Navigating the Intersection of Arbitration and Insolvency

On 19 June 2024, the Privy Council delivered a significant judgment in the case of Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16. This case, emerging from the British Virgin Islands (BVI), deals with the tension between the enforceability of arbitration agreements and the practicalities of insolvency proceedings. The ruling has profound implications for insolvency law in situations where a creditor seeks a winding-up petition on the basis of a contract subject to an arbitration clause.

The facts

The dispute involved Sian Participation Corp (“SPC“), part of a corporate structure holding a significant stake in Far-Eastern Shipping Co PJSC (“FESCO“), a prominent Russian transportation and logistics group. The respondent, Halimeda International Ltd (“Halimeda“), a wholly-owned subsidiary of FESCO, had advanced a USD140 million loan to SPC under a Facility Agreement.

The Facility Agreement included an arbitration clause which provided that:

“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’) as in force at the date of this Agreement and as modified by this clause, which Rules shall be deemed incorporated into this clause.”

SPC failed to repay the loan and Halimeda sent a letter demanding payment of the debt, claiming that the total sum due was USD226 million (the “Debt“).

On 29 September 2023, Halimeda applied to have liquidators appointed on the basis that SPC failed to repay the Debt and was thus insolvent. SPC contested that  Debt was due and payable, alleging a cross-claim and set-off related to an alleged “corporate raid” backed by the Russian State, with Halimeda purportedly complicit.

The liquidation application was allowed in first instance, on the basis that SPC had failed to show that the Debt was disputed on genuine and substantial grounds and failed to show that there were other reasons why the liquidation application should be stayed or dismissed.

SPC’s appeal to the Court of Appeal was dismissed, and it appealed to the Privy Council. Notably, the Privy Council observed at [18] that SPC did not argue before the Court of Appeal that the Debt itself (even taking into account the cross-claim issue) was disputed on genuine and substantial grounds.  

The legal issue

The primary legal issue revolved around the arbitration clause in the Facility Agreement and its effect on Halimeda’s liquidation application.

SPC argued that, in accordance with previous case law, the Debt dispute should be resolved through arbitration as per the Facility Agreement, and that no order should be made on the liquidation application until Halimeda established its debt by an arbitration award. Conversely, Halimeda maintained that the arbitration clause did not obstruct their right to seek insolvency remedies, given SPC’s failure to repay the Debt.

The Privy Council thus faced the task of reconciling two conflicting public policies: the respect for parties’ arbitration agreements and the need for efficient insolvency procedures. The agreed issue before the Privy Council was formulated in the following manner:

“What is the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement and is said to be disputed and/or subject to a cross-claim (notwithstanding that dispute is not on genuine and substantial grounds)?”

Insolvency proceedings and arbitration agreements

In determining the correct test the Court should apply, the Privy Council first considered the nature of a liquidation application (or a winding up application). The Privy Council stated that:

  • The insolvency process is a process “which exists for the benefit of a class rather than just the individual applicant (or petitioner)”;
  • The process of seeking a winding up order “does not require or involve any pursuit or adjudication of the applicant’s claim to be a creditor, either as to liability or quantum”. In this regard, the Privy Council pointed out that a liquidator remains free to reflect a proof of debt, in part or in whole, and that any dispute over a debt may be referred to Court or to arbitration;
  • The court appoints a liquidator only on a “provisional assumption” that the company is insolvent, and that this provisional assumption may subsequently turn out to be untrue without invalidating the liquidation process.
  • In contrast with the role of the court or arbitrator in proceedings for the enforcement of a debt, the Court’s powers on the hearing of a winding up application are discretionary.

The Privy Council then turned to examine Article 8 of the Model Law and the approach to interpretation of arbitration agreements. Article 8 of the Model Law is reproduced below:

(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

The Privy Council opined that Article 8 did not apply to a liquidation / winding up application for two reasons.

First, it held that it was “common ground that a creditor’s winding up petition is not an ‘action’…” . In other words, a winding up application did not fall within the ambit of Article 8 of the Model Law since it was not considered an “action” under Article 8 of the Model Law.

Second, it held that a “matter” is a substantial issue that is legally relevant “to a claim or a defence, or foreseeable defence, in the legal proceedings, and is susceptible to be determined by an arbitration as a discrete dispute” (emphasis by the Privy Council).

For completeness, we should add that the Privy Council also held that a winding up application “is not a claim for the payment of the debt” (the word “claim” being present in section 9 of the Arbitration Act 1996).

In light of the above, the Privy Council stated at [63] that:

Unless an arbitration agreement provides otherwise, it is not the policy of the Arbitration Act, or its English equivalent, to require a creditor to obtain an arbitration award before enforcing a debt which is completely undisputed, by a claim in court…

After referring to the approaches in various jurisdictions (including Singapore), the Privy Council considered that it was “wrong to introduce a discretionary stay of creditors’ petition… where an insubstantial dispute about the creditor’s debt is raised between parties to an arbitration agreement”.  The Privy Council’s reasoning was encapsulated at [88] which reads as follows:

The starting point is the perception, rightly arrived at in almost all the relevant cases including Salford Estates, that a creditor’s winding up petition (or similar liquidation application) does not trigger the mandatory stay provided for by article 8 of the Model Law, or by the various statutory provisions for a mandatory stay which implement it, such as section 9 of the 1996 Act or section 18 of the Arbitration Act. This is because a winding up petition (or similar liquidation application) is simply not a claim of the type caught by those provisions. This is not just a matter of language. It is because such a petition or application does not seek to, and does not, resolve or determine anything about the petitioner’s claim to be owed money by the company. Nor is the existence or amount of the debt a matter or issue for resolution in those proceedings.

The contractual obligation embodied in the typical arbitration agreement is to refer disputes to arbitration for resolution. The negative obligation is not to have them resolved by any court process. Thus the presentation of a winding up petition (or similar liquidation application) does not offend the negative obligation at all. It is simply not something which the creditor has agreed not to do.

The correct test

At [99], the Privy Council set out “the correct test for the court to apply” in the exercise of its discretion when faced with an arbitration agreement in insolvency proceedings:

“Accordingly, the Board concludes that, as a matter of BVI law, the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement or an exclusive jurisdiction clause and is said to be disputed is whether the debt is disputed on genuine and substantial grounds. This conclusion applies to a generally worded arbitration agreement or exclusive jurisdiction clause. Different considerations would arise if the agreement or clause was framed in terms which applied to such a liquidation application.”

(emphasis added)

It is important to note that the Privy Council concluded that the above test also extended to English law. Applying this test, the Privy Council concluded that SPC’s appeal ought to be dismissed.

Conclusion and key takeaways

The Privy Council’s judgment on the effect of arbitration clauses (including, as the Privy Council stated, exclusive jurisdiction clauses) in the context of insolvency proceedings marks a deviation from the test expounded by the Singapore Court of Appeal in AnAn Group (Singapore) PTE Ltd v VTB Bank [2020] SGCA 33 (“AnAn Group“)and Founder Group (Hong Kong) Ltd v Singapore JHC Co Pte Ltd [2023] SGCA 40.  

In both Singapore cases, the Court of Appeal adopted a prima facie standard of review when faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement. At [56] and [57] of AnAn Group, the Court of Appeal stated that:

“In our judgment, when a court is faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement, the prima facie standard should apply, such that the winding-up proceedings will be stayed or dismissed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process.

For reasons which we shall elaborate in the following section, we are of the view that the reduced standard of review promotes coherence in the law, gives effect to the principle of party autonomy and helps to achieve cost savings and certainty in the law.”

This divergence underscores a fundamental tension between the goals of insolvency law (ensuring an orderly and equitable distribution of assets) and the principles underpinning arbitration (party autonomy and the efficient resolution of disputes). It remains to be seen whether Singapore will continue to adopt the prima facie standard when met with arbitration agreements in insolvency proceedings in light of the Privy Council’s judgment.

It is important to note that the Privy Council’s test applies to “generally worded arbitration agreement[s]”, which suggests that the outcome may have been entirely different if the arbitration agreement had been worded differently such that it explicitly extended to any disputes in a winding up application. Hence, parties to an arbitration clauses should pay close attention to its terms, especially in relation to its potential effect in the context of a winding up application.

For more information on this article, please contact Bryan Tan.

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