The decision confirms that an arbitration agreement will be upheld in the face of insolvency proceedings only if it can be shown that the petition debt is genuinely disputed on substantial grounds.

The Privy Council’s decision in Sian Participation Corp (in liq) v. Halimeda International Ltd [2024] UKPC 16 (Sian Participation) is the latest in a series of judgments clarifying the common law position on whether the court can and should exercise its discretion to order a winding-up of the debtor company when the petition debt is subject to an arbitration agreement or an exclusive jurisdiction clause (or other similar agreements).

Following Sian Participation, it has been made clear that a generally worded arbitration agreement (or exclusive jurisdiction clause) will not automatically stay a winding-up petition unless it is shown that the petition debt is “genuinely disputed on substantial grounds”. This follows the approach adopted in the British Virgin Islands (BVI) in Jinpeng Group Ltd v. Peak Hotels and Resorts Ltd BVIHCMAP2014/0025 (8 December 2015) and overturns the existing English approach in Salford Estates (No 2) Ltd v. Altomart Ltd (No 2) [2014] EWCA Civ 1575 (Salford Estates), which the Privy Council held to have been wrongly decided.   

Background

Under a facility agreement dated 2012, Halimeda International Limited (Halimeda) advanced a term loan facility of US$14 million to Sian Participation Corp (Sian). The facility agreement contained an arbitration agreement. Upon receiving Halimeda’s demand letter concerning the unpaid loan in 2020, Sian disputed that the loan was due and repayable on the basis of a cross-claim and/or set-off, claiming that Halimeda had been involved in a corporate raid targeting certain shares owned by Sian (which Halimeda denied). Subsequently, Halimeda applied for the appointment of liquidators over Sian on the basis of insolvency, which the BVI court granted at first instance. An appeal was dismissed at the BVI Court of Appeal, and Sian applied for leave to appeal to the UK Privy Council.

Key Takeaways

The key takeaways from the decision are as follows:

1. Under the traditional English position in Salford Estates, in which the petition debt was subject to an arbitration agreement, the court will grant a virtually automatic stay of winding-up petitions made in relation to the debtor.
   • However, pivoting from the English position, the Privy Council held that Salford Estates wrongly introduced a pro-arbitration stance that afforded too much deference to arbitration agreements. Rather than focusing solely on the arbitration agreement, whether or not a winding-up order is to be granted should be determined by reference to whether the debt is genuinely disputed on substantial grounds.
   • Therefore, the dispute can only be referred to arbitration if the courts find that there are genuine and substantial grounds for disputing the debt. If not, the debtor will not be permitted to first resolve the dispute by way of arbitration.
2. While this Privy Council case arose from BVI litigation, it has direct implications for the English law position. Under the Willers v. Joyce direction made by the board to the effect that Salford Estates has been expressly overruled, the position in Sian Participation now represents the current law of England and Wales.

The Position in Hong Kong

In Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP [2023] HKCFA 9 (Guy Lam), the Hong Kong Court of Final Appeal established that when the petition debt is subject to an exclusive jurisdiction clause, the winding-up petition will be stayed unless there was a risk of prejudice to other creditors or the alleged dispute as to the debt “bordered on the frivolous” or is an abuse of process.

Earlier this year, this approach was endorsed and expanded in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 (Re Simplicity) and Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 (Re Shandong) in the context of arbitration agreements and disputes over cross-claims, respectively. Additionally, under Re Simplicity, adopting Lasmos Ltd v. Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (Lasmos), debtors wishing to rely on the arbitration clause must show a genuine intention to arbitrate. As such, there must be evidence the debtors have actually taken steps towards beginning arbitration proceedings, rather than using the clause strategically to delay the creditor’s action and/or avoid liability.

Accordingly, the present Hong Kong position can be summarised as follows:

1. The English approach in Salford Estates is largely followed, such that an arbitration clause is likely to be upheld when the creditor petitions for winding-up of the debtor company.
2. Any winding-up petition by the creditor will consequently be stayed pending the outcome of the arbitration.
3. However, this is qualified by the need for the debtor to show a genuine intention to arbitrate the case; unmeritorious or frivolous cases are unlikely to be granted a stay.

The Privy Council’s View on the Hong Kong Cases

The Privy Council also expressed its approval via William Wong SC’s obiter comments in Dayang (HK) Marine Shipping Co Ltd v. Asia Master Logistics Ltd [2020] HKCFI 311 (Dayang). The decision was obiter because the debtor seeking the stay had not yet taken steps to commence arbitration.

According to William Wong SC’s view, there were four reasons why the Salford Estates / Lasmos approach should not be followed:

1. A winding-up petition is not a claim seeking a determination of the disputed debt. Therefore, entering into winding-up proceedings is not a breach of the arbitration clause and party autonomy is not violated.
2. The process by which the Companies Court decides whether the petitioner has standing to present the petition is not the same as summary judgment proceedings in a claim to enforce a debt, as the latter is a final judgment while the former is a preliminary assessment only.
3. The risk of an abusive petition can be addressed through indemnity costs.
4. The Salford Estates approach imposes an unprecedented fetter on the court’s discretion to wind up a company.

Further, the Board noted that preserving the liquidation route may in fact encourage greater use of arbitration clauses, since creditors (who usually has stronger bargaining power) are more likely to agree to an arbitration clause if they are assured that the clause would not impede a liquidation when there is no genuine or substantial dispute as to the debt.

What Are the Wider Implications?

The effect of Sian Participation in England and Wales is clear — in the face of a winding-up petition, parties will be held to an arbitration clause only when the court finds that genuine and substantial grounds for disputing the debt. In the Privy Council’s view, requiring the creditor to arbitrate the debt when there is no genuine or substantial dispute as a precondition to seeking a liquidation “just adds delay, trouble and expense for no good purpose”.  

However, it remains to be seen whether the Hong Kong courts will follow the Privy Council’s approach, as Guy Lam is currently the leading authority in Hong Kong (expanded in Re Simplicity and Re Shandong). While Privy Council decisions are not binding on Hong Kong courts, they have historically been treated as highly persuasive. Moreover, the Privy Council’s decision directly alleviates some of the key policy concerns of the Hong Kong courts, such as the need to preserve party autonomy and to encourage efficient dispute resolution. Thus, when a suitable case reaches the appellate courts, we may see further evolution of the law in Hong Kong.

This decision reinforces the importance of the wording of dispute resolution clauses, as the Privy Council repeatedly emphasised that its decision may not apply when the clause itself excludes a liquidation application or a creditor’s winding-up petition. For creditors, it would be prudent to ensure that any loan agreement entered into does not include such a caveat, as this would add uncertainty to whether a winding-up petition will be granted even when there is no genuine dispute as to the petition debt, adding time and cost to the process of claiming repayment.

As seen above, the interplay between the court’s insolvency jurisdiction and arbitration agreements is a fast-evolving area of law. While Hong Kong (together with Singapore and Malaysia) largely maintain the Salford Estates approach, considering the close similarities in insolvency and arbitration regimes across the common law world, it is worth keeping a close eye on future developments in other jurisdictions and the possibility of a more unified approach on this issue.