Privy Council revisits the boundary between insolvency and arbitration

In a recent decision, the Privy Council has taken a robust approach in winding up situations where the underlying unpaid debt is subject to an arbitration agreement. Here are the 5 key takeaway points from the decision:

What was the standard practice? Ordinarily, the English courts will stay or dismiss a winding up petition for non-payment of a debt, where the debt in question is disputed on substantial grounds. However, in Salford Estates (No.2)[1], the English Court of Appeal had held that courts were expected to exercise their discretion in favour of a stay of winding up when the underlying debt of a winding-up petition was subject to an arbitration agreement. This was considered necessary to respect the parties’ freedom to choose to resolve their disputes by arbitration. While the English Court of Appeal acknowledged that a creditor’s winding up petition was not itself a claim falling within the arbitration agreement, any argument linked to the underlying debt did so and had first to be resolved before the creditor can rely on non-payment of that debt. Following Salford Estates (No.2), it was the usual practice of the English courts to grant stays, even if the debt was not shown to be genuinely disputed.
What was the Privy Council’s view? The Privy Council in Sian Participation[2] agreed with the English Court of Appeal that the presentation of a creditor’s winding up petition was not a claim, and did not include a claim, falling within the arbitration agreement. However, the Privy Council considered the Salford Estates (No.2) decision to be wrong in requiring a debt which is not seriously disputed but which is subject to an arbitration agreement to be proven through arbitration first, before it can be presented as evidence of a debtor’s inability to pay its debts.
What is the outcome of the Privy Council’s decision? Sian Participation has provided greater certainty and restores the traditional approach that a creditor should be entitled to a winding up order (or to appoint a liquidator) in England and Wales on the ground of insolvency provided the debt is not genuinely disputed on substantial grounds. The Privy Council made it clear that this is the case, regardless of whether the debt is covered by an arbitration agreement (as was the case in Sian Participation), or an exclusive jurisdiction clause (i.e. a clause providing for disputes to be litigated exclusively in a jurisdiction other than that of the insolvency court).
How does this affect future winding up petitions? This decision means that winding up petitions issued in England and Wales will no longer be subject to an automatic stay or dismissal where the debt arises out of a contract subject to an arbitration agreement or exclusive jurisdiction clause. A debtor can no longer avoid being wound up by simply “not admitting” to the debt in question. The test will be whether the debt is genuinely disputed on substantial grounds.
Does this outcome affect the English court's approach to arbitration? The decision in Sian Participation remains consistent with the English courts’ pro-arbitration stance. A stay would still be a possibility if it is demonstrated that there is a genuine dispute in relation to the underlying debt on substantial grounds which would need to be resolved by arbitration. Further, the Privy Council expressly noted that different considerations would apply if the arbitration agreement is drafted to expressly include creditors’ winding up petitions, as opposed to a generally worded arbitration agreement as was the case in both Sian Participation and Salford Estates (No.2).

The decision in Sian Participation has simplified and levelled the playing field by establishing a single test for a stay of a winding up petition irrespective of the dispute resolution mechanism to which the underlying debt is subject. It may perhaps also have added to the attractiveness of arbitration to parties who are likely to be creditors in the underlying transactions. Finance parties in particular might be more willing to include arbitration agreements in facility agreements in the knowledge that the tool of issuing a winding up petition for undisputed debts cannot easily be frustrated.

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