The Judicial Committee of the Privy Council has decisively redrawn the boundaries between arbitration agreements and insolvency proceedings in the case of Sian Participation Corp (In Liquidation) v Halimeda International Ltd.[1]
At its core, this case represents a clash between the long-established public policy of insolvency law, which aims to efficiently wind-up insolvent companies for the benefit of all creditors, and the now firmly entrenched policy that those who agree to arbitrate their disputes should be held to that bargain. For years, these two heavyweights have fought, neither quite landing a knockout blow. Now, the Privy Council has stepped in to declare a winner.
Prequel: The Rise and Fall of Salford Estates
In 2014’s Salford Estates (No 2) Ltd v Altomart Ltd,[2] the English Court of Appeal determined winding-up petitions generally should not be granted where the underlying debt was subject to an arbitration agreement, even where that debt wasn’t genuinely disputed. This handed debtors a powerful shield against liquidation.
While adopted in many common law jurisdictions, the Salford Estates approach was not followed in the British Virgin Islands, where Sian Participation v Halimeda International arose. Fast-forward to 2024, and the Privy Council has now carefully examined the Salford Estates shield and found it wanting.
The Facts
In 2012, Sian borrowed $140m from Halimeda under an agreement with an arbitration clause. The loan fell due in December 2018 but wasn’t repaid. By February 2020, over $226m was owing.
In late 2020, Halimeda applied to wind up Sian on insolvency grounds. Sian resisted. It denied the debt was payable and applied to strike out the petition, citing the arbitration clause. Relying on Salford Estates, Sian argued that the Court should not consider the merits of Sian’s case for disputing the debt, even on a preliminary basis, and should stay or dismiss the winding-up petition unless Halimeda could establish that there were exceptional circumstances that justified the Court doing otherwise.
The Court rejected that approach, finding that the BVI Court of Appeal had expressly decided to depart from the Salford Estates approach in Jinpeng Group Limited v Peak Hotels and Resorts Limited, and that the arbitration agreement didn’t preclude a winding-up application where the debt wasn’t genuinely disputed on substantial grounds. Liquidators were appointed.
Sian appealed unsuccessfully to the BVI Court of Appeal, and to the Privy Council.
The Decision
The key issue[3] for the Board was what test courts should apply when considering liquidation orders where the debt is subject to an arbitration agreement.
Lords Briggs and Hamblen dismantled the Salford Estates approach, offering a nuanced perspective that underscores the complex interplay between different areas of commercial law:
- While winding-up petitions don’t engage automatic arbitration stay provisions, Salford Estates was wrong to dismiss petitions over disputed debts subject to arbitration without examining the dispute’s merits.
- The appropriate test is whether the debt is genuinely disputed on substantial grounds, as the “matter” subject to arbitration is the underlying debt, not the appointment of liquidators. If the debt isn’t disputed, the arbitration agreement is irrelevant.
- In reaching that view, the Board considered that it was supporting the arbitration regime. By preventing arbitration clauses from impeding legitimate insolvency proceedings, commercial parties may become more willing to include such clauses in their agreements.
The New Paradigm
This decision has redrawn the map at arbitration and insolvency’s intersection, balancing arbitration agreements’ respect with insolvency proceedings’ practicalities, fundamentally altering the landscape. Its ramifications are likely to be far-reaching as this isn’t just a matter for the British Virgin Islands: through a rare Willers v Joyce direction, the case now represents the law of England and Wales as well, overruling Salford Estates in its home jurisdiction.
Debtors have lost a powerful tool in their arsenal. The shield of arbitration, while still valuable, no longer provides the near-impenetrable defence it once did against the winds of insolvency. Now, debtors will need to refocus their strategies, placing greater emphasis on demonstrating genuine disputes rather than relying on procedural defences.
For creditors, conversely, this decision removes a significant obstacle. The once-menacing cloud of an arbitration clause darkening the prospects of liquidation proceedings has been considerably diminished. We can anticipate a surge in creditors bringing liquidation applications that might previously have been stymied by arbitration agreements.
Practitioners, too, face a new challenge: how to craft arbitration clauses that encompass insolvency proceedings without running afoul of this new ruling. It’s a delicate balance that will require careful consideration and creative drafting. This case serves as a potent reminder of the evolving nature of commercial law: even well-established precedents can be overturned in the face of compelling arguments and changing commercial realities.
As we navigate this new terrain, one thing is certain: the interplay between arbitration agreements and liquidation proceedings will never be quite the same. Welcome to the new era of insolvency and arbitration law. It’s a world where genuine disputes still head to arbitration, but where the spectre of liquidation looms larger for those unable to pay their debts.
[3] In addition to the related question of whether the applicable test was satisfied, there were also questions as to whether the impact of the arbitration agreement was timely raised, and whether the appeal could be brought as of right under the 1967 Order.
