The clash of insolvency and arbitration: Salford Estates overturned

Welcome to the August edition of the R&I Update.

Also in this edition:

English court makes largest ever wrongful trading award against former BHS directors.
Rising tide of winding-up petitions against Chinese property developers.
German court denies the possibility of avoidance against guarantor due to release from guarantee obligation.

The Judicial Committee of the Privy Council (JCPC) has considered the correct test to apply to the exercise of its discretion to wind up a company where the petition debt is subject to an arbitration agreement.

Background

A £226 million petition debt owed by a BVI company was subject to an arbitration agreement. The BVI courts held both at first instance and upon appeal that the debt, although denied, was not genuinely disputed on substantial grounds and therefore could be relied upon in a petition for the compulsory winding up of the appellant.

The appellant argued before the JCPC that the BVI courts should have followed the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) and dismissed or at least stayed the winding-up petition pending arbitration where the debt was disputed even if that dispute was neither genuine, nor based upon any grounds at all, substantial or otherwise.

Decision

The Privy Council dismissed the appeal and held that Salford Estates was wrongly decided and should no longer be followed in England and Wales. The relevant test to establish whether a winding-up petition can be dismissed is whether or not the debt is disputed on genuine and substantial grounds irrespective of the existence of a general arbitration agreement.

Key takeaways

The judgment has aligned the law in England and Wales to the position in the BVI which gives creditors the ability to seek the remedy of liquidation and avoid arbitration where there is no dispute on genuine and substantial grounds.

The JCPC said the underlying policy in relation to arbitration clauses and exclusive jurisdiction clauses is the same although it should be noted that the position may be different in other common law jurisdictions (see our alert from Hong Kong here).