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TM
MEALEY’S
International
Arbitration Report
The Remedy For Non-payment Of A Contractual
Debt: Arbitration Or Winding Up? Conflicting
Approaches Taken By The Courts Of The UK,
Cayman Islands And The BVI
by
Jeremy Walton
and
Anna Gilbert
Appleby
Cayman Islands
A commentary article
reprinted from the
September 2015 issue of
Mealey’s International
Arbitration ReportMEALEY’S International Arbitration Report Vol. 30, #9 September 2015
Commentary
The Remedy For Non-payment Of A Contractual Debt: Arbitration Or
Winding Up? Conflicting Approaches Taken By The Courts Of The UK,
Cayman Islands And The BVI
By
Jeremy Walton
and
Anna Gilbert
[Editor’s Note: Jeremy Walton is a partner of leading debt, even where the creditor’s petition relies on a dis-
offshore law firm Appleby, and head of its Dispute Resolu- puted debt which is subject to an arbitration clause.
tion Group in the Cayman Islands. He is a member of the However, the agreement to arbitrate is not irrelevant.
Chartered Institute of Arbitrators and Chairman of its The Court of Appeal stressed that the courts have dis-
Cayman Chapter. Anna Gilbert is a senior associate cretion to wind up a company under section 122(1)(f)
within Appleby’s Dispute Resolution Group in the Cay- of the Insolvency Act 1986 (Insolvency Act) and in
man Islands and a member of the Chartered Institute of circumstances where a disputed debt falls within the
Arbitrators. Any commentary or opinions do not reflect the scope of an agreement to arbitrate, it would be only
opinions of Appleby’s or LexisNexis, Mealey’s. Copyright in wholly exceptional circumstances that the court
# 2015 by Jeremy Walton and Anna Gilbert. Responses would not stay or dismiss the petition.
are welcome.]
This decision represents an interesting departure from
What happens when a creditor petitions to wind up a earlier English decisions, where the court had held that
company for the non-payment of a contractual debt in such circumstances, the mandatory stay provisions in
and the company disputes both the debt and also the section 9 of the Arbitration Act are engaged, and also
jurisdiction of the court to wind up the company on the the trend established by the courts of the Cayman
basis that the debt, on which the petition is based, arises Islands and the British Virgin Isles (BVI) to retain the
out of a contract containing an arbitration agreement? power to decide whether there is a genuine and sub-
In such circumstances, should the petition be stayed in stantial dispute (the test for determining whether to
favour of arbitration, either as a matter of course or strike out the petition), even though the courts would
subject to the court’s discretion, and/or should the not go on to resolve such dispute. The conflicting
court consider the underlying dispute and its adequacy approaches raise interesting public policy issues, and
as a basis for winding up before deciding whether or not there is clearly a tension between the court upholding
to proceed? the primacy of an agreement to arbitrate and the court’s
exclusive statutory jurisdiction to determine winding
In the recent decision of Salford Estates (No.2) Ltd v up petitions.
Altomart Ltd [2014] EWCA 1575 Civ, the English
Court of Appeal held that the mandatory stay provi- The Recent English Decision Of Salford Estates
sions imposed by section 9 of the English Arbitration (No.2) Ltd v Altomart Ltd
Act 1996 (Arbitration Act) do not apply to a winding In Salford Estates, Altomart was the lessee of commercial
up petition based on a company’s inability to pay its premises in Salford Shopping Centre, which was owned
1Vol. 30, #9 September 2015 MEALEY’S International Arbitration Report
by the lessor, Salford Estates; the lease agreement con- At first instance, Judge Bird stayed the petition, follow-
tained an arbitration clause. A dispute arose as to ing the English decisions of Rusant Limited v Traxys Far
whether Altomart was required to pay certain charges East Limited [2013] EWHC 4083 and Halki Shipping v
under the lease agreement, and this was referred to Sopex Oils [1997] EWCA Civ 3062.
arbitration; the arbitrator held that charges in the sum
of £64,431.79 were payable. The sums due under the In Rusant, Warren J had restrained the presentation of a
Award were not paid immediately, and Salford Estates petition based on an alleged debt, even though there
presented a winding up petition on the ground that was no bona fide defence: it was held that the arbitra-
Altomart was unable to pay its debts for (1) tion agreement and section 9 trumped the decision he
£64,431.79 due under the Award, and (2) the further would otherwise have made to dismiss the application
sum of £22,747.22 due relating to a later period, which to restrain the petition. In Halki Shipping, the Court of
was said to follow from the reasoning in the Award. Appeal held that when a claim is not admitted as being
due and payable, there is a ‘‘dispute’’ for the purposes of
The petition was presented under section 122(f) of the
the Arbitration Act. Therefore, unless the arbitration
Insolvency Act, which provides that a company may be
agreement is null and void, inoperative or incapable of
wound up by the court if it is unable to pay its debts. An
being performed within section 9(4) of the Arbitration
equivalent provision is found in section 92(d) of the
Cayman Islands Companies Law (2013 Revision) and Act, the court must grant a mandatory stay of the peti-
section 162 of the BVI Insolvency Act 2003. Altomart tion in favour of arbitration proceedings.
paid the sum of £64,431.79, but disputed that the
further sum of £22,747.22 was payable and argued Following this approach, a court would not be required
that the dispute needed to be referred to arbitration. to determine whether the debt is disputed on bona fide
and substantial grounds: the mere raising of a defence or
Altomart applied to strike out the petition on a number dispute would be sufficient to engage the mandatory
of grounds including that (1) the debt which was the stay provisions in section 9, and the dispute must there-
subject of the petition was subject to a genuine dispute fore be referred to arbitration. Following Henry LJ’s
on substantial grounds, and (2) the petition was in any approach in Halki Shipping, this would even extend to
event liable to be stayed pursuant to section 9 of the a situation where the party who is required to pay the
Arbitration Act, which provides that: alleged debt simply does nothing; this would be treated
as a dispute which must be referred to arbitration.
‘‘9(1) A party to an arbitration agreement against whom
legal proceedings are brought (whether by way of claim On appeal, Salford Estates sought to argue that a wind-
or counterclaim) in respect of a matter which under the ing up petition based on an inability to pay a debt should
agreement is to be referred to arbitration may (upon not be stayed pursuant to section 9 of the Arbitration
notice to the other parties to the proceedings) apply to Act, on the basis that a winding up petition is not ‘‘arbi-
the court in which the proceedings have been brought
trable’’, or in the alternative it is not a ‘‘claim’’ within
to stay the proceedings so far as they concern that
section 9.
matter.
The Chancellor, Sir Terence Etherton, gave the leading
....
judgment in the Court of Appeal and held that section 9
9(4) On an application under this section the court did not apply to a petition presented on the ground of
shall grant a stay unless satisfied that the arbitration an inability to pay a debt for a different reason: non-
agreement is null and void, inoperative, or incapable payment of a debt is only evidence of the company’s
of being performed.’’ inability to pay. Furthermore, the wording of section
9(1) refers to a ‘‘claim or counterclaim’’ and the petition
Equivalent provisions are found in section 9 of the was not a claim for payment of the debt.
Cayman Islands Arbitration Law (2012 Revision)
(Arbitration Law) and section 9 of the BVI Arbitration Etherton C gave three further reasons as to why section
Act 2013. 9 did not apply to a petition based on an unpaid debt:
2MEALEY’S International Arbitration Report Vol. 30, #9 September 2015
(1) the making of a winding up petition need not result This decision was recently followed in the English deci-
in an order for payment of the petitioner’s debt, (2) by sion of Eco Measure Market Exchange Ltd v Quantum
contrast with a ‘‘claim’’ for a debt, it is an abuse to Climate Services Ltd (unreported, 18 May 2015) which
present a winding up petition to put pressure on the held that the guidance in Salford Estates made clear that
company to pay a genuinely disputed debt, and (3) if the court should, save in exceptional circumstances,
the winding up petition alleges non-payment of more exercise its discretion under section 122 of the Insol-
than one debt, and only some of those debts are subject vency Act to dismiss any petition where the disputed
to an agreement to arbitrate, then the mandatory stay debt arises from a contract containing an arbitration
imposed by section 9 is unworkable. Etherton C used clause.
the latter example as a reason why Parliament could not
Approach Taken By The Courts Of The Cayman
have intended to fetter the jurisdiction of the court to
Islands And The BVI
wind up companies in the public interest where com-
In 2011, the Cayman court took a pro-arbitration
panies are not able to pay their debts, by automatically
approach in the decision of In the Matter of Times
requiring a mandatory stay of those proceedings. Ether-
Property Holdings Limited [2011] CILR 223. A creditor
ton C distinguished cases where the relief sought in the
petitioned to wind up the company; the company
petition was on unfair prejudice grounds, on the basis
(represented by the writers) disputed the debt and
that those types of cases were essentially private disputes
argued that the petition should be stayed in favour of
in relation to the affairs of a solvent company which
arbitration proceedings which were underway in Hong
therefore neither engaged any public policy objective of
Kong to determine the company’s indebtedness to the
protecting the public, where a company continues to
company. Although Foster J was satisfied that there was
trade but is unable to pay its debts as they fall due, nor
a substantial dispute, he stayed the petition, his primary
involved a class remedy for the company’s creditors.
reason being: ‘‘it is not appropriate for this Court, even if
However, the agreement to arbitrate was not irrelevant. minded to do so, to deprive the Company of putting its case
Etherton C found that the court has a discretionary and pre-judging the issue by seeking to determine the Com-
jurisdiction to stay a winding up petition pursuant to pany’s dispute of the alleged indebtedness has not real sub-
section 122(1) of the Insolvency Act, and it would be stance. It seems to be that that question is for the arbitral
wholly exceptional to not take into account the legisla- tribunal in Hong Kong. . . .’’ Foster J commented that in
tive policy of the Arbitration Act in exercising this dis- circumstances where the parties have expressly agreed
cretion. In Halki Shipping, in which the plaintiff applied between them that a dispute is to be resolved in a
under Order 14 for summary judgment relief, the court particular forum by a particular tribunal, it was not
had considered that the legislative policy of section 9 was obvious to him why they should not be held to that
to exclude the court’s jurisdiction to give summary judg- agreement. In reaching this decision, Foster J found the
ment. Etherton C held that in those circumstances, it BVI decisions of Sparkasse Bregenz Bank AG: Re Asso-
would be anomalous for the court to conduct a sum- ciated Capital Corporation, BVI Civil Appeal (unre-
mary judgment-type analysis of liability for an unad- ported, 18 June 2003) and Pioneer Freight Futures Co
mitted debt, on which the petition is grounded, where Ltd v Worldlink Shipping Ltd, Samoa (unreported, 1
the parties have agreed to refer any dispute relating to the
July 2009) to be persuasive. In the alternative, Foster
disputed debt to arbitration. Etherton C held that it was
J held that the dispute was clearly disputed on bona fide
correct for the court to either dismiss or stay the petition
so as to compel the parties to resolve their dispute by and substantial grounds.
arbitration, rather than investigate whether the debt was
bona fide disputed on substantial grounds. As discussed below, the Cayman Islands court has since
moved away from the approach taken in the Times
The main difference between the first instance decision Property decision. The recent trend in both the Cayman
and the appeal decision was therefore that the stay is Islands and the BVI is for the court to retain its jurisdic-
discretionary, rather than mandatory, and the discre- tion to determine, in the winding up, whether there is a
tion arises from the Insolvency Act, rather than the genuine and substantial dispute in relation to the debt,
Arbitration Act. and therefore its adequacy as a basis for winding up.
3Vol. 30, #9 September 2015 MEALEY’S International Arbitration Report
The next case to consider this issue in the Cayman referred to his reasoning in Times Property, and the BVI
Islands was Re Duet Real Estate Partners 1 LP (unre- decision of Pioneer Freight on which he had previously
ported, 7 June 2011). In that case, Duet (represented relied, and commented that the BVI court had clearly
by the writers) sought a declaration that there was a considered the dispute in Pioneer Freight to be exclu-
genuine dispute in relation to two debts and sought sively one of law based entirely upon the construction
an injunction to restrain the presentation of a petition of the contract concerned, which was governed by Eng-
based on these alleged debts. The relevant loan agree- lish law: there were no insolvency proceedings under-
ment contained a London arbitration clause and Duet way and no issues of fact to be resolved. Foster J went
had commenced arbitration proceedings. Jones J on to comment that the circumstances in Times Prop-
reviewed the contemporaneous evidence, and found erty were also different and that it was ‘‘clear anyway that
Duet’s arguments as to why there was a substantial in that case, in which there were clearly factual issues, I
and genuine dispute in relation to the debts to be ‘‘thor- gave consideration to whether the company’s grounds for
oughly disingenuous’’ and nothing more than a ‘‘disin- disputing the alleged debt were substantial’’. Foster J con-
genuous delaying tactic’’; Jones J therefore dismissed cluded in Re SRT Capital that there was a substantial
Duet’s injunction application. Jones J did not refer to dispute, which must be resolved by the English courts
the decision of Times Property in his judgment, but he in accordance with English law.
clearly took the view that he was required to determine
whether there was a genuine and substantial dispute, In Huawei Technologies v Hits Africa (unreported, 29
despite the existence of an agreement to arbitrate and November 2013) Quin J expressly adopted the
arbitration proceedings being on foot in London. approach of Foster J in Re SRT Capital, and held that
this was the correct test.
The same approach was taken by Jones J in the later
Cayman Islands decision of In The Matter of Ebullio The most recent decision in the BVI on this point is
Commodity Master Fund L.P. (unreported, 24 May Alexander Jacobus de Wet v Vascon Trading Ltd (unre-
2013). In Ebullio, the petitioner relied upon non- ported, 6 December 2011). Bannister J held that the
payment of sums under shipping contracts; the com- court must first decide whether, on the evidence before
pany (represented by the writers) began an arbitration it, there is a dispute relating to the debt. If the evidence
to determine whether there was a separate oral contract discloses no grounds for challenging the debt, as was the
which would have meant that the sums were not pay- situation in that case, then it is irrelevant that there may
able, on the same day as the petition was presented. be an arbitration clause. Bannister J departed from the
Jones J held that the arbitration clause and existence of approach he had previously taken in Pioneer Freight, in
the arbitration would only come into play if the court which he had declined to decide whether there was a
concluded that there was a bona fide dispute on sub- genuine and substantial dispute where the contract was
stantial grounds. governed by a foreign law and exclusive jurisdiction
clause.
Two further Cayman Islands decisions have favoured
the approach of Jones J in Re Duet and Ebullio, over that What Approach Should Be Followed In The
of Foster J in Times Property; in both of these decisions Future?
the relevant contract, on which the alleged debt was Winding up is a statutory power which essentially ends
based, contained an exclusive foreign jurisdiction the life of a company. It allows for the realization and
clause: thus they raised similar issues. distribution of a company’s assets to discharge its debts,
and the procedure is inherently collective in nature. In
The first decision, Re SRT Capital SPC Ltd (unre- contrast with this, arbitration is a private dispute reso-
ported, 22 November 2013) was decided by Foster J, lution mechanism through which the parties are bound
in which he departed from his earlier approach in Times to resolve any dispute between them. There is clearly a
Property. The company argued that there was a substan- tension between the court’s statutory power to wind up
tial dispute in relation to the debt, but that the dispute a company based on a company’s inability to pay a
about the alleged debt was anyway required to be deter- debt, and the contractual agreement by a party to arbi-
mined by the courts of England as a result of an English trate any dispute in relation to that debt with the
governing law and exclusive jurisdiction clause. Foster J company.
4MEALEY’S International Arbitration Report Vol. 30, #9 September 2015
In the Cayman Islands and the BVI, at present, the an arbitration agreement. The agreement to submit a
court’s power to wind up will generally trump the pri- certain matter to arbitration means that this matter shall
macy of arbitration agreements. The courts of the Cay- not be heard and decided upon by any court, irrespec-
man Islands and the BVI have latterly taken the tive of whether this exclusion is expressed in the
approach that the arbitration clause relates only to the agreement.’’
underlying contract, and its existence does not oust or
otherwise affect the court’s exclusive insolvency juris-
In our view, the approach in Salford Estates seeks to
diction. Where the petition to wind up based on an
bridge the gap between upholding the primacy of the
unpaid contractual debt is disputed, the court can only
wind up the company once it has determined that the agreement to arbitrate, while allowing the court to
dispute is not ‘‘genuine and substantial’’: if it finds that retain its the discretion to wind up a company in wholly
there is a genuine and substantial dispute in relation to exceptional circumstances, despite the existence of an
the debt, then it will not go on to resolve that dispute in arbitration agreement. The main risk of this approach
deference to the arbitration agreement. However, if the is, at discussed above, that arbitration agreements will
court finds that there is no ‘‘genuine and substantial’’ be used as a ruse to delay or frustrate winding up peti-
dispute, it will proceed to wind the company up. tions. This however must be counterbalanced with the
alternative risk, that if the courts do not exercise their
The main arguments for this approach are that the discretion to wind up companies in accordance with the
winding up of insolvent companies, which are unable
legislative policy of the UNCITRAL Model Law, par-
to pay their debts as they fall due, is in the public
ties to arbitration agreements might be encouraged to
interest, and that the legislative intent behind section
9 of the Arbitration Act would not have intended pri- present a winding up petition as a standard tactic to
vate parties being able to prevent the hearing of a wind- bye-pass an agreed dispute resolution mechanism. This
ing up petition, merely because of the existence of an would in turn apply significant pressure on the party
arbitration clause. This approach also certainly meets a defending the debt to immediately pay up, or face the
practical concern that arbitration agreements could burden, often at short notice, to satisfy the court that
otherwise be used to delay or frustrate appropriate sub- the debt is bona fide disputed on substantial grounds.
stantive relief being granted where it is appropriate, or Such an outcome would be entirely contrary to the
could even be used as a ruse to avoid winding up peti- parties’ agreement to arbitrate, and the legislative policy
tions being brought against companies which failed to of the UNCITRAL Model Law.
pay their debts on time.
It has yet to be seen what approach will be taken by the
However, this approach contains an apparent flaw: in
determining whether the debt is properly disputed, the Cayman Islands and BVI courts following the recent
court must essentially undertake a form of merits-based English decision of Salford Estates. English authorities,
assessment of the dispute, which is arguably outside of while highly persuasive in the offshore courts, are not
the court’s jurisdiction, as the parties have agreed that strictly binding. However, in light of the recent English
any dispute in relation to the debt should be resolved by decision, it seems highly unlikely that the courts in the
arbitration. This approach of determining whether Cayman Islands or the BVI would take the approach
there is indeed a ‘‘genuine and substantial’’ dispute that a petition must be stayed on the basis that the
therefore runs counter to the policy of giving absolute mandatory stay provisions in section 9 are engaged.
primacy to arbitration agreements, via the UNCITRAL However, interestingly, the corresponding provisions
Model Law which has been adopted in the UK, Cay-
in the Cayman Islands and the BVI are arguably
man Islands and the BVI (amongst many others). The
broader than section 9 of the Arbitration Act, as they
policy behind the UNCITRAL Model Law is reflected
in a report to the UNCITRAL Commission which do not contain the wording ‘‘claim or counterclaim’’,
explains the policy of this provision in these terms: which was relied upon by Etherton C as one of the
reasons to dis-apply section 9. An argument could cer-
‘‘Article 8(1) [section 9 of the Arbitration Act and Arbi- tainly be made in this regard, but a plaintiff would still
tration Law] deals with an important negative effect of need to address all of the other reasons given by
5Vol. 30, #9 September 2015 MEALEY’S International Arbitration Report
Etherton C as to why section 9 does not apply to a discretionary powers to stay a winding up petition in
petition based on an unpaid debt. order to uphold the parties’ bargain to arbitrate. Arbi-
tration practitioners would no doubt welcome this
In our view, the courts of the Cayman Islands and approach, which would, in practice, prevent the courts
the BVI should be persuaded in the future to follow adjudicating any aspect of disputes which should be
the approach in Salford Estates, to exercise their resolved through arbitration. I
8MEALEY’S: INTERNATIONAL ARBITRATION REPORT
edited by Lisa Hickey
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