Kenworth Industrial v Xin Gang Power Investments BVIHCOM 2023/0006

The recent decision of the BVI Commercial Court (the "Court") (the Hon. Justice Ingrid Mangatal (Ag.)) in  Kenworth Industrial Limited v Xin Gang Power Investments Limited BVIHCOM 2023/0006 has provided clarity on the interplay between the pro-arbitration provisions of the BVI Arbitration Act, 2013 (the "Arbitration Act"), and the exclusive jurisdiction of the Court to wind up a company on the just and equitable ground under section 162(1)(b) of the Insolvency Act, 2003 (the "Insolvency Act").

The key issue considered by the Court was whether proceedings by a member seeking the appointment of liquidators to Xin Gang Power Investments Limited (the "Company") on the just and equitable ground should be stayed in favour of arbitration in accordance with an arbitration agreement (the "Arbitration Agreement") contained in the Company's articles of association.

The Application

The application in Kenworth Industrial v Xin Gang Power Investments (the "Application") was an application to appoint liquidators to the Company on the just an equitable ground, filed by the applicant (the "Applicant") in his capacity as a member of the Company. The Application relied on allegations of an absence of probity on the part of the Company's management and/or board of directors in the conduct of the affairs of the Company, giving rise to a justifiable lack of trust and confidence in the management and/or board of directors of the Company.

The Company sought an order staying the Application in favour of arbitration pursuant to section 18 of the Arbitration Act. That section incorporates into BVI law Article 8 of the UNCITRAL model law (the "Model Law").

There were, in summary, two limbs to the argument advanced  by the Company in favour of the stay:  first, that the standing of the Applicant as a member of the Company was the subject of an existing arbitration, commenced six months prior to the filing of the Application which, if decided against the Applicant, would be determinative of its standing as a member of the Company and thus determinative of the Application . Second, that the grounds on which the appointment of the liquidators was sought by the Applicant fell within the Arbitration Agreement and were arbitrable so ought to be determined in accordance with the dispute resolution mechanism agreed by the parties.

The Court's Reasoning

After considering various authorities (in particular the Court of Appeal's judgment in Siong Beng Seng v Caldicott Worldwide Ltd (BVIHCMAP 2021/0007) ("Caldicott") and the Privy Council's decision in FamilyMart China Holding Co. Ltd v Ting Chuan [2023] UKPC 33  ("Family Mart") ), the Court granted a stay of the Application, referring all of the matters the subject of the Application to arbitration.  

Considering the question whether the mandatory stay provision under section 18 of the Arbitration Act applied to applications for the appointment of liquidators,  the Court considered itself bound by the decision in Caldicott in which, Mangatal J agreed, Theodore JA had given expression to the consensus approach taken to the statutory provisions in various jurisdictions which provide for a mandatory stay of legal proceedings at the request of a party to an arbitration agreement when a matter in those proceedings is referable to arbitration. Theodore JA held that, although section 18 of the BVI Arbitration Act referred to "an action", in contrast to certain overseas legislation (including England & Wales and Singapore) which refer to matters in "proceedings", the test in the BVI and under that overseas legislation is "quintessentially the same". This is, not least, because the various jurisdictions are all seeking to implement Article 8 of the Model Law which, as mandated by Article 2A of the Model Law (incorporated, in the BVI, into the Arbitration Act as section 7) requires (inter alia) that in interpreting the Model Law regard is to be had to its international origin and the need to promote uniformity in its application.

In determining whether the allegations in the Application fell within the scope of the Arbitration Agreement, the Court accepted the Company's submission that the rulings in FamilyMart applied to the case before it, noting that the Eastern Caribbean Court of Appeal had held the same in Caldicott relying on the same authorities as the Privy Council later did in FamilyMart.  First, the Court must determine the matters which the parties have raised or foreseeably will raise in the court proceedings; and second, in relation to each such matter, determine whether it falls within the scope of the arbitration agreement.

The Court considered it "plain" that the grounds on which the Applicant sought a winding up order against the Company was a "matter" for the purposes of section 18 of the Arbitration Act. The Privy Council in FamilyMart had held that the questions whether there had been a loss of trust and confidence and a breakdown in the relationship of the shareholders were both "matters". Similarly, the Court held that each of the particularized issues relied upon by the Applicant in the Application also satisfied the definition of "matters", being "substantial issue[s] that [are] legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings, and [are] susceptible to be determined by an arbitrator as a discrete dispute".

The Court also found that the matters raised in the Application were arbitrable, and fell within the scope of the Arbitration Agreement. In FamilyMart the arbitrable loss of confidence and breakdown in relationship claims were found to fall within the scope of an arbitration agreement which provided for the submission to arbitration of “any and all disputes in connection with or arising out of this Agreement”. The Court held that, a fortiori, the lack of probity allegation in the Application and each of its component parts fell within the scope of the arbitration agreement in the Company's Articles of Association, which required the referral to arbitration of “any difference or dispute … relating to … any of the affairs of" the Company.

Accordingly, the Court held that the Company was entitled to a mandatory stay as of right of the whole Application pursuant to section 18 of the Arbitration Act.

In coming to this conclusion, and having reviewed the BVI Interpretation Amendment Act 2013, the Court also held that winding-up applications fall within the wide definition supplied by that statute of an "action". This wide definition, an application of the consensus approach and the need for uniformity and conformity with general principles referred to in section 7 of the Arbitration Act, incorporating Article 2A of the Model Law, pointed at the mandatory stay provisions in s. 18 of the Arbitration Act being given a broad interpretation.

In reaching her conclusion, Justice Mangatal might be thought to have departed from earlier decisions of the Court in which applications to wind up were held to fall outside the scope of arbitration clauses: for example, C-Mobile Services Limited v Huawei Technologies Co. Limited BVIHCMAP2014/0017 ("C-Mobile"). However, the learned Judge does confine her conclusion to just and equitable applications under section 162(1)(b) of the Insolvency Act – "or, at any rate, in non debt contexts".  In the case of an application to appoint liquidators on the grounds of insolvency, the law remains as stated by Pereira CJ in C-Mobile: that - 

"…the Mandatory Stay Provision does not apply to a wind up proceeding. A winding up application, although it may be premised on the underlying debt, is not an action or proceeding on the debt or under the contract. Winding up is a class remedy. It is a collective remedy being undertaken for the  benefit of all creditors who will no doubt rank according to any priority to be accorded to their proofs of debt in the scheme of the liquidation."

Case Significance

Whilst the Court retains exclusive jurisdiction to wind up companies,  following Mangatal J's robust decision in this case, shareholders in BVI companies whose articles contain arbitration clauses, and those BVI companies which face an application to wind up filed by a member on the just and equitable grounds where an arbitration clause is in play, can expect the Court to adopt the generous approach approved in Caldicott and in FamilyMart and adopted in Kenworth with respect to the claims the subject of the application. It is clear that the Court will not be deterred from referring to arbitration the claims relied on as the basis for the just and equitable winding up simply because they are made in the context of an application to wind up. Rather, where the claims made are disputed and are arbitrable, and the terms of the arbitration agreement allow, the parties may expect to have the dispute resolved by arbitration, with the ultimate question, whether liquidators ought to be appointed and the company wound up, only coming before the Court for its consideration once the arbitral tribunal has reached its conclusion.

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