Sian Participation – revisiting the boundary between Insolvency and Arbitration under English Law

In the recent decision Sian Participation v Halimeda (Sian), the Judicial Committee of the Privy Council (the Privy Council) held on a BVI appeal that a winding-up petition should not be stayed or dismissed merely because the underlying debt is subject to a generally-worded arbitration agreement. Although Sian is not binding on English courts, the Privy Council exercised the power conferred under Willers v Joyce (No.2) to declare the previous leading English authority (Salford Estates (No.2)) as wrongly decided; and that its instant decision now represents the position under the law of England and Wales. The English courts are expected to follow the law pronounced by the Privy Council. This means a winding-up petition would not be stayed or dismissed where the underlying debt is subject to a generally-worded arbitration agreement, unless the debt is genuinely disputed on substantial grounds. 

In Salford Estates (No.2), the English Court of Appeal had held that courts were expected to exercise their discretion in favour of a stay when the underlying debt of a winding-up petition was subject to an arbitration agreement. This was considered necessary, because the courts should consider various legislative policies underpinning the Arbitration Act 1996, before deciding whether to exercise their discretion to wind up companies under section 122(1) Insolvency Act 1986. 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. 

The Privy Council in Sian considered that to be wrong because it assumes that parties intended to include winding-up petitions within the scope of their arbitration agreement, in the absence of clear language to that effect. The Privy Council held that a generally-worded arbitration agreement, both in terms of its ordinary meaning and the parties’ objective intention, is unable to encompass winding-up petitions. To hold otherwise would lead to an infringement of parties’ autonomy, because creditors are held to a negative obligation (i.e. not to present a winding up petition), which they did not agree to in the first place. If the winding-up petition is not a matter that falls within the scope of the arbitration agreement, various public policy considerations in support of arbitration (e.g. party autonomy and the principle of holding parties to their agreements) are not relevant in the instant context. Courts are thus not required to exercise their discretion to stay or dismiss a winding up petition, merely because the underlying debt is subject to a generally-worded arbitration agreement. 

Comment

The Privy Council’s judgment exemplifies the complex public policy considerations underpinning insolvency and arbitration law. From insolvency law’s perspective, the decision would enable creditors to wind up an insolvent company without undue delay, which allows creditors to realise the company’s assets as soon as practical. Creditors would in turn have more chance to maximise their recoveries before re-deploying their capital to more economic efficient uses. This flexibility is especially important to creditors when there are many zombie companies in the economy.

From arbitration law’s perspective, despite possible perceptions to the contrary, the decision is consistent with the English courts’ ‘pro-arbitration’ stance over the past few decades. Three aspects of the Privy Council’s judgment in particular illustrate the English courts’ consistent support of arbitration:

• Stays would still be available if it could be shown that there was a genuine dispute as to the underlying debt on substantial grounds, which would be resolved by way of arbitration; 
• The Privy Council expressly confirmed that different considerations may arise if the arbitration agreement were framed in terms which applied to creditors’ winding-up petitions; and
• The Privy Council considered that its conclusion is not ‘anti-arbitration’ in nature because creditors – who often have the stronger negotiating position - would be more willing to include arbitration agreements in facility agreements if they are not prevented from recovering by unmeritorious disputes.  

In addition, Sian provides welcome clarification of the English courts’ likely approach to legal problems sitting at the borderline between insolvency and arbitration. Being one of three Supreme Court and Privy Council decisions on the interplay of arbitration and insolvency over the past year, Sian has further confirmed that courts approach this complex area of law by: (i) ascertaining the scope of the arbitration agreement; and (ii) balancing underlying public policies engaged in the respective fields. This clarification is helpful, because it assists insolvency lawyers and arbitration lawyers to navigate through this difficult and emerging territory of law. 

Various common law jurisdictions (e.g. Hong Kong, Singapore and Malaysia) have adopted a similar approach to that set out in Salford Estates (No.2). It will be interesting to see how the law of these jurisdictions will develop in light of the Privy Council’s decision in Sian.