Salford Estates overturned: Implications for insolvency proceedings and arbitration agreements

In the case of Sian Participation Corp (In Liquidation) v Halimeda International Ltd (on appeal from the BVI), the Privy Council has found that Salford Estates (No.2) Limited v Altomart Limited was incorrectly decided.

This case is not only important for BVI lawyers, as the Privy Council has directed pursuant to Willers v Joyce (No 2) [2016] UKSC 44 that the decision in the present case in respect of Salford Estates now represents the law of England and Wales.

Background

Halimeda International Ltd (“Halimeda”) applied to have liquidators appointed to Sian Participation Corp (“Sian”) under the BVI Insolvency Act after it failed to repay a loan for the sum of $140million pursuant to an agreement dated 7 December 2012. By the time Halimeda sent a letter of demand on 12 February 2020, the sum claimed had increased to over $226million. The loan agreement contained an arbitration clause which confirmed that any claim, dispute or difference of whatever nature arising under, out of or in connection with the agreement shall be referred to arbitration at the LCIA.

Sian disputed the debt on the basis of a cross-claim or set-off. However, the judge found that Sian failed to show that the debt was disputed on genuine and substantial grounds, and ordered that it be put into liquidation.

Decision

One of the main issues considered by the Privy Council was the test that should be applied as a matter of BVI law when exercising its discretion to make a liquidation order, where the debt is subject to an arbitration agreement and is said to be disputed (notwithstanding that dispute is not on genuine and substantial grounds). In respect of this issue, it was found that:

• Following the Court of Appeal decision in Salford Estates, some jurisdictions have adopted a wide definition of what amounts to a dispute about a debt. If the debt is not admitted, the creditor will likely have its winding up petition dismissed or stayed if there is an agreement to arbitrate. Other jurisdictions like the BVI require the debt to be genuinely disputed on substantial grounds, before it would be stayed based on an arbitration agreement.
   
• The Court of Appeal in Salford Estates was wrong to introduce a discretionary stay of creditors’ petitions where an insubstantial dispute about the creditor’s debt was covered by an arbitration agreement because:

1. A creditor’s winding up petition does not trigger a mandatory stay under applicable arbitration legislation, as a petition does not seek to, and does not, resolve or determine anything about the claim to be owed money. The existence or amount of the debt is not a matter or issue for resolution in those proceedings.
    
2. If the mandatory stay provisions do not apply, then the policy to enforce the positive and negative aspects of arbitration agreements does not apply. Those are only engaged, in respect of a “matter” which is subject to the arbitration agreement.
    
3. The same reasoning applies to the court’s exercise of its discretion to dismiss or stay insolvency proceedings. A winding up or liquidation order based on a debt not disputed on substantial grounds does not offend the general objectives of arbitration legislation, because it does not seek to resolve anything about the underlying debt, or interfere with the resolution of any dispute about the debt. It does not offend the parties’ arbitration agreement because it is not a “matter” subject to that agreement; seeking a liquidation is simply not something the creditor has promised not to do. To require the creditor to go through an arbitration where there is an insubstantial dispute simply adds delay, trouble and expense for no good purpose.

• As a matter of BVI law, the correct test for the court to apply in exercising its discretion to make a liquidation order in circumstances where there is an arbitration agreement between the parties is whether the debt is disputed on genuine and substantial grounds.

• This conclusion applies not only to generally worded arbitration agreements, but also to exclusive jurisdiction clauses. Different considerations would arise if the agreement or clause was framed in terms which applied specifically to a creditor’s winding up petition.

Conclusion

Concerns had been raised in the Court of Appeal about the risk of insolvency proceedings being abused as a means of applying pressure on a company to pay a debt, where a dispute should properly be resolved through arbitration. However, the Privy Council’s view was that abuses of process of this nature are already dealt with by the courts, and indemnity costs commonly visited on perpetrators, such that there is no reason for the position to differ where arbitration clauses apply. A debtor cannot therefore rely on the existence of an arbitration clause to avoid a winding up order where it does not genuinely dispute the debt on substantial grounds.

Given the confirmation that different considerations would arise if the agreement or clause was framed in terms applying specifically to a creditor’s winding up petition, it is likely that contract drafters will seek to cover off this issue in future agreements. The extent to which they are successful will be determined in future cases. 

further information 

If you have any questions or concerns about the topics raised in this blog, please contact James Glaysher or Lucy Edwards. 

about the author 

James Glaysher is an experienced solicitor-advocate specialising in international commercial arbitration and commercial litigation, and leads our International Arbitration practice.

Lucy Edwards is Legal Director in Kingsley Napley’s Dispute Resolution team, based in London. Lucy has a wealth of experience in insolvency across numerous sectors in both contentious and non-contentious corporate and personal insolvency.