The Judicial Committee of the Privy Council (the Board) has recently handed down an important judgment for the ability of creditors to obtain a winding up order from the English courts on the ground that a debtor is unable to pay its debts.

Although the case, Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16, was an appeal from the BVI courts determined by the Board (and not the UKSC), it expressly directed, pursuant to its power to do so under Willers v Joyce (No2) [2016] UKSC 44, that the decision is also to represent the law in England and Wales.

The legal landscape in issue

The ability to wind-up a corporate debtor can be an important (albeit drastic) step in the toolbox of a creditor seeking repayment. In England, in very brief outline, one ground upon which a creditor can base such a petition is that the debtor is unable to pay its debts (and this can be established in different ways including by an unsatisfied statutory demand, or by other proof to the satisfaction of the court). A general limitation in such cases, however, is that the creditor cannot invoke a debt where it is genuinely disputed on substantial grounds.

An important question which has arisen in the past is whether a debtor, who disputes the debt and is faced with such a petition, is entitled to have the court stay/dismiss the petition if the relevant debt arises from a contract subject to an arbitration agreement, or an exclusive jurisdiction agreement in favour of a foreign court.

In other words, in such circumstances, can the English court decide for itself whether the debt is genuinely disputed on substantial grounds (and, if not, therefore proceed with the petition on the basis that the debt exists)? Or does the selection of a different forum, on an exclusive basis, preclude it from doing so, pending establishment of that debt by an award/judgment from the selected forum?

Where there is an arbitration agreement, the English courts set quite a low bar for debtors to avoid the court proceeding on the basis that the debt exists. In Salford Estates (No2) Limited [2014] EWCA Civ 1575, the Court of Appeal said that all the debtor need do, for these purposes, is dispute the existence of the debt, and invoke the existence of the arbitration agreement. Critically, according to the Court of Appeal in that case, it was not then for the English court to determine whether or not the grounds of dispute were genuine and substantial.

More specifically, in that case the Court of Appeal said that, although the nature of the petition before it was such that it did not fall within s.9 of the Arbitration Act 1996 (s.9  concerns mandatory stays of proceedings where there is a claim or counterclaim), the court should still exercise its discretion in such a way. It thought that the policy of the Arbitration Act 1996 had been to exclude the court’s jurisdiction to give summary judgment on a claim covered by an arbitration clause, and that conducting a similar exercise in this context would be inconsistent with that.

By contrast, the English courts have taken a different approach in cases where the debt arises from an agreement which contains a foreign exclusive jurisdiction clause. There, in a number of petitions involving the inability to pay debts, the court has gone ahead and considered the question of whether the debt was genuinely contested on substantial grounds (as opposed to taking the view that it is for the foreign court designated in the exclusive choice of court agreement to determine that issue).

What happened in Sian Participation?

The case before the Board involved a substantial debt which had arisen under a facility agreement between the respondent creditor (Halimeda, a Cypriot company) and the appellant debtor (Sian, a BVI company). That agreement contained an LCIA arbitration agreement.

Halimeda had received no response in attempts to pursue the debt. So, a few months later, it started winding up proceedings against Sian in the BVI courts based on Sian being unable to pay its debts. In the BVI, for present purposes, the insolvency and arbitration regime was not materially different from the position in England; save that the BVI courts did not adopt the Salford Estates approach (see Jinpeng).

Thus, Sian tried to defeat the petition by showing that the debt was genuinely disputed on substantial grounds. In granting the petition, Sian’s arguments in this respect (which centred around a “corporate raid”) were rejected by the BVI courts below.

These conclusions as to the existence of a bona fide dispute were not in issue before the Board. Instead the main issue which Sian relied then relied on was that the BVI courts should have followed Salford Estates and simply dismissed or stayed the petition in favour of arbitration once Sian had disputed the debt.

What did the Board decide? – Salford Estates overruled.

The case, then, raised the issue whether Salford Estates was correctly decided. The Board tackled the question head on.

In short, it decided it was not. So the result is that, generally speaking, the existence of an arbitration agreement (or foreign exclusive jurisdiction agreement) should not, in a winding up petition based on a debtor’s inability to pay its debts, preclude an English court from proceeding to consider whether the debt is genuinely disputed on substantial grounds. The Board’s material reasoning was, in short, as follows.

First, it agreed with Salford Estates that such a petition itself did not fall within the scope of the mandatory stay of s.9 Arbitration Act 1996 (or the equivalent BVI provision); it was simply not a claim of the type caught by those provisions because the petition does not resolve or determine anything about the petitioner's claim in respect of the debt itself. Nor is the existence or amount of the debt a matter or issue for resolution in those proceedings [53-54,88]. In such a petition non-payment is simply relied on as evidence to show the debtor is unable to pay its debts; there is no claim for the payment of the debt itself [53].

Second, arbitration agreements are generally concerned with dispute resolution and the determination by the tribunal of disputed rights and obligations, including remedial rights. As such (in light of the above), a winding up petition of the type in issue would not generally offend against a promise to have disputes resolved by an arbitral tribunal [88].

Third, being the key error made by Salford Estates, there was no policy behind the Arbitration Act 1996 (or the equivalent BVI legislation) which supported a contrary conclusion. The key legislative policy was set out in s.9 Arbitration Act; being that claims within the scope of an arbitration agreement should be resolved in arbitration. Therefore, policy stopped short of the type of winding up proceedings in issue, as nothing about the relevant debt would be resolved therein [94].

Finally, the Board said that the same reasoning and outcome should apply in the case of a (foreign) exclusive jurisdiction agreement as (although not in the specific context of the Arbitration Act 1996) the underlying policy remained the same [64-66, 126].

Some implications of the ruling

The judgment is likely to be warmly welcomed by creditors. In the English courts, a creditor’s petition on the ground of an inability of the debtor to pay its debts is now generally less likely to be frustrated where the relevant debt is caught by an arbitration agreement, or a foreign exclusive jurisdiction agreement.

One limitation is that the Board’s decision was, ultimately, rooted in the construction/scope of such clauses; so it talks of general outcomes applying to clauses with general wording as to scope (such as the clause before it). So, ultimately, as the Board noted [99], it is not absolutely inconceivable that, in the case of an exceptionally worded clause extending to such a petition (or, presumably, a law applicable to the relevant clause mandating such an exceptional approach to interpretation), different considerations might apply. But, given the Board’s stress that such agreements are fundamentally about disputes, matched with its insistence that the issues in such a winding up are not a dispute about the debt, the scope for such arguments would appear to be very narrow (and, furthermore, in such a case, an arbitral tribunal would not have the power to wind up the company).

Separately, it is also not hard to see that the Board’s reasoning might be transposed to different contexts in which the Court exercises some form of supervisory jurisdiction over a party. Some care, however, needs to be taken with this. For example, applications, even if they appear to be of a nature which do not engage a stay under s.9 Arbitration Act might involve the resolution of disputed matters. And, if so, a partial stay over that is possible and might be required (see the Board’s discussion of the case of FamilyMart at [56] and [95] - in the different context of a winding up on the just and equitable ground, for an example of this).

And finally, the issue of principle is one that has received judicial consideration in a number of common law jurisdictions around the world (for example, in Hong Kong SAR, the balance leans towards staying winding up proceedings pending determination of the dispute in arbitration (and/or in favour of the foreign court), see Re. Guy Kwok Hung Lam and Simplicity & Vogue Retailing Co., Limited ), with divergent approaches being taken. The decision is, therefore, likely to be of wider interest and influence; whether it consequently brings greater conformity remains to be seen.

Click here for a copy of the judgment.