A recent decision handed down in relation to a British Virgin Islands (BVI) case has changed the legal approach in England and Wales in relation to the treatment of winding up petitions where the underlying debt is subject to an agreement to submit to arbitration.

In an appeal from the BVI courts concerning BVI law, the Privy Council has exceptionally handed down a decision that also changes the law to be followed in England and Wales in relation to the treatment of winding up petitions where the underlying debt is subject to arbitration.

In its decision, the board made a Willers v Joyce direction that Salford Estates (No 2) Limited v Altomart Limited (No 2) [2015] Ch 589 (“Salford Estates”) (the previous authority on this matter) was wrongly decided and should no longer be followed in England and Wales.

The effect of this is that while previously it was enough for a debtor company to stay a winding up petition where an agreement to submit to arbitration was present; it is now necessary to show that the debt is disputed on genuine and substantial grounds before the petition will be stayed for arbitration.

The previous approach

Salford Estates previously determined that the court should not “conduct a summary judgment type analysis of liability save in wholly exceptional circumstances”. Instead, it should defer to the relevant arbitration tribunal’s jurisdiction to determine the validity of the debt. Until now, any winding up petitions were suspended or dismissed by the court pending the determination of the arbitration. Salford Estates was the beginning of a series of many debates to follow across multiple jurisdictions, notably the BVI court decision in Jinpeng v. Peak Hotels which refused to follow Salford Estates and now appears to have been ahead of its time.

The new approach

The judgment in Sian Participation Corp will now allow creditors to proceed with winding up petitions as long as any debt is not genuinely disputed on substantial grounds.

The Privy Council held that there was “an impermissible and unexplained leap in the reasoning of the Court of Appeal as to the extent of the legislative policy behind the [arbitration legislation]”, going on to say “none of the general objectives of arbitration legislation…are offended by allowing a winding up to be ordered where the creditor’s unpaid debt is not genuinely disputed on substantial grounds”. The board found that it was incorrect to hold that a petition founded on a disputed debt which was subject to arbitration should be dismissed without enquiry into the merits of the dispute.

It was also stated that a creditor should not be expected “to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose”. The correct approach is that which was identified in Jinpeng and the right question for the courts to consider is whether or not the debt is the subject of a genuine and substantial dispute. This, it was said, is the test to be applied whether the dispute was related to an arbitration or jurisdiction agreement.

The effect

While the Privy Council is keen to stress this is not an “anti-arbitration” decision but rather the reinstatement of the need to show a “genuine and substantial dispute”, it will likely be seen as a bonus to creditors in the English courts who may now seek a quicker and more direct route to recourse.

It remains to be seen what the impact this decision will have in other jurisdictions such as Hong Kong, Malaysia and Singapore, where Salford Estates remains the binding precedent. However, it is anticipated that the decision is likely to have an effect on creditor strategy and the drafting of future disputes clauses across those common law jurisdictions which have previously gravitated toward Salford Estates, seeing it as a protection for debtors against overzealous creditors commencing winding up proceedings without first establishing the debt.

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