In an important decision which is likely to be widely cited, and to have significant ramifications for practice in the English Companies Court, the Privy Council has today decided that the decision of the English Court of Appeal in Salford Estates (No 2) v. Altomart was wrongly decided: Sian Participation Corp v. Halimeda [2024] UKPC 16. Privy Council decisions are usually only of persuasive effect in England, but the Board has, for the first time, issued a Willers v. Joyce direction to the effect that Salford is no longer to be followed in England.
The Privy Council has also resolved a longstanding debate concerning the right to appeal in winding up cases under Section 3(1)(a) of the Virgin Islands (Appeals to the Privy Council) Order 1967 (the 1967 Order), adopting the analysis of Farara JA in the Court of Appeal. This part of the decision will be relevant in all of those jurisdictions which have a right to appeal to appeal to the Privy Council in terms similar to Section 3(1)(a) of the 1967 Order and may be relevant outside of the winding-up context, to cases which are concerned with a "right" which is not measured in financial terms.
The Right to a Winding Up Order
The British Virgin Islands has a similar scheme in relation to the winding up of insolvent companies as England, Hong Kong, and the Cayman Islands. In each, the creditors' right to a winding up order is, in theory, discretionary. However, the practice of the Court is to appoint a liquidator where a creditor establishes that it has standing to apply, and that the Company is insolvent, except in exceptional circumstances (In re Crigglestone Coal Co Ltd [1906] 2 Ch 327).
For that purpose, a company is treated as being insolvent if it is unable to pay its debts as they fall due. A company is unable to pay its debts as they fall due if either an admitted debt is unpaid, or there is no "genuine and substantial dispute" in cases where the debt is not formally admitted (see Mann v Goldstein [1968] 1 WLR 1091 in England and Sparkasse Bregenz Bank AG v In the matter of Associated Capital Corporation BVIHCVAP2002/0010 in the BVI).
It is how these principles should be applied in the context of debts which are the subject of arbitration agreements that has been the cause of debate. Halki Shipping Corpn v Sopex Oils Ltd [1998] 1 WLR 726 decides that in cases where the debt is not admitted, then a "dispute" exists which engages the relevant arbitration agreement. But in such cases, should the Court hearing a winding-up petition consider whether or not the debt is the subject of a genuine and substantial dispute, or simply wash its hands of the question entirely until an arbitrator has resolved liability for the debt?
Salford Estates
In a harbinger of the debates which would later follow, the question first arose in the BVI in 2009. In Pioneer Freight Futures v. Worldlink Shipping BVIHCV 135/2009 Bannister J set aside a statutory demand, on the basis that the debt upon which the creditor relied was the subject of an arbitration agreement. A few months later, the same Judge reached the opposite conclusion in De Wet v. Vascon Trading BVIHCV 2011/0129, in that case on an application for the appointment of liquidators. Sparkasse already stood as authority that in cases involving jurisdiction agreements, the correct approach was to consider whether or not the debt was genuinely and substantially disputed.
In 2014, the English Court of Appeal considered the issue in Salford Estates (No 2) v. Altomart [2014] EWCA Civ 575, concluding that in cases where a debt which was the subject of an arbitration agreement was disputed, it was not the Court's role to consider whether or not the dispute was genuine and substantial. The BVI Courts disagreed: in Jinpeng v. Peak Hotels BVIHCMAPP 2014/0025, Webster JA refused to follow Salford Estates, observing:
"The position outlined by the Chancellor in these passages comes close to the automatic stay position which is now firmly a part of the learning in connection with section 18 of the Arbitration Act. He is saying in very clear terms that a winding up application based on a debt that is covered by an arbitration agreement will be stayed unless there are exceptional circumstances. However, I do not think that a creditor should have to prove exceptional circumstances. This Court's judgment in the C-Mobile case sets out and distinguishes the BVI court's statutory jurisdiction to wind up a company based on its inability to pay its debts as they fall due unless the debt is disputed on genuine and substantial grounds. This principle is too firmly a part of BVI law to now require a creditor exercising the statutory right belonging to all the creditors of the company to apply to wind up the company, to prove exceptional circumstances to establish his status to apply. The statutory jurisdiction under section 162(1)(b) is satisfied once the creditor is applying on the basis of a debt that is not disputed on genuine and substantial grounds."
That appeared to settle the position in the BVI, at least for a time, but Judges at first instance continued to grapple with the issue. In Rangecroft v. Lenox Holdings BVIHCM 2020/0037, Jack J dismissed an application for the appointment of liquidators – in that case, on the basis that the Court had a residual discretion to decline to appoint liquidators. A few weeks later, the Court appointed liquidators in the face of an arbitration clause in a decision which was anonymised: A Creditor v. An Anonymous Company: in that case the "dispute" was held to be transparently hopeless. More recently, in Waterfront Property v. Arius Litigation Funding BVIHCM2023/0192, Mangatal J decided to depart from Jinpeng, a decision which bound her, and to set aside a statutory demand – in part on the basis of a belief that the decision of the Privy Council in Family Mart China Holding v. Ting Chuan [2023] UKPC 33 "although...concerned with a winding up petition under Cayman Law on just and equitable grounds... made some very powerful pronouncements about the paramountcy of parties' agreements to arbitrate."
The position elsewhere
If the position in the BVI was unsettled, the position was if anything more confused elsewhere. In Malaysia and Singapore, the Courts have broadly followed the approach in Salford Estates. In Hong Kong, there have been divergent decisions. In Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (Lasmos), the approach in Salford was followed but with the additional pre-condition that the Company should in fact have taken steps to start the arbitral process. In Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9, the Hong Kong Court of Final Appeal took a similar approach in a case involving an exclusive jurisdiction clause, whilst reserving the Court's discretion to make a winding-up order if the dispute was frivolous or vexatious, or there was a risk of prejudice to creditors. To add to the confusion, that was the position on the facts in Jinpeng: in that case, the Court accepted that there was a need for Provisional Liquidators to be appointed to protect assets.
The Privy Council's decision
If the refusal by the Court of Appeal in Jinpeng to follow Salford Estates was considered bold at the time, it can now be seen to have been ahead of its time. In Sian, the Court was concerned with a $226m debt, to which the Court held there was no genuine and substantial dispute. In the Court of Appeal, Sian accepted that Jinpeng was binding, but sought to reserve the question of whether or not the Court should entertain the petition in circumstances where the debt which was the subject of the petition was the subject of an arbitration agreement.
The decision was in the affirmative. The Privy Council held that:
- the Court of Appeal in Salford Estates was correct to find that a winding-up petition does not engage the automatic stay provisions within the Arbitration Act 1996;
- but that Salford Estates was wrong to hold that a petition founded upon a disputed debt which was the subject of an arbitration agreement should be dismissed without enquiring into the merits of the dispute;
- the correct question for the Court is that identified by the BVI Court of Appeal in Jinpeng: whether or not the debt was the subject of a genuine and substantial dispute;
- that was the case whether or not the dispute was the subject of an arbitration or a jurisdiction agreement: the relevant test was the same;
- Webster JA was therefore correct in Jinpeng to refuse to follow Salford Estates, because Salford Estates was itself wrong.
The Privy Council reached this conclusion on the basis that the "the matter" which was the subject of the arbitration agreement was not the application for the appointment of liquidators, but the underlying debt. It noted that cases such as In re Menastar Finance Ltd [2003] BCC 404 establish that a winding up petition does not give rise to any form of estoppel and that a liquidator is free to reject the claim upon which the petition was founded. Accordingly, a winding up petition involved no resolution of the question of whether or not the debt was owed. As Foster J put it, in a different context, in Re China Alarm Holdings, the Court's function was to enquire as to whether there was a genuine and substantial dispute; not to resolve the dispute.
Predictably, Sian sought to take refuge in the policy of encouraging arbitration. But as the Board noted, its decision promotes (rather than discourages) arbitration, for at least two reasons:
- first, arbitration is based upon party autonomy, and it would undermine party autonomy if parties were routinely forced to arbitrate subsidiary questions which formed no part of their agreement and were not contemplated at the time; and
- second, as some of the academic commentators had observed, lenders are typically advised not to include arbitration agreements within finance documents for fear that doing so will interfere with the Court's jurisdiction to entertain a winding-up petition. The decision in Sian removes that imperative.
Although the Board has given a Willers v Joyce direction to the effect Sian will bind the English Courts, it remains to be seen how the Courts in Hong Kong, Singapore and Malaysia will respond and to what extent the ghost of Salford Estates will live on in those jurisdictions. Until broader uniformity in the common law is achieved, the common law of England will at least now follow where the BVI led over a decade ago.
The 1967 Order
The Board also took the opportunity to resolve a longstanding debate in relation to whether or not an appeal to the Privy Council exists as of right in winding up cases. Section 3(1) of the Virgin Islands (Appeals to the Privy Council) Order 1967 provides that an appeal to the Board exists as of right against final decisions which "directly or indirectly [involve] a claim to or question respecting property or a right of the value of £300 sterling or upwards". In agreement with Farara JA, the Privy Council concluded that although the relevant debt was $226m, the relevant "right" which is the subject of Section 3(1) is the right to a winding-up order, which has no financial value. Leave to appeal as of right therefore does not exist in appeals against winding-up orders.
Andrew Willins and Tamara Cameron of Appleby acted on behalf of the successful Respondent, Halimeda. Appleby has been at the forefront of this debate, having also acted for the Liquidators in Peak Hotels, the successful Respondent in Rangecroft v. Lenox, the successful Applicant in A Creditor v. An Anonymous Company, and the less successful Respondent in Waterfront.
Paul Lowenstein KC, Rupert Hamilton and Michal Hain at Twenty Essex appeared on behalf of the successful Respondents in the Privy Council, and Paul Lowenstein at every instance below. James Collins and Yuri Botiuk of Candey acted as Privy Council agents, and on behalf of Halimeda in wider disputes in England. The decision will be found HERE, the Privy Council's press summary HERE and an article by Twenty Essex will be found HERE.
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