The interplay between insolvency and arbitration proceedings: an insight into developments across jurisdictions

An original version of this article was first published by INSOL International, February 2025.

British Virgin Islands (BVI)

Chapter authored by Carey Olsen Singapore partner James Noble, counsel Amelia Tan and senior associate Yan Chng. 

Overview

In the BVI, the interplay between arbitration clauses and winding up proceedings has arisen in the context of insolvency petitions, as well as in “just and equitable” (i.e. solvent) winding up proceedings.

In relation to the former, the Privy Council’s decision in Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16 (Sian Participation) recently affirmed the BVI Court's approach in Jinpeng Group Limited v Peak Hotels and Resorts Limited BVIHCMAP2014/0025 (8 December 2015) (Jinpeng) in staying insolvency proceedings only when a debt is genuinely disputed on substantial grounds.

In the context of a just and equitable winding up petition, the approach taken in the BVI was set out by the Court of Appeal in Kenworth Industrial Limited v Xin Gang Power Investments Limited BVIHCOM2023/0006 (1 February 2024) (Kenworth), discussed further below.

The starting point of the analysis is section 18 of the Arbitration Act 2013 and section 162 of the Insolvency Act 2003. Under section 18, where "an action is brought in a matter which is the subject of an arbitration agreement", the mandatory stay provisions apply such that the court "shall" refer the parties to arbitration, unless it finds that the arbitration agreement is "null and void, inoperative or incapable of being performed".

Insolvent winding up applications

It has been recently established that a creditors’ winding up petition on the insolvency ground under section 162(1)(a) of the Insolvency Act 2003 (i.e. on the ground that the debtor is unable to pay its debts as they fall due) is not an "action" within the meaning of section 18 of the Arbitration Act 2013, such that the mandatory stay provisions do not apply to creditors' liquidation applications.

The test in the BVI is whether the debt is disputed on genuine and substantial grounds. If so, and the dispute falls within the terms of the arbitration clause, then while there will not be a mandatory stay, the court retains a wide discretion under section 162 of the Insolvency Act 2003 to stay or dismiss the winding up application and force the parties to resolve the dispute by arbitration. This test was applied by the Court of Appeal of the Eastern Caribbean Supreme Court in Jinpeng. The Court had declined to follow the approach in the England and Wales decision in Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575 (Salford Estates), which required that a winding up application based on a debt that is covered by an arbitration agreement should be stayed unless there are exceptional circumstances.

In England and Wales, the decision in Salford Estates has now been overturned by the recent Privy Council decision in Sian Participation, where the Privy Council held that the BVI courts were correct not to follow Salford Estates, and Jinpeng had applied the correct test.

The correct test in England and Wales is now whether the debt is disputed on genuine and substantial grounds. This brings the approach in England and Wales in line with the BVI.

Just and equitable winding up applications

The position in the BVI in respect of just and equitable winding up applications under section 162(1) (b) of the Insolvency Act 2003 is that there will be a mandatory stay of the court proceedings under section 18 of the Arbitration Act 2013 to the extent the proceedings concern any matter that falls within the scope of an arbitration agreement.

This approach was adopted in Kenworth, which was decided after the Eastern Caribbean Supreme Court of Appeal's decision in Siong Beng Seng v Caldicott Worldwide Ltd BVIHCMAP2021/0007 (22 March 2023) (Caldicott) and shortly after the Privy Council handed down its judgment in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corporation [2023] UKPC 33 (FamilyMart).

In Kenworth, the BVI court applied the two-stage approach in Caldicott and FamilyMart for determining whether just and equitable winding up proceedings are caught within the scope of the arbitration agreement and ought to be stayed under section 18(1) of the Arbitration Act 2013: (i) to determine what the matters are which the parties have raised or foreseeably will raise in the court proceedings; and (ii) in relation to each such matter, whether it falls within the ambit of the arbitration agreement.

After determining that a mandatory stay applied to the winding up application, the court also held that there should, in any event, be a discretionary stay of the winding up application either at an interim stage or by deferring any final remedy pending the outcome of the arbitration, even if section 18 was not applicable. This would give effect to the role of arbitration policy and curial efficiency.

The Kenworth case confirms that the BVI courts will follow the Privy Council's decision in FamilyMart in determining whether just and equitable winding up applications ought to be stayed in favour of arbitration. The Court held that there is a public interest in holding that the decision in FamilyMart applies in the BVI as well as in the Cayman Islands, which is elaborated on in the section below.

Cayman Islands

Chapter authored by Carey Olsen partner James Noble, counsel Amelia Tan and senior associate Yan Chng. 

The law as set out in the FamilyMart decision

The Privy Council's decision in FamilyMart is a significant one in relation to the interplay between arbitration agreements and court applications for winding up on the just and equitable ground. While it had previously been well-established that the court has the exclusive jurisdiction to make a winding up order, it was unclear what the test was for deciding whether the underlying dispute in a just and equitable winding up application should be stayed pending arbitration. FamilyMart clarified that the applicable test is a two-stage analysis:

• first, the court must identify the matters which the parties have raised or foreseeably will raise in the court proceedings; and
• second, in relation to each such matter, whether it falls within the scope of the arbitration agreement.

In the Cayman Islands, the court has the power to wind up a company under section 92(e) of the Companies Act (2022 Revision) if the court is of the opinion that it is just and equitable to do so.

The Cayman Islands has separate legislation governing foreign and domestic arbitrations. The Foreign Arbitral Awards Enforcement Act (1997 Revision) (FAAEA) addresses the former, while the latter are governed by the Arbitration Act 2012.

FamilyMart concerned an application by the majority shareholder to strike out, dismiss or stay a just and equitable winding up application brought by the minority shareholder under section 4 of the FAAEA or, pursuant to the court's inherent jurisdiction, until the underlying dispute had been arbitrated.

In elaborating on the two-stage approach above, the Privy Council held that a "matter" is a substantial issue which is legally relevant to a claim or defence (or foreseeable defence) in the legal proceedings, and is susceptible to be determined by an arbitrator as a discrete dispute. The Board affirmed that the test is one of whether "substantial matters" fall within the ambit of the arbitration agreement. If so, a mandatory stay would be granted to the extent of those matters.

The two-stage approach similarly applies to non-insolvency proceedings

The two-stage method adopted in FamilyMart for determining whether matters must be referred to arbitration pursuant to section 4 of the FAAEA similarly applies to non-insolvency proceedings. In the matter of Ren Ci Cause No. FSD 210 of 2022 (DDJ) (16 February 2023) (Ren Ci), the Cayman Grand Court stayed proceedings which included claims for declarations, permanent injunctions and an order for rectification of the defendant's registers of directors and members, in favour of arbitration.

In doing so, the Court considered the two-stage inquiry in the English Court of Appeal judgment in The Republic of Mozambique v Credit Suisse International [2021] EWCA Civ 329. First, to identify the "matters" in respect of which the proceedings are brought. Second, to assess whether those matters are "matters" which the parties have agreed are "to be referred to arbitration".

The Court in Ren Ci held that it should stay the proceedings to the extent of any issues which fall within the ambit of an arbitration agreement. The search is not for the main issue or issues, or what are the most substantial issues, but for any and all issues which may be the subject matter of an arbitration agreement.

Insolvent winding up petitions

The position in the Cayman Islands towards insolvent winding up proceedings, where there is an arbitration agreement in existence, has not been settled. The Grand Court has adopted differing approaches across cases, and the appellate court has not had an occasion to consider the issue.

In the recent Grand Court decision in Re BPGIC Holdings Limited (unrep., 20 November 2023, FSD 248 of 2023 (MRHCJ)) (BPGIC Holdings), Ramsay-Hale CJ held that the Cayman courts should not shy away from examining the evidence to determine the threshold question of whether the dispute is genuine and substantial. The Court declined to follow an earlier Grand Court decision in Re Times Property Holdings Ltd [2011(1) CILR 223] insofar as it is said to be authority for the proposition that once the debt is disputed the Court should not determine the threshold question as to the genuineness of the dispute.

The Court also departed from the English position in the now-overruled Salford Estates, which imposed the "wholly exceptional circumstances" test. Ramsay-Hale CJ held that, unlike the United Kingdom provisions, section 4 of the FAAEA directs the Cayman court to determine the threshold question of whether the debt is bona fide disputed on substantial grounds before dismissing a petition in favour of arbitration. The court's normal practice is to stay the petition if it finds that there is a genuine dispute of substance with respect to the debt, leaving the dispute to be resolved in a different action or in a different forum. This approach is consistent with what was adopted in the earlier Grand Court decisions of Re Grand State Investments Limited (unreported, 28 April 2021, FSD 11 of 2021 (RPJ)) and Re Duet Real Estate Partners 1 LP (unreported, 7 June 2011, FSD 77 of 2011 (AJJ)), where the Court undertook an inquiry of whether there was a genuine and substantial dispute as to the existence of the alleged debt.

The prevailing methodology in insolvent winding up applications in the Cayman Islands is that the court will at least determine the threshold question of whether there is a genuine and substantial dispute of the alleged debt. However, BGPIC Holdings was decided before Sian Participation. It is therefore likely that the Cayman court will now derive guidance from the decision in Sian Participation (which BGPIC Holdings is consistent with in any event) in future cases.

Bermuda

Chapter authored by Carey Olsen Hong Kong partner Matthew Watson. 

There are two different arbitration regimes in Bermuda. The Arbitration Act 1986 governs the arbitration of domestic disputes, while the Bermuda International Conciliation and Arbitration Act 1993 (1993 Act), which incorporates into Bermuda law the UNCITRAL Model Law on International Commercial Arbitration, applies to "international commercial arbitrations”. 

This section of the technical paper focuses on international arbitration under the 1993 Act. The 1993 Act does not contain a similar provision to section 9 of the Arbitration Act 1996 of England and Wales.

The Companies Act 1981, the Companies (Winding Up) Rules 1982 and the Bankruptcy Act 1989 (as applied to corporate insolvency by sections 234 and 235 of the Companies Act 1981) are the primary statutes regulating insolvencies of corporate entities in Bermuda. The insolvency regimes provided by the Companies Act 1981 and the Companies (Winding Up Rules) 1982 are derived largely from the English Companies Act 1948 and corresponding rules.

Upon hearing a winding up petition, the court has the power to dismiss or adjourn the petition on such terms as it thinks fit (section 164 of the Companies Act 1981). It also has the power to stay a winding up petition upon the application of the company, creditor or contributory (section 165 of the Companies Act 1981).

Privy Council decisions on general common law issues unaffected by local statutes are binding on the Bermudian courts, even if the appeal to the Privy Council emanated from another jurisdiction such as the BVI or the Cayman Islands.

The recent Privy Council decisions in Sian Participation and FamilyMart are expected to be binding in Bermuda, such that it is anticipated that the Bermuda courts will apply a test – in exercising their discretion whether to make a liquidation order in circumstances where there is an arbitration agreement between the parties – of whether the debt is disputed on genuine and substantial grounds. It is apparent that the Privy Council's conclusion not only applies to generally worded arbitration agreements, but also to exclusive jurisdiction clauses.

Jersey

Chapter authored by Carey Olsen Jersey partner Marcus Pallot and senior associate Mike Kushner.

Overview

Under the laws of Jersey, a creditor whose claim is subject to a genuine dispute cannot apply for the debtor's bankruptcy. This is so regardless of whether the claim is subject to an arbitration agreement or not. It is principally a matter for the court to determine whether a genuine dispute exists. In the bankruptcy context, the court has the discretion (but not the obligation) to direct that a matter which is subject to an arbitration agreement be determined by way of arbitration.

A creditor is also precluded from seeking the debtor's bankruptcy where there is a non-petition agreement in place. Therefore, an arbitration agreement which contains an explicit undertaking not to commence bankruptcy proceedings would be enforceable in accordance with its terms. The court would have no discretion to entertain an application for bankruptcy in circumstances where the creditor is party to a non-petition agreement.

Jersey insolvency mechanisms

There are a number of different insolvency mechanisms in Jersey. The two key creditor-driven mechanisms are:

• an application for a creditors’ winding up (Companies (Jersey) Law, Article 157A); and
• an application for a declaration of désastre (pursuant to the Bankruptcy (Désastre) (Jersey) Law 1990).

Both of these creditor-driven mechanisms require the creditor to have a claim against the debtor in a "liquidated sum" of not less than the prescribed amount (currently £3,000).

Creditor must have a claim in a "liquidated sum" – i.e. not subject to a genuine dispute

The creditor's claim must be certain and not the subject of a genuine dispute, arguable defence or counterclaim. Putting it another way, it is open to a debtor to resist bankruptcy on the basis that the creditor's claim is the subject of a genuine dispute.

It is principally for the court, seized of a bankruptcy application, to determine whether a genuine dispute exists. As we will explain below, the existence of an arbitration clause does not oust the court's jurisdiction to rule on this. Ultimately, the court must be satisfied on a balance of probabilities that the creditor's claim is such as may form the basis of a summary judgment. Applying the Jersey summary judgment test, this means that the defence must have a real prospect of success – that is, the defence must be realistic as opposed to fanciful, and better than merely arguable.

An arbitration clause does not oust the court's jurisdiction to determine whether a debt is disputed on genuine grounds

Assuming that the creditor's claim is subject to an arbitration clause, the court could refer the matter to arbitration. In our view, the court would be entitled – but not obliged – to refer to arbitration the question of whether there is a genuine dispute.

This position is supported by article 4 of the Arbitration (Jersey) Law 1998, which deals explicitly with the interplay between bankruptcy and arbitration. In particular, article 4(2) of the Arbitration (Jersey) Law 1998 provides that if an arbitration agreement applies to a matter to be determined in connection with or for the purposes of bankruptcy proceedings, the court may direct that the matter be determined by way of arbitration. Accordingly, the court could direct that the issue of whether a genuine dispute arises or not be referred to arbitration.

Insofar as the court will be conscious of the overriding objective to resolve disputes justly and at proportionate cost, it seems far more likely that the court would grasp the nettle and decide for itself whether there is a genuine dispute rather than referring that narrow point to arbitration. Of course, where the court is satisfied that there is indeed a genuine dispute, the creditor would not succeed with its bankruptcy application. The creditor would have to pursue its claim by way of arbitration. This is so because, outside of the bankruptcy context in which the special rules described above apply, article 5 of the Arbitration (Jersey) Law 1998 provides for a mandatory stay of court proceedings where a dispute is subject to an arbitration agreement.

Non-petition provisions

A further scenario that may arise is where there is a dispute resolution clause, which contains an arbitration clause coupled with a non-petition provision. That is, a provision by which the creditor undertakes not to commence bankruptcy proceedings against the debtor.

In such a case, if the creditor sought to commence bankruptcy proceedings, the court would be obliged to refuse to grant the creditor's application. This situation is regulated by article 3 of the Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005, which provides that notwithstanding any provision of law to the contrary, a non-petition provision of an agreement is enforceable in accordance with its terms by any party to the agreement. Accordingly, where a creditor has undertaken not to commence bankruptcy proceedings, the court is obliged – "shall" being the word used in the statute – to refuse the creditor's application.

Guernsey

Chapter authored by Carey Olsen Guernsey partner David Jones and senior associate Steven Balmer.

The relationship between arbitration and insolvency proceedings in Guernsey is relatively untested. While arbitration in an insolvency context is not prohibited, there are very few practical examples of arbitration being used in Guernsey for insolvency or restructuring matters.

The statutory framework for arbitration is contained in the Arbitration (Guernsey) Law 2016 (Guernsey Law). The Guernsey Law is an expansion and reformulation of the previous arbitration regime contained within the Arbitration (Guernsey) Law 1982 (1982 Law), and it offers greater powers, flexibility and scope for judicial intervention in the arbitral space.

The Guernsey Law utilises English jurisprudence and internationally recognised standards, modelling itself primarily on two foreign instruments:

• the UN Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (Model Law); and
• the United Kingdom statute, the Arbitration Act 1996 (applying to England, Wales and Northern Ireland).

Where parties have entered into an arbitration agreement, or a commercial contract contains an arbitration clause, then pursuant to section 6 of the Guernsey Law, a party to that agreement can apply to the court in which the proceedings have been brought for a stay of proceedings. The court in the jurisdiction where the application has been brought must grant the stay unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable or being performed. This is equally applicable in an insolvency context as it would be generally.

The lack of specific case law in this area in Guernsey makes drawing conclusions as to the court's approach to the interplay between arbitration clauses and insolvency uncertain. However, Guernsey does have a robust and internationally recognised statutory arbitration regime. The jurisdiction has a solid legal framework in place to facilitate any increase in parties opting for arbitration over traditional court processes in insolvency matters.

Where Guernsey also has an established track record is in the recognition and enforcement of final foreign arbitration awards pursuant to section 84 of the Guernsey Law and the Parts II and III of the 1982 Law. A distinct procedure exists under the Guernsey Law for recognition of New York Convention awards made in a State, other than the United Kingdom, that is a contracting party to the New York Convention 1958.

The close alignment with the United Kingdom means that Guernsey will always have a bank of persuasive authorities to draw upon even where the jurisdiction does not handle a significant volume of arbitrations.

Although as yet untested, it is anticipated that the Guernsey court would adopt a similar approach as outlined by the Privy Council in Sian Participation, finding that liquidation applications are not subject to the stay provisions outlined in section 6 of the Guernsey Law, as such proceedings are not directly related to the claim for monies owed. Liquidations, whereby the Royal Court exercises its supervisory jurisdiction, would fall outside the confines of any arbitration agreement between the parties. Finally, the judgment in Sian Participation outlined that the policies underlying the arbitration legislation which implement the Model Law are not offended or infringed by a party to an arbitration agreement who seeks the liquidation of a debtor party which fails to pay a debt. While this was in the context of the BVI legislation, because the Guernsey Law is modelled on the Model Law, the ratio of the Board in Sian Particiaption would be difficult for the Guernsey courts to depart from.

Singapore

Chapter authored by Herbert Smith Freehills Prolegis.

Overview

Singapore presently follows the traditional approach in Salford Estates. The threshold test is whether, on a prima facie basis, there is a valid arbitration agreement between the parties, and the dispute falls within the scope of that agreement, as opposed to whether there are genuine and substantial grounds for disputing the debt (i.e. the formulation of the test in Sian Participation).

Hence, under prevailing Singapore law, where a dispute is governed by an arbitration agreement, and the defendant disputes the debt or raises a cross-claim arising out of such a contract, the insolvency court will consider whether:

• the arbitration agreement appears prima facie to be valid;
• the dispute or cross-claim appears prima facie to fall within the scope of the arbitration agreement; and
• the defendant is abusing the court's process by raising the dispute or cross-claim.

These are known as the "AnAn requirements", from the decision in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co).

If the AnAn requirements are satisfied, then the insolvency court will ordinarily dismiss the winding up application, or, in exceptional circumstances, grant a stay of the winding up proceedings. This is consistent with the principle of party autonomy – i.e. where the parties had agreed to a method of dispute resolution, it should be upheld, and the insolvency court should not allow a creditor to bypass the arbitration agreement by presenting a winding up application in an attempt to get the court to resolve their disputes.

The AnAn requirements have recently been endorsed by Singapore's highest court in a case decided in November 2023. Per the Founder Group decision, the steps to be taken by the Singapore insolvency court in winding up applications where a debtor's liability is disputed or contested may be summarised as follows:

• where there is no arbitration agreement, and where the facts and the liability are heavily contested, and cannot be summarily disposed of, the insolvency court should dismiss, or exceptionally, stay, the winding up application;
• where there is no arbitration agreement, and where the insolvency court is satisfied that no triable issues have been raised, then the winding up application may be granted; and
• where the dispute in question is governed by an arbitration agreement, the defendant may apply for the court proceedings to be stayed to compel the dispute to be referred to arbitration.

A stay will typically be granted if the court is satisfied on a prima facie basis that there is a valid arbitration agreement between the parties, and the dispute falls within the scope of that agreement.

The AnAn requirements are relevant to a creditor's standing to present a winding up petition

The AnAn requirements do not apply solely to whether a winding up application may be granted. The requirements also directly impact whether a creditor has standing to present the application in the first place.

In Founder Group, the Singapore Court of Appeal expressly clarified that a claimant who relies on a disputed debt that is subject to arbitration cannot claim to have status as a creditor. It is only when the debt has been established by way of arbitration, and remains unsatisfied, that the insolvency regime is engaged.

Hence, where a debt is subject to a dispute that falls within the scope of an applicable arbitration clause, the claimant cannot be considered to be a creditor of the defendant until that dispute has been resolved by arbitration in the claimant's favour. Until then, the claimant will have no standing to even present a winding up application as a creditor in the first place.

The AnAn requirements will not be applied in a vacuum

However, as shown in the Founder Group decision, the existence of an arbitration clause does not guarantee that pending winding up proceedings will be dismissed or stayed. In a very narrow set of facts in Founder Group, the respondent had sought to rely on the arbitration clauses while simultaneously maintaining that the contracts (that contained the arbitration clauses) were null and void.

This is not permissible under Singapore law, and accordingly, Singapore's Court of Appeal was satisfied that the respondent could not invoke the arbitration agreement in these circumstances and the AnAn requirements therefore did not apply at all. It would be an abuse of process for the debtor to adopt an inconsistent position in the same or related proceedings in the absence of a clear and / or convincing reason to do so.

The Singapore insolvency court therefore retains a high level of discretion to undertake a fact-sensitive exercise where the very applicability of the arbitration clause is in issue.

The AnAn requirements will apply in applications for Fortuna injunctions

A Fortuna injunction – derived from the Australian case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation – is an order from the insolvency court prohibiting or restraining a creditor from filing and presenting a winding-up petition against the alleged debtor.

Where a dispute is raised by a debtor in these circumstances, and the debt is prima facie subject to an applicable arbitration agreement, the Singapore insolvency court will be in favour of granting an injunction restraining the commencement of winding-up proceedings. Such an injunction may be subject to conditions, for example, that it last only until the end of pending arbitration proceedings.

The impact of Sian Participation in Singapore

In Sian Participation, the Privy Council considered what test a court should apply in exercising its discretion whether to make a liquidation order under BVI law (similar to an order for winding up in Singapore) where the debt concerned is subject to an arbitration agreement.

The Sian Participation decision has not yet been applied in Singapore. As of the date of writing, no test case has arisen for the Singapore Court's contemplation. Moreover, Founder Group is a very recent decision of Singapore's apex court which affirms the continued application of the AnAn requirements. Accordingly, it is not clear whether the Singapore courts will so easily adopt the reasoning in Sian Participation, although the Privy Council's reasoning may undeniably be persuasive in any future reconsideration by the Singapore courts of the AnAn requirements.

It should further be noted that, in December 2024, the Singapore International Arbitration Centre (SIAC) released for public consultation a draft of the new SIAC Insolvency Arbitration Protocol.

The Draft Protocol contemplates, among other things, that parties can opt in to an expedited and time-efficient six month arbitration procedure for the resolution of disputes relating to insolvency proceedings. The SIAC appears to be the first international arbitration institution to propose the use of an arbitration protocol for the resolution of insolvency-related disputes and claims.

The Protocol is still in draft form and is not final at this stage. Depending on its implementation, the SIAC may, in time, prove to be a suitable and cost-efficient forum for the adjudication and resolution of insolvency-proceeding related disputes governed by arbitration clauses.

England and Wales

Chapter authored by Herbert Smith Freehills.

Overview

Under the law of England and Wales, where a winding-up petition is made based on a debt subject to an arbitration agreement, the courts will only stay or dismiss the petition in favour of arbitration if the debt is genuinely disputed on substantial grounds.

This current position was established by the recent decision of the Privy Council in Sian Participation. This now represents the law of England and Wales and overturns the earlier decision of the Court of Appeal in Salford Estates, the Privy Council having expressly determined so by making a so-called Willers v Joyce order in the course of its decision in Sian Participation.

This change provides for harmonisation of the position under English law as regards both jurisdiction and arbitration clauses and with the laws of other common law jurisdictions, including the BVI.

The applicable statutory regime in England and Wales

At the highest level, the interplay between arbitration and insolvency under the law of England and Wales is reflected in the Insolvency Act 1986 and the Arbitration Act 1996.

While the court has the discretion to wind up a company under section 122(1) of the Insolvency Act 1986 on the grounds of commercial insolvency (i.e. the company cannot pay its debts as they fall due), parties are also free to agree that their disputes should be resolved by arbitration under the Arbitration Act 1996 – including disputes as to debts upon which a winding up petition may be based.

The latter public policy is underwritten by section 9 of the Arbitration Act 1996, under which a party to an arbitration agreement against whom legal proceedings are brought may apply to the court for a mandatory stay of those legal proceedings in respect of matters subject to that agreement.

Friction between the insolvency and arbitration regimes

No conflict arises between the insolvency and arbitration regimes where a debt is undisputed because there is no dispute that needs to be resolved by arbitration. Similarly, no conflict should arise in respect of disputed debts, because a disputed debt is not good evidence of insolvency for the purposes of a winding up petition until the dispute is resolved and liability is established.

The key question is therefore when a debt can be said to be disputed and where the line should be drawn between the insolvency and dispute resolution processes.

In circumstances where there is no arbitration agreement (e.g. where the parties include an exclusive jurisdiction clause in favour of foreign or domestic courts), the question depends on whether the debt is genuinely disputed by the debtor on substantial grounds. If this threshold is met, the winding up petition will generally be dismissed. Conversely, if it is not met, the insolvency regime takes precedence and a winding up petition is highly unlikely to be stayed or dismissed by the court.

Traditionally, however, the position was different where disputes were subject to an arbitration agreement.

The previous position: a winding-up petition would be stayed where the debt is not admitted

Under the now-overturned case of Salford Estates, where a debt was subject to an arbitration agreement, the English courts would routinely exercise a discretionary stay or dismissal of a winding up petition if the debt concerned was simply denied or not admitted. Non-admission by the debtor was sufficient to constitute a dispute that should be referred to and resolved by arbitration, regardless of the substantive merits of any defence. This low threshold was thought to be consistent with the legislative policy of the Arbitration Act 1996 of holding parties to their agreement to arbitrate.

The decision in Salford Estates was based on the court's inherent discretion under section 122(1) of the Insolvency Act 1986, rather than on a mandatory stay under section 9 of the Arbitration Act 1996.

Salford Estates in fact acknowledged that winding up petitions do not fall within the scope of section 9 of the Arbitration Act 1996 at all. They are not legal proceedings by a creditor against a debtor and do not determine questions of liability or quantum as to the debt between them. Rather, winding up petitions are instead intended to prove the debtor's insolvency (of which the debt is evidence) and initiate a broader insolvency process to divide the debtor's assets fairly between all creditors.

Although based on the court's discretionary powers under section 122(1), the court's decision in Salford Estates was tantamount to requiring a mandatory stay of any winding up petition where the debt concerned was subject to an arbitration agreement and merely not admitted by the debtor.

Sian Participation: a winding up petition will be stayed only if the debt is disputed on genuine and substantial grounds

In Sian Participation, the Privy Council revisited this issue and considered what test a court should apply in exercising its discretion whether to make a liquidation order under BVI law (equivalent to an order for winding up in England), where the debt concerned is subject to an arbitration agreement.

As noted earlier in this paper, the Privy Council held that Salford Estates was wrongly decided and that the correct test is whether the debt is genuinely disputed on substantial grounds. To this end, the Privy Council made a Willers v Joyce order that Sian Participation, insofar as it holds that Salford was wrongly decided, now represents the law in England and Wales.

The court held that there was no principled reason why a lower threshold should apply to determine whether debts subject to arbitration are disputed as against the standard that English law applies to disputed debts in other contexts. The Privy Council emphasised that section 9 of the Arbitration Act 1996 does not apply to winding up petitions and so the parties could have no expectation of a mandatory stay being issued simply because the parties have agreed to arbitrate. A winding up petition per se therefore does not infringe on party autonomy or the contractual obligation to refer disputes to arbitration. Neither does it contravene any policy underlying the Arbitration Act 1996, the boundary of which is drawn by the mandatory stay provision in section 9. It was held that the court in Salford had erred in assuming that the policy underlying the Arbitration Act 1996 was more expansive than the terms of section 9.

One potential area of uncertainty is that the Privy Council stressed that its decision applied in circumstances where there is a "generally worded arbitration agreement" and left open the possibility of a different outcome if an arbitration agreement is framed in terms that apply specifically to a creditor's winding up petition. It is not entirely clear how this would apply in practice, but does appear to leave open the possibility of parties expressly agreeing to alter the threshold for disputed matters in arbitration agreements.

Genuine and substantial grounds likely to require a rational prospect of success

A stay will therefore now be granted on a winding up petition based on a debt subject to an arbitration agreement only if the debt is genuinely disputed on substantial grounds. This likely requires a rational prospect of success and not merely a "cloud of objections".

Hong Kong

Chapter authored by Herbert Smith Freehills.

Overview

The latest Hong Kong position was established in 2023 in the Hong Kong Court of Final Appeal (HKCFA) decision in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP21 (Guy Lam), as subsequently clarified by a pair of decisions from the Hong Kong Court of Appeal (HKCA) in April 2024.

Pursuant to the Hong Kong approach, if the contract under which the debt allegedly arises is subject to an arbitration or exclusive jurisdiction clause (EJC), the court has a discretion to determine whether to exercise or decline its jurisdiction over the disputed debt based on a "multi-factorial approach". Absent any "countervailing factors", such as where the dispute borders on the frivolous or an abuse of process, the parties' agreement will generally be respected and upheld by the Hong Kong courts.

The previous position: conflicting authorities on whether an arbitration agreement would be upheld in winding up proceedings

The debate first arose in Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd (Lasmos) in 2018. In that case, the Hong Kong Court of First Instance (HKCFI) held that where a debtor company disputes the underlying debt and takes steps to commence arbitration in accordance with the contractually mandated dispute resolution process, the court should generally pay deference to arbitration and not grant any winding up orders. Under the Lasmos approach, the court retains a discretion to make a winding up order in very exceptional circumstances, such as where there is a risk of misappropriation of assets. This case marked a clear departure from the historically established approach that the debtor would be required to demonstrate a bona fide dispute of the petition debt on substantial grounds.

The Lasmos approach was, however, controversial and was not universally followed in later HKCFI decisions.

Subsequently, in May 2023, in an analogous context involving a foreign EJC and a bankruptcy petition, the HKCFA held in Guy Lam that where the underlying debt is subject to a foreign EJC, absent countervailing factors such as the risk of insolvency affecting third parties, a dispute that borders on the frivolous, or abuse of process, the effect of the EJC should be upheld. Nonetheless, the HKCFA left open the question of whether these principles apply equally where the debt is subject to an arbitration agreement.

Different HKCFI judges have since expressed different views on how to deal with arbitration clauses in the context of a winding up petition, leading to conflicting authorities on this important question.

The current position: the test to winding up seems higher and is based on a multi-factorial approach

Following the twin decisions of Re Simplicity & Vogue Retailing (HK) Co Limited (Re Simplicity, in which our firm acted for the successful petitioner),24 and Re Shandong Chenming Paper Holdings Limited (Re Shandong Chenming), which both came out in April 2024, the HKCA has now clarified that the approach in Guy Lam applies equally where a debtor opposes a winding up petition on the basis of a defence or claim being subject to an arbitration agreement.

As a starting point, the parties' arbitration agreement should be respected and upheld. In other words, the court in exercising its discretion should decline jurisdiction on the petition debt (including the jurisdiction to determine whether there is a bona fide dispute of the debt on substantial grounds).

However, this is subject to a residual discretion of the court to assume jurisdiction and determine the relevant defence or claim where it considers there to be "strong reasons" or "countervailing factors" at play. Prime examples of such countervailing factors are where the debtor's defence or claim is frivolous or an abuse of process, or where there is a risk of the debtor’s insolvency affecting third parties. In considering the relevant "countervailing factors", the HKCA also made clear that the examples given by the court are non-exhaustive and will be assessed on a case-by-case basis.

In addition, the third requirement laid down in Lasmos continues to be relevant, such that debtors are also required to demonstrate a genuine intention to arbitrate, including taking steps to commence the contractually mandated dispute resolution process under the arbitration clause, rather than just raising an arbitration clause as a tactical move.

The recent development in Sian Participation

The position in England and Wales and in the BVI has since diverged from the Hong Kong position.

As noted already in this paper, the Privy Council held in Sian Participation that the court will stay or dismiss a winding up petition in favour of arbitration only if the debt is genuinely disputed on substantial grounds (in contrast to the starting point in Hong Kong that the parties’ arbitration agreement should ordinarily be respected and upheld). However, as a matter of stare decisis, Sian Participation is not binding on the Hong Kong courts.

This has been confirmed by the HKCFI in Re Mega Gold Holdings Ltd, where the court observed that there is a stark difference between the approach taken by the Privy Council and that adopted by the Hong Kong courts. It remains to be seen whether the HKCFA will adopt the test in this Privy Council decision if and when a further opportunity arises for it to reconsider the matter.

The path forward in Hong Kong

Given the current approach's strong focus on taking all circumstances into account, and the fact that it is relatively new, there remains some uncertainty on what kind of "countervailing factors" would be sufficient to tip the balance and lead to a successful winding up petition in Hong Kong despite an arbitration clause or an EJC.

It will also be interesting to see what the Hong Kong courts will find to be a defence or claim "which borders on the frivolous or an abuse of process" – and how that may be different in practice from the lack of bona fide substantial grounds.

Thailand

Overview

Chapter authored by Herbert Smith Freehills.

The legal system of Thailand is fundamentally a civil law system. The criteria for consideration primarily rely on statutory law, with the Supreme Court's judgments serving as a precedent to interpret laws in lower and subsequent court cases.

Petition for bankruptcy against a debtor under Thai law

The interplay between arbitration and bankruptcy under Thai law is governed by the Arbitration Act B.E. 2545 (2002) (Arbitration Act) and the Bankruptcy Act B.E. 2483 (1940) (Bankruptcy Act) of Thailand. In particular, Thai law has established criteria for creditors to file an application for bankruptcy against debtors in section 9 of Bankruptcy Act, only if:

• the debtor becomes insolvent;
• the debtor who is a natural person is indebted to one or more plaintiff creditors in an amount of not less than one million Baht or the debtor who is a juristic person is indebted to one or more plaintiff creditors in an amount of not less than two million Baht; and
• the definite amount of such debt is determinable, whether it becomes due forthwith or at a future date.

If the above criteria are satisfied by the court, the court shall issue "an absolute receivership order" against the debtor. Upon the court’s receivership order against the debtor, the Official Receiver is empowered to:

• manage and dispose of the debtor's property, collect and receive money or property which the debtor is entitled to receive form other persons, and conclude, compromise or institute any action or defend in an any action in connection with the debtor's property; and
• join all civil actions concerning the debtor’s property pending in court at the time of the receivership order and the court, upon the Official Receiver’s application by motion, has the power to order a stay of such civil action or order otherwise, as it deems appropriate.

In addition, upon the court’s receivership order against the debtor, a creditor in Thailand may request payment of a debt only by applying to the Official Receiver within two months as from the date of the publication of the absolute receivership order, although the creditor is a judgment creditor or a creditor who has instituted a civil action which remains under trial.

Validity of the arbitration agreement

The validity of the arbitration agreement is confirmed in section 12 of the Arbitration Act, which determines that "the validity of the arbitration agreement and the appointment of arbitrator shall not be prejudiced, even if any party thereto is dead, or ceases to be a juristic person, or against whom an absolute receivership order has been issued against his property, or has been adjudged incompetent or quasi-incompetent."

However, section 12 of the Arbitration Act is not an exception to the principle regarding debt recovery under bankruptcy law, but rather a provision concerning the validity of arbitration agreements and the establishment of arbitration, affirming that these agreements remain valid even if subsequently one party is subject to an absolute receivership order (as precedent in the Supreme Court Judgment Nos. 7082-7083/2558).

Interplay between bankruptcy and arbitration proceedings

To analyse this issue, it is worth considering the following two scenarios, where a creditor initiates arbitration proceedings against a debtor according to the arbitration agreement, before filing an applicant for a bankruptcy order against the debtor.

(1) The debt claimed in the bankruptcy case is the same amount as the dispute under arbitration

Presuming that the criteria under sections 9(1) and 9(2) of the Bankruptcy Act are satisfied, the court will not grant the petition of the creditor (the claimant in the arbitration) for a bankruptcy order because as long as the arbitral tribunal does not issue the final award, the disputed amount under the arbitration could not regarded as the determinable debt under section 9(3) of the Bankruptcy Act (as precedent in the Supreme Court Judgment Nos. 5525/2552 and 5618/2559).

(2) The debt claimed in the bankruptcy case is not the same amount as the dispute under arbitration, or other creditors (not the claimant in arbitration) apply for a bankruptcy order against the debtor (the respondent in arbitration).

The court could render an absolute receivership order, provided that the legal criteria under section 9 of the Bankruptcy Act are achieved. If the court issues the absolute receivership order against the debtor, the Official Receiver will be empowered to take control all the debtor's properties and join the pending arbitration. The Official Receiver may request the arbitral tribunal to suspend proceedings temporarily or proceed with the case on behalf of the debtor if it is deemed more beneficial for managing and collecting the debtor's assets (as precedent in the Supreme Court Judgment No. 278/2562).

Conclusion

It is evident that different jurisdictions have adopted very different approaches when considering the interplay between arbitration and insolvency, and this is an evolving area of the law. The guidance provided by the Privy Council in Sian Participation and FamilyMart has offered some clarity on the position in various jurisdictions and is a welcome development. It remains to be seen, however, whether other jurisdictions will adopt the same approach when future cases arise for consideration.