the creditor has well-founded reasons for wanting the debtor put into liquidation as fast as possible. An approach that allows a debtor to sit back and exploit the delay in a creditor’s access to the insolvency regime and the attendant tools that protect creditors’ rights, which is likely to result from a creditor being required to obtain an arbitration award in its favour, is unattractive.
In both Salford Estates and Sian, the courts preferred clear-cut approaches rather than one that gives weight to both the parties’ contractual choices and considerations that arise in the insolvency context. Presumably, both courts were concerned that an attempt to achieve a syncretic approach of the sort advanced in the Hong Kong High Court case, Lasmos, would likely cause problems in practice. The next section will address whether such a concern is justified and consider an alternative approach, which reconciles both the principle of party autonomy and the exercise of the rights given to creditors by insolvency legislation.
4. The way forward: Lasmos and beyond
4.1. Lasmos
In Lasmos, the petitioning creditor’s debt was disputed and subject to an arbitration agreement. The court took the view that a dispute over a debt should be determined in accordance with the arbitration clause if certain conditions were met. The court reasoned that there is a material distinction between proving: (a) that the petitioner is a member of the creditor class; and (b) that the class remedy of a winding-up order should be granted.Footnote 89 Since the former does not involve considerations affecting the class as a whole, the method for determining whether a debt is owed by the company should not be influenced by the petitioner’s pursuit of a class remedy.Footnote 90 On this premise, it was held that the winding-up petition should ‘generally’ be dismissed if:
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(i) the company disputes the debt relied on by the petitioner;
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(ii) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
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(iii) the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with rule 32 of the Companies (Winding-up) Rules, Cap 32H, demonstrating this.Footnote 91
4.2. Correct reading of Lasmos
Special attention needs to be paid to the word ‘generally’. It should be noted that Lasmos does not purport to establish a hard-and-fast rule that a petition should always proceed where a company has failed to initiate arbitration, or a petition cannot be dismissed ‘unless’ a company has commenced or has taken steps to initiate arbitration.Footnote 92 Lasmos states that since the remedy sought is discretionary in nature, there may be circumstances that justify issuing a petition without first undergoing arbitration.Footnote 93 Examples include circumstances that would ordinarily warrant the court appointing provisional liquidators, such as the misappropriation of the company’s assets, an urgent need to appoint independent individuals to investigate the company’s assets or affairs or the necessity of invoking referral back or avoidance provisions due to suspected fraudulent preferences.Footnote 94 In such cases, the court may stay the petition or proceed with the petition if justified by the specifics of the case. The court may order the winding-up or impose conditions, such as the provision of security, or allow the necessary evidence to be filed by the company.Footnote 95
Even if the company has not yet initiated arbitration, this does not necessarily conclude the matter. Interpreting Lasmos as ‘requiring’ or ‘forcing’ the company to commence, or take steps to commence, arbitration before the petition can be dismissedFootnote 96 is a misunderstanding.
The Lasmos test does not give ‘conclusive or near conclusive weight’ to an arbitration agreement or commencement of arbitration in the exercise of the court’s discretion.Footnote 97 Regardless of whether the company has commenced arbitration, the court retains the discretion. Depending on the facts of the case, where the company has not yet commenced arbitration, the court may stay, dismiss or proceed with the petition. For example, where there are circumstances as described in paragraphs 29 and 30 of Lasmos, the court may proceed with the petition. In cases where the court considers it appropriate to grant more time for the company to commence arbitration, it may stay the petition. In other cases, the court may dismiss it.
What the third prong of the Lasmos test attempts is to identify factors for the court to consider when exercising its discretion, and to illustrate how that discretion can be exercised in a principled manner. Lasmos recognises that the court must consider both the parties’ agreed contractual mechanisms and insolvency considerations. The doctrinal underpinning of Lasmos is that, generally, if the company has invoked the agreed dispute resolution mechanism, the petition should be dismissed, subject to other relevant considerations.
The Lasmos test recognises both: (i) that a conventionally drafted arbitration clause is engaged if a company disputes a debt in response to a statutory demand; and (ii) the commencement of winding-up proceedings brings other considerations into play, which may justify the court providing some relief, either in the form of case management directions or substantive interlocutory orders of the sort referred to in the previous paragraphs—something Salford Estates does not envisage and, therefore, falls short of protecting insolvency considerations by allowing a company with no defence to a debt to use arbitration to delay the commencement of insolvency proceedings. A similar problem can be found in AnAn, which will be explored in Section 4.3. Sian, on the other hand, does not give due consideration to party autonomy, as it applies the same test regardless of the presence of an arbitration agreement. With respect, both tests are simplistic.
4.3. Comparison with AnAn
The approach in Lasmos can be contrasted with that favoured by the Singapore Court of Appeal in AnAn. The Singapore Court of Appeal established what it calls a prima facie standard, under which winding-up proceedings should be stayed or dismissed as long as there is a valid arbitration agreement, which covers the dispute and the dispute is not being raised in abuse of the court’s process.Footnote 98 While it is noteworthy that AnAn attempts to provide clearer guidance than the ‘wholly exceptional circumstances’ test in Salford Estates Footnote 99 as to when a winding-up petition should proceed,Footnote 100 this approach differs from Lasmos and has certain shortcomings.
AnAn’s qualification to the prima facie standard is limited to abuse of process situations. As the Court itself recognises,Footnote 101 this is a feature of litigation generally. AnAn therefore fails to reconcile relevant policy considerations and the respective interests of the creditor and debtor, in the specific situation where a creditor wishes to commence winding-up proceedings relying on a debt subject to an arbitration agreement, as seen in the following examples.
First, AnAn stated that, until the dispute over the debt is resolved, the insolvency regime is not engaged and there ‘is thus strictly speaking no conflict of policy interests between the two regimes under such considerations’.Footnote 102 While (i) a dispute over the debt and (ii) whether the winding-up order should be granted are distinct and materially different matters,Footnote 103 this does not mean that insolvency considerations are not engaged until the former is resolved. The availability of interim relief, such as the appointment of a provisional liquidator after the presentation of a petition and before a winding-up order is madeFootnote 104—and, therefore, necessarily before any final decision is reached as to whether the debtor has a substantial defence to the debt, whether that dispute is to be resolved in the winding-up proceedings (by the debtor demonstrating a substantial defence) or by an arbitrator determining the claim—suggests that AnAn’s view is open to doubt. In the authors’ opinion, referral-back provisions also call this view into question.Footnote 105
Second, AnAn falls short of providing a consistent analysis. Although AnAn takes the view that insolvency considerations do not come into play until the debt is established, it nonetheless relies on such considerations in paragraph 99(c) as an example of abuse of process and also states that insolvency considerations are relevant in deciding whether to stay the petition.Footnote 106 Furthermore, on the one hand, AnAn emphasises that the ‘abuse of process’ standard should not be used as a ‘backdoor to argue on the merits of the dispute’, and the court ‘must be wary that it does not engage in examining the merits.Footnote 107 On the other hand, AnAn states that where the creditor is able to demonstrate legitimate concerns about the solvency of the company and that no triable issues are raised by the debtor, the court can grant a stay. While it is understandable that AnAn sought to limit the court’s review of the merits, this illustrates the difficulty of the ‘abuse of process’ test, in that it cannot completely prevent the court from looking into the merits, contrary to what the test purports to do.
The factors that the Court in AnAn sought to take into account in deciding whether to dismiss or stay the petition are more coherently identified and weighed in Lasmos, properly understood as a balancing test, as explained in Section 4.2. The Lasmos test provides the court with flexibility to address conflicting interests, recognising that different considerations may prevail in each case. It gives due weight to party autonomy by upholding the parties’ arbitration agreement, while also allowing for exceptions under which the court may, based on the specific facts of the case, reconcile the interests of the company, the petitioner and other creditors.
4.4. Validity of criticisms of Lasmos
As the authors have acknowledged, this approach is more complicated than either Salford Estates or Sian and has been questioned for various reasons. This section will examine whether the existing and potential criticisms of Lasmos are valid.
4.1.1. Undue weight given to commencement of arbitration?
Shaun Matos suggests that the Court in Lasmos failed to consider the competing policy concerns of party autonomy and public-interest elements, arguing that under Lasmos, ‘unless and until the alleged debtor takes the steps required to commence arbitration, a court [following Lasmos] will require alleged debtors to satisfy the traditional requirement of showing that the debt is bona fide disputed on substantial grounds’ and, therefore, ‘the values of arbitration receive no recognition, and it is as though the arbitration clause did not exist’.Footnote 108 He further asserts that by having regard to what, if any steps, have been taken to commence arbitral proceedings in deciding which standard to apply, the Court in Lasmos appears to have given weight to the commencement of the arbitration process, rather than the arbitration agreement.Footnote 109
As explained in Section 4.2, this criticism is based on two false assumptions. First, the Court in Lasmos did not purport to establish a rigid rule mandating that the petition cannot be dismissed unless the company initiates arbitration, nor does it treat the commencement of arbitration (as opposed to the existence of an arbitration agreement) as a decisive factor. Second, the Court in Lasmos did not state that where the company has not taken steps towards arbitration, the traditional test applies. As explained in Section 4.2, when there is an arbitration agreement, but the debtor has not initiated arbitration, the court will take into account various considerations relating to respect for party autonomy and insolvency-related public policy, making a decision accordingly. The ‘traditional test’ (i.e. a bona fide dispute on substantial grounds), unlike in Sian, is not the only standard under Lasmos.
What the Court in Lasmos did was to give weight to the values of both insolvency and arbitration.Footnote 110 A person claiming to be a creditor of a debtor and complying with the Companies Winding-up Rules (Hong Kong) is entitled to seek a winding-up order for the benefit of the class ex debito justitiae,Footnote 111 thereby engaging the values of insolvency. Where the debtor relies on an arbitration clause, the values of arbitration are also engaged. What is required is correct identification of the issue before the court, which then permits consideration of the relevant juridical concepts.
The reasoning in Lasmos was that the issue to be determined was whether the debt was disputed and, as that issue was covered by an arbitration clause, the values of arbitration were engaged. However, since proceedings before the court were insolvency proceedings, the court explained that, depending on the facts of the case, insolvency considerations might also be engaged, which would affect how it exercised its discretionary powers. The specific facts of Lasmos did not require the relief described in paragraphs 29 and 30. The decision in Lasmos was the result of a careful balancing of competing policy concerns.
4.4.2. ‘No good purpose’
In Sian, the Privy Council expressed its concern that requiring a creditor to undergo arbitration where there is no genuine or substantial dispute before seeking liquidation of a company only causes ‘delay, trouble and expense for no good purpose’.Footnote 112 The criticism of ‘no good purpose’ is misplaced, as the purpose is to uphold party autonomy, a principle which is generally treated by the courts as of one great importance. So far as the practical aspects of the criticism are concerned, the Lasmos test, as explained, also incorporates mechanisms to prevent undue delays in the initiation of the winding-up proceedings,Footnote 113 which helps to mitigate procedural stalling and ensures protection of creditors.
4.4.3. Delay in proceedings
It could be argued that the Lasmos test cannot effectively prevent delays in the commencement of insolvency proceedings since, under this test, even if the company lacks substantial grounds for disputing the debt but has started arbitration proceedings, the court may still dismiss the winding-up petition.
However, the Lasmos test does not disregard other relevant factors in the exercise of the court’s discretion simply because the company has initiated arbitration. The concern about delays in accessing the insolvency regime is adequately addressed through the exception to the ‘general rule’ outlined in Lasmos at paragraph 31. In such cases, the court can make orders that protect the creditor’s interests. These may include an immediate winding-up order, a stay of the petition, the appointment of provisional liquidators, payment into court or the imposition of other conditions.
4.4.4. Procedural fragmentation
The Lasmos test does have the potential for procedural fragmentation, as separate processes in arbitration and winding-up proceedings may arise concurrently or sequentially. This could result in inefficiency and inconsistency in outcomes. However, this problem should not be overstated for four reasons.
First, to some extent, procedural fragmentation is a natural consequence of the parties’ intention to arbitrate the dispute over the debt and, necessarily, to do so even if one party takes the view that the other side has no defence to its claim. There must be few, if any, parties to a contract containing an arbitration clause that have ever considered the major questions considered in this article. If they have thought about the effect of an arbitration clause at all, they will have understood themselves to have signed up to an agreement that requires all disputes of whatever nature concerned with the underlying commercial transaction between the parties to be resolved by arbitration rather than by a court. Moreover, in many jurisdictions, while winding-up proceedings are not considered arbitrable, disputes concerning the underlying issues are typically regarded as arbitrable.Footnote 114
Second, there is no real risk of concurrent proceedings or conflicting outcomes, as the issues addressed by the court and the arbitral tribunal are distinct. The arbitral tribunal determines whether a debt is owed by the company and, if so, the amount. The court, on the other hand, decides—taking into account the award rendered by the arbitral tribunal, among other factors—whether to exercise its discretion to wind up the company or to dismiss or stay the petition. Furthermore, if the company has initiated arbitration, the court, applying the Lasmos test, will generally dismiss the petition. As a result, concurrent proceedings in arbitration and before the court are unlikely.
Third, procedural inefficiency can be tackled by the case management powers of the court and the arbitral tribunal. The tribunal may decide to expedite its proceedings when a winding-up petition is pending or expected to be subsequently presented by the creditor. If the court has stayed the winding-up petition in favour of arbitration, the court can pay a close attention to the progress of the arbitration proceedings and decide accordingly how to proceed.
Fourth, referring the dispute over the debt to arbitration at the winding-up petition stage may be more efficient. Under the Sian test, if the court determines that there is no dispute on substantial grounds and grants the winding-up petition, the resulting winding-up order does not have a res judicata effect on the existence or amount of the debt.Footnote 115 The liquidator may still reject the creditor’s proof of debt during the liquidation process, commonly if the liquidator becomes aware of matters relevant to the company’s defence that were not adequately canvassed before the court at the petition stage. If the debt continues to be contested at that point, the issue will eventually require resolution by the court or with the parties’ agreement or the court’s direction by arbitration.
4.4.5. Deterrent effect on arbitration agreements
Concerns may be raised that if the Lasmos test is applied as a general rule, creditors may become reluctant to include arbitration agreements in their contracts, as this approach could hinder the progression of insolvency proceedings. This seems to the authors to be doubtful given the routine inclusion of arbitration clauses in all kinds of contracts without there being any evidence of a conscious consideration by the parties of whether it is in their best commercial interests. That being said, if there is concern by prospective creditors, it can be readily addressed by drafting the clause to specifically exclude disputes over debts in insolvency proceedings. The authors incline to the view that it is desirable for parties to consider precisely which disputes the arbitration clause will cover. This is a benefit, not a detriment.
5. Conclusion
As this article has sought to demonstrate, a dispute over a debt relied on by a claimant who is considering issuing a winding-up petition is covered by a conventionally drafted arbitration clause and it is consistent with the principles and policies encapsulated in Article 8 Model Law that effect should be given to the arbitration clause. The authors acknowledge that there may be reasons to modify the way in which an arbitration clause operates in the insolvency context, but consider that Sian and Salford Estates fail to address them. Lasmos recognises this and identifies tools available to the courts to manage them whilst giving effect to the parties’ arbitration agreement in a way which better aligns with principles of party autonomy and the protection of creditor interests than Sian and Salford Estates.
Table of principal legislation referred to in this article
Acknowledgments
The authors would like to thank Mr Look-Chan Ho and the anonymous reviewers for their helpful comments on an earlier draft of this article. We would also like to thank Ms Fontane Wong Fong Ting for her assistance with proofreading. All remaining errors are the authors’ own.
