Winding-up versus arbitration agreements: A victory for petitioning creditors

26 June 2024

Winding up companies where the underlying debt is subject to an arbitration agreement or the exclusive jurisdiction of a court outside England and Wales has now become easier. This is the result of the Privy Council’s recent decision in Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16 (Sian).

When a creditor seeks to place a company into compulsory liquidation by presenting a winding up petition it will have to satisfy the court hearing the petition that the unpaid debt is not genuinely disputed on substantial grounds. When the debt forming the basis of the winding up petition is subject to an arbitration agreement the question arises as to whether the court hearing the petition or an arbitrator should decide whether that debt is genuinely disputed on substantial grounds. 

Prior to Sian, the leading English case on this question was Salford Estates (No. 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575 (Salford Estates). In Salford Estates, the Court of Appeal held that, although a winding up petition was not subject to the automatic stay under section 9 of the Arbitration Act 1996, the court should generally exercise its discretion not to make a winding-up order unless exceptional circumstances applied. This was on the basis that the Court of Appeal considered that a winding-up petition should not cut across the parties’ agreement to subject the debt to arbitration.

The practical effect of Salford Estates was that, unless the debtor admitted the debt, it was relatively easy for a debtor to get a winding-up petition dismissed or adjourned until the petitioning creditor had obtained an arbitral award. This could be frustrating for a petitioning creditor when it seemed apparent to them that any dispute was spurious and neither genuine nor on substantial grounds.

The decision in Salford Estates was even applied to applications for administration orders in Fieldfisher LLP v Pennyfeathers Limited [2016] EWHC 566 (Ch). In that case Mr Justice Nugee reluctantly declined to make an administration order as he considered he was bound by the Court of Appeal’s decision in Salford Estates.

However, in Sian, the Privy Council held that Salford Estates had been wrongly decided. The Privy Council’s view was that allowing a winding-up order to be made did not offend the public policy objectives in favour of arbitration such as supporting party’s autonomy or the principle that agreements should be kept as the winding-up order would not resolve anything about the debt. 

Although Sian was a decision of the Privy Council concerning an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands), the Privy Council made a so-called Willer v Joyce direction that Salford Estates should no longer be followed in England and Wales.

The English court, when considering whether to make a winding-up order on the basis of a debt subject to an arbitration agreement, now has greater latitude to conclude that the debt is not genuinely disputed on substantial grounds. Accordingly, the English court, no longer bound by Salford Estates, can now more easily exercise its discretion in favour of making a winding-up order.

A similar logic would also apply where a debt which is subject to the exclusive jurisdiction of a court other than the court considering the winding-up petition (although this may depend on the drafting of the relevant exclusive jurisdiction provision).

The Privy Council’s judgement in Sian is broadly to be welcomed, particularly by creditors. Sian limits the use of spurious disputes as a defence to a winding-up petition as a court will no longer defer to an arbitrator to decide the genuineness of a dispute. Sian may also give creditors more confidence to include an arbitration agreement as this will now be a less significant impediment to enforcing by way of a winding-up petition or administration application.

View this link to the Privy Council’s judgment.