Commercial disputes: Arbitration and insolvency

Sian Participation Corp (In Liquidation) (Appellant) v Halimeda Worldwide Ltd (Respondent) (Virgin Islands) [2024] UKPC 16

On 19 June the solar shone on the Supreme Courtroom and introduced a really feel of the tropics to London. It was an appropriate reflection of the judgment being handed down within the Judicial Committee of the Privy Council (JCPC), the court docket which serves the British Abroad Territories, Crown dependencies and a few Commonwealth nations. Lord Briggs and Lord Hamblen sought to convey readability to the beforehand cloudy judicial panorama of whether or not an organization could be wound up for a debt due beneath a contract containing an arbitration settlement, or whether or not a creditor should first undergo the arbitration process to find out whether or not the debt is disputed.  

The court docket held that the check to be utilized is whether or not the debt is disputed on real and substantial grounds, and never merely a non-admission of the debt. It was held that the follow of the English courts of staying or dismissing a creditor’s winding-up petition based mostly on a large interpretation of a ‘disputed debt’ (that’s, with out the necessity to present that the debt is genuinely disputed on substantial grounds) is incorrect and will cease.

Background

The final precept adopted by the British Virgin Islands (BVI) (and England and Wales) is {that a} creditor can not search the winding-up of an organization if the debt is disputed. The creditor should have an undisputed debt to start insolvency proceedings. Nevertheless, there was inconsistent software of this precept between totally different nations as to tips on how to interpret the which means of a ‘disputed debt’. The place the related debt is roofed by an settlement to arbitrate, there was uncertainty about whether or not the difficulty relating to the genuineness of a debt must be decided by the arbitrator earlier than being handed to the insolvency course of.

Salford Estates

In that particular context of a debt based mostly on an settlement topic to an arbitration settlement, some nations (equivalent to England and Wales) beforehand adopted a large definition of a ‘disputed debt’. This meant that it was comparatively straightforward for a debtor to use for an adjournment or dismissal of a winding-up petition, on the premise that the debt was merely not admitted. This led to frustration on the a part of collectors who must take the case to arbitration even when it appeared that the dispute was disingenuous or insubstantial.

This was the follow set out within the Courtroom of Attraction determination of Salford Estates (No 2) Ltd v Altomart Ltd (No 2). This determination had far-reaching penalties, being the follow subsequently adopted by many different frequent legislation jurisdictions internationally.

Different nations (such because the BVI) adopted the narrower, extra conventional place set out within the main case of Jinpeng Group Ltd v Peak Lodges and Resorts Ltd. This favoured the appointment of a liquidator and required the debt to be genuinely disputed on substantial grounds earlier than a creditor’s software could possibly be dismissed or stayed due to an settlement to arbitration.

The JCPC was requested to resolve which method the BVI court docket ought to take, and whether or not the English courts ought to observe the identical method.

Info of the case

Within the attraction in query, the appellant firm had incurred a really massive unpaid debt (claimed to be roughly $226m). This fell into the gray space of being denied by the corporate on the premise of a cross-claim and/or set-off, nevertheless it was not genuinely disputed on substantial grounds.

The contract to which the debt associated contained a extensively drafted arbitration clause. This supplied that ‘any declare, dispute or distinction of no matter nature arising beneath, out of or in reference to this settlement’ shall be referred to arbitration on the London Courtroom of Worldwide Arbitration (the ‘arbitration settlement’).

The respondent utilized to have liquidators appointed in respect of the appellant firm on the premise that it was bancrupt. The liquidation software was heard by Wallbank J who held that the appellant had failed to point out that the debt was disputed on real and substantial grounds, and ordered that the appellant firm be put into liquidation. The appellant appealed towards that call and the attraction was dismissed by the Courtroom of Attraction.

JCPC determination    

The JCPC determined that Salford Estates was incorrect to introduce a discretionary keep of collectors’ petitions the place an insubstantial dispute in regards to the creditor’s debt is raised between events to an arbitration settlement. The JCPC famous that the aim of a typical arbitration settlement is to supply another technique of dispute decision, in order to keep away from a court docket course of. Nevertheless, an arbitration settlement shouldn’t be usually designed to keep away from a winding-up petition. The JCPC additionally famous that the identical ought to apply in relation to unique jurisdiction clauses and that an unique jurisdiction clause relevant to the debt in query shouldn’t lead to a keep or dismissal of the winding-up petition, except the debt is genuinely disputed on substantial grounds.

Because of this, the JCPC concluded that the BVI Courtroom of Attraction had utilized the proper check as set out in Jinpeng and upheld the appointment of liquidators.

The JCPC particularly dominated that this determination will likely be binding on the courts of England and Wales, overturning the Courtroom of Attraction’s determination in Salford Estates.

The judgment will likely be welcomed by collectors and encourage them to proceed to make use of arbitration agreements, protected within the data that it’ll not hurt their means to concern insolvency proceedings if crucial. 

Miranda Joseph is a senior data lawyer and Catherine Penny a associate at Stevens & Bolton, Guildford