Great minds think alike! A convergence of judicial opinion occurred in June 2024 – the Privy Council and the Malaysian Court of Appeal concurrently but independently arrived at common ground on what constitutes a “disputed” debt for winding-up proceedings when there is an arbitration clause in play.
Where the parties to a civil court proceeding are bound by an arbitration agreement, the courts usually adopt a low threshold when deciding whether to stay that proceeding so as to compel the parties to comply with their agreement and refer their dispute to arbitration. To constitute a “dispute” that should be arbitrated (and hence justify a stay), the debt alleged by the claimant need not be denied; it is enough that the debt is not admitted.
In contrast, a deeper analysis of the “dispute” is required for petitions to wind-up a company based on debt. Generally, the test is whether the debt is disputed by the company on genuine and substantial grounds; if it is, then the company should not be wound up. The mere fact that the debt is not admitted is insufficient to meet this higher threshold.
However, the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 created an exception to the general winding-up test for situations where the parties are subject to an arbitration clause. Influenced by the test for stay, the Court held that where the debt is not admitted and falls within the ambit of such a clause, then the winding up petition should be dismissed. This is so as to compel the parties to resolve their dispute over the debt by their chosen method of dispute resolution (arbitration) rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds. See paras 39, 41.
Recently on 19 June 2024, the Privy Council gave a judgment in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 proclaiming that Salford Estates was wrongly decided. According to the Council, where the alleged debt is the subject of an arbitration agreement and is said to be disputed, the courts would have to look into whether such dispute is genuine and on substantial grounds. In other words, the general winding-up test still applied notwithstanding the arbitration agreement. Although the Council was dealing with an appeal from the British Virgin Islands (“BVI”), it took the opportunity to direct that its decision also now represented the law of England and Wales. On the facts here, there was no genuine dispute of the debt on substantial ground by the company (Sian Participation) and thus the BVI equivalent of a winding-up order was granted. See paras 16, 17, 99, 122(1), 125, 127.
That outcome in Sian Participation was foreshadowed by a decision two weeks earlier, more than 10,000 kilometres away. On 6 June 2024, the Malaysian Court of Appeal issued its grounds of decision in Swissray Asia Healthcare Co Ltd v V Medical Services M Sdn Bhd [2024] CLJU 1358 which also departed from Salford Estates.
The Swissray decision was made in the context of a different application from that in Sian Participation – the application in Swissray was by the company for an injunction to restrain the claimant from filing a winding-up petition against it, whereas the application in Sian Participation was the BVI equivalent of the winding-up petition itself. Nevertheless, the injunction court will take into account whether the intended petition has any chance of success. In this regard, the correct test for disputed debts in a winding-up petition becomes a relevant factor by extension.
The Court of Appeal in Swissray held that even where there is an arbitration clause in the contract between the parties, the company – in order to qualify for the injunction – must show the existence of a bona fide or genuine dispute of the debt, and not merely a prima facie dispute. There was no bona fide dispute here, because the company had repeatedly acknowledged the debt. Consequently, the injunction granted by the High Court was set aside. See paras 56, 57, 60, 66, 67, 74, 83, 93. (Coincidentally, the High Court judgment was referred to in Sian Participation, at para 80)
The effect of both Sian Participation and Swissray is that the assessment whether or not a debt justifies the winding-up of a company is the same in situations where there is an arbitration clause and where there is none. The general winding-up test applies in both situations.
The core reasons in Sian Participation for rejecting the use of the lower threshold stay test in creditor winding-up proceedings are – (i) a creditor’s winding up petition is not a court proceeding caught by the statutory provision for stay (section 9, English Arbitration Act 1996); and (ii) the winding-up court does not determine either the liability or quantum of the claim (basis of the subject debt), unlike an arbitrator who will make such determinations. Elaborating on (ii), the Council observed (at para 33) that:
a) the winding-up order is not a judgment that that can be executed; and
b) even if the claimant was successful in procuring a winding-up order, the liquidator is still free to dispute the debt alleged by the claimant, and may reject the claimant’s proof of debt or refer the dispute to court or arbitration.
Interestingly, the Council acknowledged that different considerations would arise if the arbitration agreement was “framed in terms which applied to a creditor’s winding-up petition”, as opposed to a generally worded clause. The arbitration clause in Sian Participation was regarded as generally worded, and reads as follows (para 50):
“The Parties agree that any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement (including a claim, dispute or difference regarding its existence, termination or validity or any non-contractual obligations arising out of or in connection with this Agreement) (a ‘Dispute’), shall be referred to and finally settled by arbitration in accordance with the London Court of International Arbitration (‘LCIA’) Rules (the ‘Rules’) …”
The upshot of Sian Participation and Swissray appears to be that where a debt is not genuinely disputed by the company on substantial ground:
a) the company may be able to obtain a stay of a civil court proceeding brought by the claimant; but
b) the company may not be able to fend off a winding-up petition by the claimant.
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