In Sian Participation Corp (In Liquidation) v Halimeda International [2024] UKPC 16, the Privy Council held that, under English and BVI law, a company needs to show that the petition debt is genuinely disputed on substantial grounds to resist a winding up petition even in circumstances where such debt has been incurred with respect to a transaction subject to an arbitration agreement or a conflicting exclusive jurisdiction clause. This departs from the Hong Kong legal position where the presence of an arbitration agreement or conflicting exclusive jurisdiction clause alone is usually sufficient to stay or dismiss winding up proceedings (the so called “Lasmos approach”): Re Guy Kwok Hung Lam [2023] HKCFA 9 (previously noted here); Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299 (previously noted here).
Background
Sian Participation concerned a loan default. Pursuant to a facility agreement, the respondent advanced a term loan of USD140 million to the appellant. The facility agreement contained an arbitration clause providing that “any claim, dispute or difference of whatever nature arising under, out of or in connection with” the facility agreement should be referred to arbitration at the London Court of International Arbitration. The appellant did not repay the loan despite the respondent’s demand.
The respondent applied to the BVI court to have liquidators appointed in respect of the appellant on the basis that it was insolvent, a process broadly similar to presenting a winding up petition in Hong Kong. This was opposed by the appellant. Both the first instance and appellate courts decided in favour of the respondent. The appellant therefore appealed to the Privy Council, being the final appellate court for the BVI. Although the appellant had initially disputed the debt on the basis of cross-claim and/or set off, it was established before the Privy Council that the debt was not genuinely disputed on substantial grounds. The only question that remained therefore was whether an order should be made putting the appellant into liquidation given the petition debt was subject to an arbitration agreement.
Decision
The Privy Council unanimously dismissed the appellant’s appeal, holding that a company subject to a liquidation application (or winding up petition) was required to show that the petition debt against it was genuinely disputed on substantial grounds notwithstanding that the debt was subject to an arbitration agreement. The Privy Council’s reasoning can be summarised as follows:
- Firstly, it is apparent that the mandatory stay provision in the BVI Arbitration Act 2013 (the equivalent of English Arbitration Act 1996) does not apply to liquidation applications as a matter of language on a plain reading of the same (at [88]). However, the question still remains whether the court should nonetheless exercise its discretion to grant a stay of proceedings in light of an arbitration agreement (at [56]).
- Parties to an arbitration agreement are contractually obliged not to have disputes determined by court process (at [89]). In determining a liquidation application, however, the court is not required to determine whether the alleged debt on which the application is based is indeed owed or anything about such debt (at [88] and [92]). In fact, the debt is only determined in the liquidation process when the liquidator adjudicates upon the proof of debt of the petitioner (at [33]). As such, a party does not breach an arbitration agreement by making a liquidation application (at [92]). None of the general objectives of arbitration legislation are offended by allowing a winding up or liquidation to be ordered where the creditor’s unpaid debt is not genuinely disputed on substantial grounds (at [92]). Overall, the courts should not grant a discretionary stay of insolvency proceedings when there is an insubstantial dispute concerning the debt (at [88]).
- Such conclusion is not anti-arbitration, as a creditor is more likely to agree to include an arbitration clause that does not impede a liquidation where there is no genuine or substantial dispute about the debt (at [93]). It was suggested that if the parties would like the arbitration agreement to apply to liquidation applications, they could expressly provide for the same in the agreement (at [99]).
- The underlying policy regarding arbitration and exclusive jurisdiction agreements are the same and the two types of dispute resolution agreements should therefore be treated the same (at [126]).
In reaching the above conclusions, the Privy Council held that the previous English Court of Appeal decision of Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 was wrongly decided (at [88]). Accordingly, the Privy Council unusually engaged its jurisdiction to make a direction that Salford Estates should no longer be followed in England and Wales (at [125]).
Commentary
In light of Sian Participation, English and BVI law have departed from the Hong Kong law, which continues to adopt the Lasmos approach given the binding decisions of the Hong Kong Court of Final Appeal in Re Guy Lam and Court of Appeal in Re Simplicity.
In terms of other major common law jurisdiction, Singapore has adopted a position largely similar to that of Hong Kong: AnAn Group (Singapore) Pte Ltd v VTB Bank [2020] SGCA 33; Founder Group (Hong Kong) Ltd v Singapore JHC Co Pte Ltd [2023] SGCA 40. Malaysia has declined to follow Salford Estates in a Court of Appeal decision handed down shortly before Sian Participation: Swissray Asia Healthcare Co. Ltd v V Medical Services M Sdn Bhd (unreported, Appeal No. W-02(NCC)(A)-1479-08/2022, 6 June 2024).
It remains to be seen whether the Hong Kong court will reconsider the Lasmos approach in the wake of Sian Participation. Given the divergent judicial views, parties are advised to tailor arbitration agreements and exclusive jurisdiction clauses to expressly provide for insolvency proceedings so as to minimise any uncertainties as to their effect in the advent of winding up proceedings.
We will continue to follow and report on the latest legal developments in this and other areas in the latest news section of our website.