Walking the Tightrope Between Agreements to Arbitrate and Winding Up Proceedings: Differing Approaches in Onshore and Offshore Jurisdictions

In recent years, the courts have sought to strike a balance between upholding contractual agreements to refer disputes to arbitration and protecting a party’s statutory rights to wind up a company in court.

While courts in England and Hong Kong generally land on the side of upholding arbitration agreements, the position in BVI and Cayman is not so clear-cut and there is potentially more room for argument.

England and Hong Kong

Under English, Hong Kong, BVI and Cayman law, courts are required (subject to certain conditions) to stay proceedings where a party brings an ‘action’ which is subject to a valid arbitration agreement. An ‘action’ in this context is a private dispute (rather than a dispute falling within the exclusive jurisdiction of the court).

In Salford Estates (No.2) Ltd v Altomart Ltd (No.2) [2015] Ch. 589, the English Court of Appeal held that mandatory stay provisions do not apply to a creditor’s petition to wind up a company on the insolvency basis, as this is a collective remedy for the benefit of all creditors rather than a private claim. It is for the court (not an arbitral tribunal) to determine whether to wind up the company. However, the Court of Appeal went on to hold that courts should exercise their discretion taking account of a party’s forum choice and stay petitions in favour of valid arbitration agreements, save in ‘exceptional circumstances’.

In practice, an English court is therefore likely to stay or dismiss a creditor’s petition where there is a disputed petition debt and a valid arbitration agreement. The Hong Kong courts have recently followed that position in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426.

English courts may also stay a contributory’s petition brought on unfair prejudice or just and equitable grounds if, under the terms of the parties’ arbitration agreement, a tribunal is able properly to deal with the substance of the issues in dispute before the court hears the petition (see Fulham Football Club (1987) Ltd v Richards [2012] Ch. 333). This is so even though a tribunal cannot itself order the winding up of a company, as that jurisdiction is the preserve of the courts.

BVI and Cayman

BVI and Cayman courts have taken a slightly different approach; they will not automatically stay petitions to wind up BVI or Cayman companies (whether on the insolvency basis or on just and equitable grounds) solely because there is a dispute between the parties and a valid agreement to arbitrate.

While the BVI Court of Appeal has agreed with the finding in Salford that courts retain jurisdiction to determine petitions as a collective remedy, they depart from the English approach when exercising the discretion to stay. In C-Mobile Services Limited v Huawei Technologies Co [2015] ECSC J0915-4, the BVI Court of Appeal held that BVI courts should not stay creditors’ petitions in favour of arbitration unless they are satisfied that the debt is disputed on genuine and substantial grounds. BVI courts will not require a creditor to prove ‘exceptional circumstances’ in order to proceed with the petition and will wind up a company if they conclude that there is no bona fide dispute regarding the alleged debt. This approach was followed in Jinpeng Group Limited v Peak Hotels and Resorts Limited [2015] ECSC J1208-4.

The Cayman courts have generally taken the same approach to insolvency petitions but have handed down at least two first instance decisions relating to just and equitable petitions which diverge in approach. In Cybernaut Growth Fund L.P. [2014] (2) CILR 413, Jones J distinguished Fulham on the facts and held that petitions brought on just and equitable grounds that relate solely to the appointment of liquidators (or a winding up) are class remedies which can only be determined by the court. In contrast, more recently, in China CVS (Cayman Islands) Holding Corp (Cause No. FSD 195 of 2018 (IKJ)), Kawaley J followed the obiter position in Fulham and held that such petitions may be stayed where the disputed matters underlying the petition can be properly ‘hived off’ for determination by an arbitral tribunal.

Conclusion

When it comes to petitions on the insolvency basis, the Cayman courts, as with those in BVI, would likely permit the petition to proceed unless they can discern a bona fide dispute on substantial grounds that falls within the ambit of the arbitration clause, in which case the matter would be stayed to arbitration.

Recent decisions of BVI and Cayman courts on applications to stay just and equitable petitions are less clear and, depending on the issues raised and the ambit of disputes put before the court, there remains significant room to manoeuvre for practitioners.

Jurisdictions: 

Partner, Walkers

Partner, Walkers

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