IT is trite that a company can resist a winding up petition if it can show that it genuinely disputes the petition debt on substantial grounds. Should a different threshold apply if the petition debt is subject to a dispute resolution agreement (i.e. arbitration or exclusive jurisdiction agreement)? In Salford Estates (No. 2) Ltd. v Altomart Ltd. [2014] EWCA Civ 1575, [2015] Ch. 589 (“Salford”) it was held that in such case the insolvency proceedings should be stayed or dismissed until the dispute as to the debt is determined in accordance with the arbitration agreement, save in wholly exceptional circumstances (at [39]). A similar approach was adopted by the apex courts in Singapore (AnAn Group (Singapore) Pte Ltd. v VTB Bank [2020] SGCA 33, [2020] 1 S.L.R. 1158) and in Hong Kong in the analogous context of exclusive jurisdiction agreement (Re Lam Kwok Hung Guy [2023] HKCFA 9, (2023) 26 H.K.C.F.A.R. 119). Reversing this jurisprudential trend, the Privy Council, in Sian Participation Corp. v Halimeda International Ltd. [2024] UKPC 16, [2024] 3 W.L.R. 937 (“Sian”), an appeal from the British Virgin Islands (“BVI”), disapproved Salford and declared that its decision represented English law.
Sian concerned a loan default under a facility agreement which contained an arbitration clause providing that “any claim, dispute or difference of whatever nature arising under, out of or in connection with” the facility agreement should be referred to arbitration. Having issued an unsatisfied statutory demand, the respondent applied to the BVI court to have liquidators appointed over the appellant on the grounds that the appellant was insolvent. The lower courts decided in favour of the respondent. Before the Privy Council, there was no appeal against the finding of the first instance court that the debt was not genuinely disputed on substantial grounds. The only question remaining was whether a liquidation order should be made given the petition debt was subject to an arbitration agreement.
In an advice given jointly by Lord Briggs and Lord Hamblen, the Board unanimously dismissed the appeal. Their Lordships correctly observed that the mandatory stay provisions under the arbitration legislations in the BVI and England and Wales (based on the UNCITRAL Model Law on International Commercial Arbitration) did not apply to insolvency proceedings (at [53]). The real issue was whether the Court should nevertheless exercise its discretion to grant a discretionary stay in light of the dispute resolution agreements (at [56]), to which the Board answered in the negative. The reasoning which underpins that answer may be briefly summarised as follows: (1) parties to a dispute resolution agreement have promised not to seek the determination of the dispute in a manner other than provided for in the agreement (at [89]); (2) however, a liquidation application does not breach the dispute resolution agreement, as the court is not required to determine or resolve any dispute about the debt (at [33], [88], [92], [115]); and (3) Salford’s reliance on the legislative policy of the Arbitration Act 1996 in support of a discretionary stay is misplaced because the boundary of such legislative policy is demarcated by the scope of the mandatory stay (at [91]). Under the Sian approach, a stay of insolvency proceedings is only available where the debt is genuinely disputed, in which case the arbitration will go ahead. This way, a balance can be struck between preventing an alleged debtor to string out repayment through arbitration; and the paralysing effects of an insolvency petition where a debt is genuinely disputed.
Proposition (2) is a frontal attack on the fundamental premise of Salford that to ask the bankruptcy court to venture into consideration of whether the petition debt is subject to a bona fide dispute on substantial grounds is to ask the court to determine a dispute covered by the dispute resolution agreement. Proposition (2) was said to find exemplification in the principles that “the court’s order creates no res judicata as between the applicant and the company” (In Re Vitoria [1894] 2 Q.B. 387 (C.A.) (“Vitoria”)) and that “the liquidator is free to reject the applicant’s proof of debt, in part or in whole” (at [33]) (In Re Menastar Finance Ltd. [2002] EWHC 2610 (Ch), [2003] B.C.C. 404, at [44]–[45] (“Menastar”)).
The Board’s reasoning calls for a number of comments.
First, while it was common ground before the Board that on the facts, the particular debt in question was not bona fide disputed on substantial grounds, this is irrelevant to whether the Salford approach should be adopted as a matter of principle.
Second, Vitoria and Menastar were decided in the context of a petition founded upon a judgment debt. The judgment, unless and until it is set aside, generally removes any room for argument or dispute before the bankruptcy court as to the existence and validity of the debt absent any suggestion of fraud or collusion. As Lord Esher M.R. remarked in Vitoria, “when an application is made to a registrar in bankruptcy for a receiving order founded upon a judgment debt, the registrar has no jurisdiction to determine, as between the parties, that there never was a debt due. There is a judgment for the debt, and the judgment is still standing” (p. 389, emphasis added). Thus, a creditor who obtains judgment and issues execution has a right ex debito justitiæ against his debtor to seize his assets by the hands of liquidator: In Re Crigglestone Coal Co. Ltd. [1906] 2 Ch. 327, 331 (C.A.). The same applies to a creditor who has obtained an arbitral award in his favour: Shandong Chenming Paper Holdings Ltd. v Arjowiggins HKK 2 Ltd. [2022] HKCFA 11, (2022) 25 H.K.C.F.A.R. 98. In contrast, where no such judgment or arbitral award is obtained, whether the debt is subject to a bona fide dispute on substantial grounds is very much a live issue in order to engage the court’s bankruptcy jurisdiction. The determination of that issue, as much as a summary judgment determination, ought to be regarded as a judicial resolution of a dispute (“both have a common element of summary process”: Salford, at [96]). That a petition does not lead to monetary judgment does not detract from this common feature.
Third, the liquidator’s power to go behind a judgment debt is only exercisable in specific circumstances involving fraud or collusion or miscarriage of justice: Re Flatau, ex parte Scotch Whiskey Distillers Ltd. (1888) 22 Q.B.D. 83, 85 (C.A.). As observed in Menastar, “the court (and the liquidator or trustee in bankruptcy) will not, as a matter of course, look behind every judgment debt and consider afresh the validity of the debt” (at [48], emphasis added). To say that the liquidator has “freedom” to go behind the judgment debt rather oversimplifies the true position. Likewise, there is a line of New Zealand and Australian authorities suggesting that an issue estoppel arises in relation to a petition debt after a contested hearing in the absence of fraud or collusion: Levin v Ikiua [2010] NZCA 309, [2010] 1 N.Z.L.R. 400, at [55]–[71]; Direct Acceptance Investments Pty. Ltd. v Blackwell (1995) 17 A.C.S.R. 89, 92; Direct Acceptance Investments Pty. Ltd. v Blackwell (No. 2) (1995) 13 A.C.L.C. 1251, 1253.
Fourth, their Lordships remarked that the appointment of a liquidator proceeds on the provisional assumption that the company is insolvent, citing the example of Lehman Brothers International Europe Ltd. (at [34]). However, the Lehman Brothers example is a case of “balance-sheet” insolvency (i.e. the value of the company’s assets being less than the amount of its liabilities), as opposed to insolvency founded upon a failure to pay a particular debt as it falls due. It provides no support for the proposition that a finding of insolvency on the basis of inability to pay a debt which underpins the appointment of liquidator is merely “provisional”.
Fifth, irrespective of whether a discretionary stay can be justified by the legislative policy of the Arbitration Act 1996, the fundamental point is that the parties’ agreement to have all disputes covered by the agreement litigated in a contractually agreed forum will be offended by one party seeking a petition on the strength of an unpaid debt which is said not to be subject to a bona fide or substantial dispute.
Lastly, insofar as requiring a creditor to resort to arbitration in the absence of a genuine or substantial dispute has been criticised as adding “delay, trouble and expense for no good reason” (at [92]), one may argue that this is the price which the parties are willing to pay for an arrangement which enables them to resolve their disputes in their desired forum.
Sian represents a decisive move away from a formidable body of case law in favour of a principle which gives effect to party autonomy in the context of petition debt covered by dispute resolution agreement. While undoubtedly motivated by the laudable objective to prevent a debtor from using a dispute about the debt as a delaying tactic to stave off insolvency proceeds, the approach in Sian rests on precarious doctrinal grounds. For this reason, such a move should be viewed with scepticism.
