19/06/2024

Liquidation applications and arbitration agreements: farewell to Salford Estates

On an appeal from the British Virgin Islands, via the Eastern Caribbean Court of Appeal, the Privy Council has decided in Sian v Halimeda [2024] UKPC 16 that the judgment of the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 was wrong, and has directed the English courts to no longer follow it. This is the first time that the Judicial Committee has exercised its powers to give such a direction.

Paul Lowenstein KC, Rupert Hamilton and Michal Hain acted for the successful respondent.

Summary

Following Salford Estates, English courts would dismiss or stay winding-up petitions (liquidation applications) in every case where the underlying debt was subject to an arbitration agreement, even if the debtor could not show that it was disputed on genuine and substantial grounds. This approach had subsequently been followed in many common law jurisdictions, including Singapore and Malaysia and, at least to some degree, in Hong Kong. The BVI courts, by contrast, had refused to follow Salford Estates: in the decision of the Eastern Caribbean Court of Appeal in the BVI case of Jinpeng Group Ltd v Peak Hotels and Resorts Ltd BVIHCMAP2014/0025 (8 December 2015), as followed by the court at first instance and on appeal in Sian v Halimeda BVIHCMAP2021/0017 (11 November 2022) itself.

In today’s decision, the Privy Council has held that Salford Estates was wrong on the reference to arbitration point and that the BVI’s approach is correct. This means that a winding-up petition should only be stayed where the underlying debt is disputed on genuine and substantial grounds: no longer can a debtor company simply rely on the fact that there is an arbitration agreement between it and the petitioning creditor as a sufficient basis for having the petition stayed or dismissed.

The Privy Council’s decision also resolves the question of whether the reasoning in Salford Estates applies by extension in the context of generally worded exclusive jurisdiction clauses allocating jurisdiction to a foreign court. (This has caused some confusion: see for example the differing approaches in Al Kuwari v Cantervale Ltd [2022] EWHC 3490 (Ch) and Hex Technologies Ltd v DCBX Ltd [2023] EWHC 537 (Ch)). It has expressly said that the presence of such an exclusive jurisdiction clause should also not lead to the stay or dismissal of a winding-up petition unless the debt is genuinely disputed on substantial grounds.

The Privy Council has additionally held that, for those jurisdictions in which an appeal lies to the Privy Council as of right where the value of the appeal exceeds a statutory specified financial threshold, an appeal against an order putting a company into liquidation cannot meet that value threshold because a liquidation order does not resolve the underlying dispute, meaning it does not meet the threshold test which requires the judgment under appeal “[to involve] directly or indirectly a claim to or question respecting property or a right of the value of £300 sterling or upwards”. There will therefore be no automatic right of appeal against winding-up orders.

The judgment will therefore be important for:

• any creditor that may be contemplating applying to wind up a company or commence bankruptcy proceedings against a debtor on the basis of an unpaid debt where there is an arbitration agreement or exclusive jurisdiction clause between the creditor and debtor;
• any debtor that had hoped to avoid being wound up or to delay the inevitable by insisting on invoking an arbitration agreement whilst not advancing any viable defence;
• any party contemplating an application for leave to appeal to the Privy Council against an order either putting a company into liquidation or refusing to do so.

Salford Estates was wrongly decided

Lords Briggs and Hamblen, who jointly delivered the advice of the Privy Council, held that (consistent with Salford Estates) the correct starting point is that a creditor’s winding-up petition does not trigger a mandatory stay under article 8 of the UNCITRAL Model Law or statutory provisions that implement it, such as section 9 of the English Arbitration Act 1996 or section 18 of the BVI Arbitration Act 2013.

The presentation of a winding-up petition does not offend against the obligations contained in an arbitration agreement to refer disputes to arbitration and not to refer them to any court process. Insolvent liquidation is a process which exists for the benefit of a class rather than just the individual applicant (or petitioner). A winding-up order does not involve resolution of any dispute about either the existence or amount of the petition debt, and a petition does not therefore invite or require the court to resolve or determine anything about the petitioner’s claim to be owed money.

Bringing a winding-up petition is not contrary to the policy underlying the arbitration legislation, as is clear from the fact that such an application falls outside the limits of the mandatory stay imposed by provisions implementing art 8 of the Model Law. Such a petition does not offend against any of the general objectives of arbitration legislation; on the other hand, requiring a creditor to go through arbitration where there is no genuine or substantial dispute only adds delay, trouble and expense for no good purpose.

The Privy Council held that the reasoning in Salford Estates contained “an impermissible and unexplained leap” [96]. It also expressed agreement with judicial and academic criticism of the decision, including the concern that applying Salford Estates was liable to discourage parties from including arbitration clauses in their contracts if doing so was liable to impede their remedies in the event of an insolvency of the debtor.

In Willers v Joyce [2016] UKSC 44, a Supreme Court consisting of nine Justices recognised that it may be appropriate for the Judicial Committee of the Privy Council to decide that the House of Lords, Supreme Court or Court of Appeal in England was wrong, and to direct that domestic courts should treat the decision of the Privy Council as representing English law.

The appeal was the first occasion on which the Privy Council took the exceptional step of making such a direction: it held that Salford Estates should no longer be followed in England and Wales and, in particular, that “the current practice of the Companies Court in England and Wales to follow Salford Estates … should cease and it so directs” [125].

No leave to appeal as of right in a liquidation case

Even though the question was academic (because it had already granted permission to appeal), the Privy Council nevertheless determined the question of whether an appeal against a liquidation on the basis of a debt exceeding the BVI statutory value threshold of £300 could be pursued as of right under the legislation that provided a route of appeal to the Privy Council. In this case, the petition debt was over $200 million.

The Privy Council held that, irrespective of the size of the underlying debt, there was no appeal as of right.

The provisions governing appeals as of right are to be strictly construed, and the process of seeking and obtaining an order for the appointment of a liquidator does not require or involve any pursuit or adjudication of the applicant’s claim to be a creditor, either as to liability or quantum: because a winding-up order leaves the underlying debt untouched, it does not affect an appellant’s interest to the extent of the amount of the petition debt or at all. Furthermore, the making of a winding-up order is always a matter for the court’s discretion: a petitioning creditor has no right to a winding-up order, only an entitlement to have any winding-up petition properly determined. That entitlement is not one to which any monetary value can be ascribed and cannot satisfy the value threshold.

Of likely relevance to applications for leave to appeal even from jurisdictions that do not include a value threshold requirement, the Privy Council noted that appeals in respect of winding-up orders would be second appeals against a judge’s exercise of discretion. Reconsidering such discretionary decisions does not obviously fall within the Privy Council’s purpose, and this remark may well reflect a view that such applications will only very rarely merit leave to appeal.

See also a press summary from the Judicial Committee of the Privy Council.

Paul Lowenstein KC, Rupert Hamilton and Michal Hain were instructed at each stage by Andrew Willins (who appeared at each stage) and Tamara Cameron (who appeared below) of Appleby (BVI). In the Privy Council they were also instructed by Yuri Botiuk, James Collins and Serene Allen of CANDEY, London.

Paul Lowenstein KC led Tony Beswetherick (now KC) at first instance in the BVI, and Rupert Hamilton before the Eastern Caribbean Court of Appeal.