Insolvency and arbitration: A landmark judgment in Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16

Introduction

The Privy Council has considered an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court, originating from the courts of the British Virgin Islands (BVI), and delivered a landmark judgment in Sian Participation Corporation (In Liquidation) v Halimeda International Ltd [2024] UKPC 16. This decision engages the competing public policy considerations of (a) ensuring insolvency proceedings can progress without undue delay; and (b) upholding parties’ agreement to arbitrate disputes.

The Privy Council has decided that a debt must be the subject of a genuine dispute on substantial grounds for the court to stay or dismiss a creditor’s winding up petition in favor of arbitration. It is not enough for a respondent to the petition to raise an insubstantial dispute and require the creditor to go through arbitration as a prelude to seeking a liquidation.

This article provides analysis on the judgment in Sian Participation, which now represents the law in England and Wales, and compares that approach with that adopted by the courts in other common law jurisdictions, namely Australia, Hong Kong, Malaysia and Singapore.

England and Wales perspective

Following the decision in Sian Participation, the position under English law is that a creditor’s petition will only be dismissed or stayed in favor of arbitration where the debt (which is the subject of the petition) is disputed on genuine and substantial grounds.

The Privy Council directed (through a Willers v Joyce direction) that its decision in Sian Participation now represents the law of England and Wales, having held that the previous English authority from the Court of Appeal case of Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 was wrongly decided.

In Salford Estates, it was held that where a debt is not admitted and is subject to an arbitration agreement, the court should exercise its discretion (pursuant to Section 122(1) of the 1986 Insolvency Act) to stay or dismiss a creditor’s winding up petition in favor of arbitration save in wholly exceptional circumstances.

In Sian Participation, the Privy Council commented that Salford Estates set a very low prima facie threshold – all that was necessary was for the debt not to be admitted. It need not be denied, nor need any (or even any substantial) grounds for disputing the debt. The practical effect of this low threshold was to grant virtually a mandatory stay of such winding up petitions. It meant debtors which had agreed to arbitration were often in a better position to resist winding up petitions than those which had not.

In overturning Salford Estates, the Privy Council held that the debt needed to be disputed on genuine and substantial grounds (that is, a triable issue threshold) for the winding up petition to be stayed or dismissed in favor of arbitration.

The Privy Council presents this as an arbitration-friendly decision on the basis that requiring a creditor to go through an arbitration where there is no genuine or substantial dispute adds needless delay, inconvenience and expense. Moreover, the Privy Council considers a party is much more likely to agree to arbitration if it does not impede a liquidation where there is no genuine or substantial dispute about the debt.

The Privy Council also addressed the issue as to whether the Court, in applying this threshold test, is in effect conducting a summary judgment of the dispute. The Privy Council concluded that this is not anomalous to a summary judgment – rather, hearing a creditor’s petition involves a light touch process in which the Companies Court does not resolve the dispute one way or another and no executable judgment results from the process.

Moreover, the Privy Council considers a party is much more likely to agree to arbitration if it does not impede a liquidation where there is no genuine or substantial dispute about the debt.

The judgment raises three additional interesting points which are worth setting out briefly:

• A different approach is required where the winding up petition is based on the just and equitable ground. Unlike a creditor’s petition on the insolvency ground, a petition on the just and equitable ground will require the resolution of a dispute that usually concerns alleged inequitable conduct by other shareholders. In those circumstances, the winding up proceedings will be stayed whilst the disputes are resolved in arbitration through a declaratory award.
• The underlying policy as regards arbitration agreements applies equally to exclusive jurisdiction clauses.
• The triable issues threshold test to be applied pursuant to Sian Participation applies to generally worded arbitration agreements or exclusive jurisdiction clauses. It is open to parties to include express terms in their arbitration agreements or exclusive jurisdiction clauses to specifically address the procedure in the event of a creditor’s winding up petition.

Singapore perspective

Sian Participation has not yet been considered in Singapore, but the Singapore Court of Appeal reached a different conclusion in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158 (AnAn Group), ultimately deciding that the prima facie threshold in Salford Estates rather than the triable issue threshold should apply when considering applications to stay winding up proceedings in favor of arbitration. In reaching this conclusion, the Court of Appeal took the following view:

• There should be coherence in the law concerning stay applications (whether in winding up or general civil proceedings) to prevent abuse of winding up proceedings and there is no principled basis for a different standard depending solely on the creditor’s arbitrary or tactical choice to pursue winding up or a general claim in damages.
• The prima facie standard also ensures the draconian threat of liquidation is not abused, particularly as a winding up petition “may adversely affect the reputation and the business of the company and may also set in motion a process that may create cross-defaults or cut the company off from further sources of financing, thereby exacerbating its financial condition.”
• The triable issue standard offends the principle of party autonomy because it requires the court to “critically consider the merits of the company’s defences” contrary to parties’ agreement to arbitrate. It also results in uncertainty and incurs significant and overlapping costs.

The underlying policy as regards arbitration agreements applies equally to exclusive jurisdiction clauses.

Anticipating that some parties may attempt to abuse the arbitration process when faced with winding up proceedings, the Court of Appeal cautioned that the prima facie standard did not equate to an automatic stay or dismissal but would depend on the specific facts of each case. Further, even after a stay of the winding-up petition is granted, the creditor can still apply to the Singapore Court to recommence winding up if it can be shown that the debtor has no genuine desire to arbitrate or is actively stifling arbitration.

Malaysian perspective

The Malaysian Courts have acknowledged in cases such as Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd [2019] MLJU 1365 and NFC Labuan Shipleasing I Ltd v Semua Chemical Shipping Sdn Bhd [2017] 1 LNS 943 that a creditor has a statutory right to a winding up petition independent of any contractual right to arbitrate a disputed debt.

Nonetheless, in consistently upholding the prima facie threshold applied in Salford Estates and AnAn Group, the Malaysian Courts have taken the position that a debtor’s contractual right to arbitrate a disputed debt ultimately prevails over the creditor’s statutory right to seek the winding-up of an insolvent debtor. For instance, in V Medical Services M Sdn Bhd v Swissray Asia Healthcare Co [2023] 7 MLJ 155, the Malaysian High Court held that winding up proceedings should be stayed if the debtor can demonstrate that “there is a prima facie dispute over the debt which is governed by an arbitration agreement.”

As to what constitutes a prima facie dispute over a debt, the Malaysian High Court held in V Medical Services that it is enough that the debtor disputes or denies the debt, “irrespective of the substantive merits of any defence.” Instead of determining whether the debt is bona fide disputed on substantial grounds, the rationale is that the Malaysian Courts should instead “hold the parties to their bargain to resolve their dispute over the debt by their chosen method of dispute resolution to arbitrate the matter.” It was also observed, citing the AnAn Group decision, that the prima facie threshold test “is consonant with the Malaysian Court’s policy underpinning minimal curial intervention when parties have chosen arbitration over litigation.”

Hong Kong perspective

The decision in Sian Participation also represents a divergence from recent Hong Kong decisions, which have generally adopted the approach taken in Salford Estates, such that a disputed debt arising under a contract that contains an arbitration clause or an exclusive jurisdiction clause should generally be dismissed save in exceptional circumstances.

The landmark decision on this area was laid down by the Hong Kong Court of Final Appeal last year (“CFA”) in Re Guy Kwok- Hung Lam v. Tor Asia Credit Master Fund LP [2023] HKCFA 9, which confirmed the approach to dismiss insolvency proceedings in favor of the parties’ agreed exclusive jurisdiction clause unless there are countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process. The CFA held that the “established approach” for staying or dismissing a petition only if the debtor shows a bona fide dispute on substantial grounds is not appropriate when an exclusive jurisdiction clause is involved.

Anticipating that some parties may attempt to abuse the arbitration process when faced with winding up proceedings, the Court of Appeal cautioned that the prima facie standard did not equate to an automatic stay or dismissal but would depend on the specific facts of each case.

The Hong Kong Court of Appeal, in its recent judgments of Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 (Re Chenming) and Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 (Re Simplicity), has endorsed and extended the approach in Re Guy Lam to apply to disputed debt or a crossclaim subject to an arbitration clause. The CA in Re Simplicity considered that the alternative would be even less appropriate in the case of an arbitration clause, having regard to the public policy underpinning the pro-arbitration statutory framework in Hong Kong in addition to the public policy interest in holding parties to their contract bargains.

Now that exclusive jurisdiction clauses and arbitration clauses are treated alike by Hong Kong courts in winding up proceedings

Notwithstanding the apparent divergent findings in Sian Participation from the line of Hong Kong authorities above, the Hong Kong CFA and CA in Re Guy, Re Chenming and Re Simplicity have pointed out that the exercise of the Court’s discretion to decline jurisdiction to determine whether the debtor shows a bona fide dispute on substantial grounds involves a “multi-factorial” approach. As such, where the grounds for disputing the debt are obviously insubstantial or “borders on the frivolous or abuse of process,” the Hong Kong courts retain a discretion to grant the winding-up / bankruptcy order despite the presence of an arbitration clause or exclusive jurisdiction clause. While the Privy Council’s decision in Sian Participation is not strictly speaking binding in Hong Kong, the decision might further tilt the balance of Hong Kong courts towards a greater emphasis on determining “bona fides” and “substance of a dispute” for a petition debt under the “multi-factorial” approach. Further, the condition laid down in Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (Lasmos), which requires a company opposing a winding up petition to have taken requisite steps under the arbitration clause to commence the arbitration process, was also upheld in Re Simplicity. As such, an opposing debtor would need to demonstrate a genuine intention to arbitrate and cannot merely raise the arbitration clause as a tactical device.

Now that exclusive jurisdiction clauses and arbitration clauses are treated alike by Hong Kong courts in winding up proceedings, Hong Kong has become one of the first common law jurisdictions to have a harmonized approach in favor of parties’ choice of dispute resolution in exercising its insolvency jurisdiction.

Australian perspective

There has been no formal consideration of Salford Estates or the relevant decisions in Singapore, Malaysia, and Hong Kong in Australia. However, comments in several decisions concerning the setting aside of statutory demands suggests that the Australian approach is more likely to follow that set out in Sian Participation.

There has been no formal consideration of Salford Estates or the relevant decisions in Singapore, Malaysia, and Hong Kong in Australia.

In SMEC International Pty Ltd v C.E.M.S. Engineering Inc (2001) 162 FLR 383 one of the grounds asserted for setting aside a statutory demand was that the contract pursuant to which the statutory demand was made contained provisions requiring that any dispute be referred to arbitration. The Court held that at [36]: “it is unlikely that a court would set aside a statutory demand on the bare ground that the service of the demand or the commencement of winding up proceedings in consequence of it, violated an arbitration clause. The question is a little artificial, because the application of the arbitration clause is likely to arise for consideration only if there is a dispute between the parties, and once there is a genuine dispute the Court will set aside the statutory demand on that ground.”

This non-binding comment was considered in Arris Investments Pty Ltd v Fahd & Anor [2010] NSWSC 309. The Court agreed that the “existence of a mediation or arbitration clause in an agreement between parties will not automatically preclude one of them from serving a Statutory Demand on the other” because the Court retains its discretion about the “significance to attach to such a contractual term in the circumstances of the case,” The Court may “see the position taken by one of the disputants is so transparently untenable that it can conclude… that party is invoking the arbitration clause in bad faith” or “where a plaintiff seeking to set aside the Statutory Demand has continually frustrated the endeavours of the defendant to have the dispute resolved in accordance with the arbitration clause.” However, where a dispute “is not resolvable by the Court virtually at a glance because the position taken by one of them is transparently untenable, or where there is no conduct making it unconscionable for one party to invoke an arbitration clause, then an express agreement that the parties’ disputes must be determined by arbitration rather than by any other form of litigious proceeding should carry great discretionary weight in considering whether a Statutory Demand should be set aside.” The Court recognized the commercial reasons for parties to agree to arbitration and that the Court “should not lightly permit one party to ignore the clause and precipitate legal proceedings by the issue of a Statutory Demand,” which would be to “encourage parties to breach their contracts,”

The Court also considered Palmer Petroleum Pty Ltd v BGP Geoexplorer Pte Ltd [2016] QSC 33, where the applicant argued that an arbitration clause provided “some other reason” to set aside the statutory demand because there was a dispute about the amount claimed. The Court concluded there was no genuine dispute and observed:

“Similarly, the presence of an arbitration clause…does not provide “some other reason” for this Court to set aside the statutory demand. If the arbitration clause is to be properly engaged, there must be shown to exist a dispute between the parties in relation to a matter properly the subject of that arbitration clause. As was observed by Palmer J in Arris, s 459J provides a discretion to prevent abuses of process and to ensure the statutory demand process is not itself improperly used by parties to an agreement to escape an arbitration clause. There is no basis to form such a conclusion in the present case. The applicant has not established there is a dispute between the parties that should properly be the subject of arbitration in accordance with the clause. The applicant has sought to grasp onto the arbitration clause in an effort to avoid the effects of the statutory demand, in circumstances where the material supports a conclusion that the applicant’s failure to comply with the statutory demand is due to the applicant’s inability to do so financially. The applicant has not established there is “some other reason” the statutory demand ought to be set aside.”

Similarly, the presence of an arbitration clause…does not provide
“some other reason” for this Court to set aside the statutory demand.

In summary, the point remains untested but some judicial support can be discerned for the Sian Participation approach of requiring a genuine and substantial dispute.

Conclusion

When considering a creditor’s petition based on a disputed debt arising under a contract that contains an arbitration clause (or indeed an exclusive jurisdiction clause), the question of public policy pulls in opposite directions. On the one hand, the court must consider the preservation of the parties’ autonomy and choice to arbitrate. On the other, courts will be conscious of the interests of the creditors and the risks of insolvency affecting the debtor and third parties.

On the one hand, the court must consider the preservation of the parties’ autonomy and choice to arbitrate.

In Salford Estates, the English Court of Appeal set a low prima facie threshold – namely, all that was necessary was for the debt to be not admitted. Therefore, the recent divergence away from Salford Estates as a matter of English law is significant. Following Sian Participation, the debt must be the subject of a genuine dispute on substantial grounds for the court to stay or dismiss a creditor’s petition in favor of arbitration.

To date, the issue remains untested in Australian courts, but the Malaysian and Singaporean courts have partially followed suit, especially so in Malaysia, where it is clear that the Salford Estates prima facie standard will apply and therefore, the debtor’s contractual right to arbitrate a disputed debt ultimately prevails over a creditor’s statutory right to seek the winding up of an insolvent debtor. While Singapore does offer creditors some comfort through a potential grant of a stay when (inter alia) the triable issue threshold is met, the protection afforded is not quite as substantive in comparison to Sian Participation, and the emphasis on preventing abuse of the winding up process (as opposed to abuse of arbitration procedure) is evident in recent case law. The courts of Hong Kong have inched closer to the meritorious considerations taken in Sian Participation, as the courts there will at least consider whether the grounds for disputing the debt are obviously insubstantial or border on the frivolous or abuse of process.

When considering a creditor’s petition based on a disputed debt arising under a contract that contains an arbitration clause (or indeed an exclusive jurisdiction clause), the question of public policy pulls in opposite directions.

However, as Sian Participation is yet to be considered outside of the English courts, the practical effect of the Privy Council decision remains to be seen in jurisdictions like Singapore and Hong Kong which have only recently confirmed their alignment with Salford Estates. While Sian Participation demonstrates clear doctrinal differences in approach, the resulting difference of how these approaches will play out on a practical level may not be so fundamental. The Sian Participation approach may not be as arbitration-unfriendly as it may first seem. Certainly, lenders may now be more willing to use arbitration if it no longer places them at a disadvantage compared to litigation when it comes to availability of insolvency remedies.

With thanks to Bea Byrne Hill and Victoria Thomson