Sian v Halimeda: UK Privy Council revisits the interplay between insolvency and arbitration

What you need to know

• In Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16, the Judicial Committee of the Privy Council (Privy Council), the court of final appeal for the UK overseas territories and crown dependencies, decided the test to be applied by English courts in determining whether to dismiss or stay a winding up petition where the underlying debt arises under a contract which contains an arbitration agreement.¹
• The Privy Council held that an agreement to arbitrate the underlying debt claims which prompted the winding up petition should not automatically result in the stay or dismissal of that petition before the BVI courts. A stay or dismissal of the winding up proceedings will be justified only where the debt is genuinely disputed on substantial grounds.
• The Privy Council also took the exceptional step of directing that its decision should represent the law of England and Wales, overriding the position previously established in the 2014 English Court of Appeal decision in Salford Estates (No 2) v. Altomart [2014] EWCA Civ 575.
• Accordingly, debtors seeking to rely on an arbitration agreement to dismiss or stay a winding up petition against them in the English courts will have to demonstrate that the debt subject to that arbitration agreement is genuinely disputed on substantial grounds. The English commercial court will no longer stay or dismiss the winding up proceedings merely because the debt which prompted the commencement of those proceedings is subject to an arbitration agreement.

Background to the case

In September 2020, Halimeda International Ltd (Halimeda) made a successful application before the BVI Commercial Court to put Sian Participation Corp (Sian) into liquidation following the failure by Sian to repay a term loan pursuant to a facility agreement. The facility agreement included an arbitration clause.  

Following an unsuccessful appeal before the Court of Appeal of the Eastern Caribbean Supreme Court, Sian appealed to the Privy Council on the basis that the BVI Commercial Court should have dismissed or stayed Halimeda's application to appoint a liquidator in favour of the arbitration agreement in the facility agreement (applying the English law position as per Salford Estates). The Privy Council dismissed the appeal, holding that the presence of a generally worded arbitration agreement applicable to the debt relied upon by a creditor bringing a winding up petition should not automatically result in the stay or dismissal of the petition unless the debt is "genuinely disputed on substantial grounds".²

The Salford Estates approach

Prior to this decision, and applying the 2014 English Court of Appeal decision in Salford Estates, the English courts have generally stayed or dismissed winding up petitions where the debt prompting the petition was subject to an arbitration agreement. That approach has been adopted irrespective of whether the debtor disputed the debt on genuine and substantial grounds (or at all), and thus even in circumstances where the arbitration agreement was not engaged (and was not likely to be engaged in the future). As noted by the Privy Council in Sian, this approach has been broadly followed in other common law jurisdictions, including Singapore, Malaysia and Hong Kong.

The Privy Council test

The Privy Council held that the starting point, as adopted in Salford Estates, is that a creditor's winding up petition (or 'liquidation application') does not qualify as a "claim" or "action" under applicable arbitration legislation (including section 9 of the English Arbitration Act 1996 (the 1996 Act)) and so does not trigger a mandatory stay.³ This is because the winding up petition does not seek to, and does not, resolve or determine the creditor's debt claim, and the debtor's non-payment of the debt serves only as evidence to support the petition. 

What is left is for the court to exercise its discretionary power in dismissing or staying the proceedings. In this context, the Privy Council considered inter alia that a winding up petition based on a debt which is not disputed on substantial grounds does not offend the general objectives of arbitration legislation (i.e. efficiency, party autonomy, pacta sunt servanda and non-interference by the courts) as there is no resolution required in respect of the underlying debt.⁴ In this regard, the Privy Council noted that English and BVI courts will generally uphold insolvency actions in respect of undisputed debts, and will only consider dismissal in respect of disputed debts where the disputes are genuine and are of substantial ground.⁵ Thus, to allow a disingenuous dispute over an underlying debt to mandate a dismissal or stay of a winding up petition would render "virtually illusory"⁶ the court's discretion to wind up and add "delay, trouble and expense for no good purpose".

The Privy Council held that Salford Estates has been wrongly decided and took the exceptional step of issuing a direction (pursuant to the discretion granted to it by the Supreme Court in Willers v Joyce (No 2) [2016] UKSC 44) that its decision should not represent law in England and Wales. This means that Sian will override the position established in Salford Estates, such that the English commercial courts will not continue to grant stays or dismissals of winding up proceedings where an arbitration agreement applies to the debt which prompted the insolvency proceedings unless that debt is also disputed on genuine and substantial grounds.

Conclusion

This decision will be welcomed by creditors left with no option but to seek the winding up of the company indebted to them.

As a result of the decision in Sian, debtors seeking to dismiss or stay winding up petitions against them in the English courts will not be able to rely merely on the existence of an underlying arbitration agreement. They will also have to establish that the underlying debt is genuinely disputed on substantial grounds. 

While the Privy Council noted that it may be possible for an exceptionally worded arbitration agreement to extend to a winding up petition, it is not clear whether this would trigger a mandatory stay or dismissal of the court proceedings on the basis that the winding up petition is a "claim" or "action" under the applicable arbitration legislation (i.e. section 9 of the 1996 Act), or whether the courts should exercise their discretionary powers to stay or dismiss. In any event, this would require careful consideration of the wording used in the arbitration agreement.

The full impact of the decision remains to be seen. Notably, the decision in Sian represents a departure from the approach taken in other common law jurisdictions such as Singapore, Malaysia and Hong Kong (where the Court of Final Appeal's decision in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 currently represents the highest appellate court decision on this issue⁷  – see our briefing on this decision here). The Sian decision may prove highly persuasive before the courts in those jurisdictions in the not too distant future.

Authors: Emma Johnson, Partner; Sylvia Tee, Partner; Amy Cable, Senior Expertise Lawyer; Jenny Zhang, Associate 

^{1. Or an exclusive jurisdiction clause in favour of the courts of a jurisdiction other than those in which the winding up petition has been made. In this regard, the Privy Council made clear that the same approach should be taken in respect of a foreign exclusive jurisdiction clause on the basis that the underlying policy in respect of those clauses is the same as arbitration agreements.}

^{2.  Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16, [99].}

^{3.  Salford Estates (No 2) v. Altomart [2014] EWCA Civ 575, [88].}

^{4.  Paragraphs 89 – 92.}

^{5.  Paragraph 67.}

^{6.  Paragraph 75.}

^{7.  The decision in Guy Kwok-Hung Lam has been recently endorsed in the context of arbitration agreements by two Hong Kong Court of Appeal decisions, Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 and Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352.}