Bulletins | July 4, 2024

Sian Participation Corp v Halimeda International Ltd

In December 2012, Halimeda International Ltd lent $140m to Sian Participation Corp. The loan agreement provided that any claim, dispute or difference of whatever nature arising under, out of or in connection with the loan should be referred to arbitration. In September 2020, in proceedings akin to a winding up petition, Halimeda applied to have liquidators appointed over Sian under the BVI Insolvency Act 2003. Wallbank J held that Sian had failed to show that the debt was disputed on genuine and substantial grounds and ordered that the company be put into liquidation. The Court of Appeal of the Eastern Caribbean Supreme Court dismissed the company’s appeal. In November 2023, the Privy Council granted permission to appeal.

Giving the advice of the board of the Privy Council in Sian Participation Corp (In Liquidation) v Halimeda International Ltd (Virgin Islands)[2024] UKPC 16, Lords Briggs and Hamblen identified the issue in the following terms:

“This appeal is about the dividing line between two areas of public policy in the British Virgin Islands, namely insolvency and arbitration. Put in the broadest terms, it is in the public interest that there should be a relatively simple means whereby a company which is insolvent, because it is unable to pay its debts in full as they fall due, should (unless it can be reconstructed) be placed without undue delay into an insolvency process whereby its assets are divided fairly (mainly pari passu) between all its creditors. At the same time there is a public policy that those who agree together to resolve their disputes by arbitration should be held to that agreement without interference from the courts.”

They went on:

“The simplicity of this picture has unfortunately been obscured by disagreement between the courts of a number of countries, which apply the same two public policies, as to what really amounts to a dispute about a debt. Leaving aside arbitration for a moment, it is virtually common ground in all those countries that whether a debt is disputed, so as to remove it from the class of unpaid debts sufficient to ground a winding up petition, depends upon whether it is genuinely disputed by the company on substantial grounds. But where a dispute about a relevant debt is covered by an agreement to arbitrate then, generally speaking, if the creditor wishes to pursue a claim for payment he must arbitrate rather than make a claim in court, if the debt is denied or even not admitted, leaving any issue about the genuineness of grounds for dispute to the arbitrator, rather than to a judge.”

The primacy of arbitration has been the position in a number of jurisdictions since the decision of the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2)[2014] EWCA Civ 1575 in which the court held that insolvency proceedings should be stayed in favour of arbitration proceedings save in exceptional circumstances. The effect of the decision has been that, even if a debtor company is unable to show that a petition debt is genuinely disputed on substantial grounds, the petitioning creditor still has to go to arbitration to establish its debt before it can petition for the company to be wound up. The decision has been the subject of adverse comment by a number of writers.

Lords Briggs and Hamblen concluded in the case before them that, as a matter of BVI law, the correct test for the court to apply in exercising its discretion whether or not to make a liquidation order (the BVI equivalent of a winding up order) in circumstances where there was an arbitration agreement between the parties was whether the debt was disputed on genuine and substantial grounds. That test had been correctly applied by the judge at first instance and by the Eastern Caribbean Court of Appeal. A creditor’s winding up petition (or, in the BVI, a liquidation application) was not subject to a mandatory stay in favour of arbitration. That was because the purpose of a petition was not to resolve or determine the petitioner’s claim to be owed money, nor was the existence or amount of the debt a matter or issue for resolution in such proceedings. The policy underpinning the  enforcement of  arbitration agreements was only engaged as regards a “matter” which was properly subject to the relevant arbitration agreement. The making of a winding up (or liquidation) order based on a debt that was not disputed on substantial grounds did not therefore offend the general objectives of arbitration, and to require a creditor to go through arbitration where there was no substantial dispute served only to cause delay and expense for no good purpose.

The appeal to the Privy Council therefore failed.

Although the appeal related to BVI proceedings, the implications of the decision are wider.  For that reason the Privy Council directed, pursuant to Willers v Joyce (No 2) [2016] UKSC 44, that Salford Estates should no longer be followed in England and Wales and that the Board’s decision in the present case to that effect now represented the law of England and Wales.