Sian Participation Corp (In Liquidation): Overruling Salford Estates and the potential effect on future jurisprudence in the DIFC and the ADGM Courts

The recent Privy Council decision in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] (SPC) has overturned a principle of English law relating to the interaction between a contractual agreement to arbitrate and traditional insolvency measures where a debt is said to be disputed without substantial grounds. 

The issue in SPC concerned whether the court at first instance in the BVI should have ordered a discretionary stay or dismissed an application to appoint liquidators (the equivalent of a creditor’s winding up petition in England and Wales) because the debt which founded the application was covered by an arbitration clause. 

The Privy Council, on appeal from the Court of Appeal of the Eastern Caribbean Supreme Court, by a judgment of Lord Briggs and Lord Hamblen, rejected the English law authority of Salford Estates (No 2) Ltd v Altomart Ltd (No 2)[i] (Salford Estates).

The Lords ruled that when a creditor issues an application for an appointment of a liquidator, the court will only stay or dismiss that application on the basis of the debt being subject to an arbitration agreement where the debt is genuinely disputed on substantial grounds. The Privy Council also made a direction for the purposes of English law that Salford Estates was wrongly decided and should no longer be followed in England and Wales. 

In this article, we consider the main issues raised in SPC and how it may influence similar matters in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) in the UAE, with particular comment on NMC v Dubai Islamic Bank[ii] (NMC), a case heard by the ADGM Courts in which Salford Estates was followed, and Gauge Investments Limited v Ganelle Capital Limited[iii] (Gauge), a case in the DIFC Courts where Salford Estates was referenced.

SPC: Brief facts

Under a facility agreement (the Agreement), Halimeda advanced a loan of US$140m to SPC. The Agreement included a widely drawn arbitration agreement referring “…any claim, dispute or difference of whatever nature…to arbitration at the LCIA.”  SPC had subsequently failed to repay the loan and Halimeda successfully petitioned for a liquidator to be appointed.

On hearing the petition, the Judge held that SPC had failed to establish that the debt was genuinely disputed on substantial grounds. SPC’s case on appeal was that, following Salford Estates, the application should have been stayed or dismissed on the basis that the debt was disputed regardless of the grounds of dispute, and that it should have been referred to arbitration under the terms of the arbitration agreement between the parties.   

As a matter of BVI law, the issue on appeal in SPC was as follows: what is the correct test for the court to apply to the exercise of its discretion to make an order for the liquidation of a company where there is a dispute over the debt (or a cross-claim) on which the application is based, and that dispute is said to be subject to an arbitration agreement, notwithstanding that the dispute is not on genuine and substantial grounds?

The interplay with the arbitration agreement

Arbitration in the BVI is governed by the BVI Arbitration Act 2013, which has equivalent provisions to the English Arbitration Act 1996, with those laws having as their base the UNCITRAL Model Law on International Commercial Arbitration. Notably, section 9 of the English Arbitration Act provides that a party may apply for a stay of English court proceedings if the claims against it constitute a matter that falls under an arbitration agreement. Section 18 of the BVI Arbitration Act provides that the parties will be directed to arbitration where the matter brought before the court is subject to an arbitration agreement which is valid and capable of being performed. In SPC, the arbitration agreement set out at clause 14.1 of the Agreement states “any claim, dispute or difference of whatever nature arising under, or out of or in connection with this Agreement” shall be referred to arbitration at the LCIA. 

The parties agreed that the application for the appointment of liquidators is not an “action” within the mandatory stay provisions of the BVI Arbitration Act, just as a creditors’ winding up petition in England and Wales is not a “claim” within the same provisions in the English Arbitration Act.  Accordingly, the question related to the court’s application of its discretion to stay or dismiss the application (or petition).

There is common ground between the English approach and that taken by the BVI in that, arbitration clause aside, whether a debt is sufficiently disputed, so as to remove it from the class of unpaid debts sufficient to found a winding up petition, depends upon whether it is genuinely disputed by the debtor on substantial grounds.

Where the approaches differ, is in how widely the courts have exercised their discretion in relation to the stay to enable the definition of a disputed debt to expand, where the debt in question is covered by an arbitration clause.

In Salford Estates, the Court of Appeal in England and Wales had widened the definition of a disputed debt.  In that case the Court decided that although a winding up petition did not invoke the mandatory stay provisions of the English Arbitration Act, the policy underlying the legislation was such that in circumstances where there was an arbitration clause, an application for a stay on that basis would usually be successful unless there were exceptional circumstances to the contrary. The result was that parties must first seek an arbitral award in respect of the debt, whether or not that debt was genuinely disputed on substantial grounds, or simply not admitted without justification. That was very different from the position where there was no arbitration agreement governing the debt in question.

The approach in the BVI has been to reject the broadening of the definition of a disputed debt in this way.  Following the judgment in Jinpeng Group Ltd v Peak Hotels and Resorts Ltd (Jinpeng)[iv], in order for an application for the appointment of liquidators to be stayed or dismissed, the debtor must provide evidence that the debt is disputed on genuine and substantial grounds. 

SPC approved the reasoning in Jinpeng and confirmed that Salford Estates broadened the definition of a disputed debt in matters subject to an arbitration agreement too widely, and was wrongly decided. Accordingly, SPC has narrowed that definition by the Privy Council’s issuance of a Willers v Joyce direction that Salford Estates was wrongly decided and ought no longer to be followed as a matter of English law.  Accordingly, the Companies Court in England and Wales should no longer exercise its discretion to stay or dismiss a creditors’ petition on the ground the petitioner’s debt is covered by an arbitration clause, unless the debt is genuinely disputed on substantial grounds.  

The Privy Council also resolved the parallel issue surrounding exclusive jurisdiction clauses; it held that the underlying policy issues around arbitration clauses and exclusive jurisdiction clauses was the same and accordingly the presence of an exclusive jurisdiction clause applicable to the debt relied on by a petitioner should not lead to the stay or dismissal of the petition unless the debt is genuinely disputed on substantial grounds.

Comparative analysis: ADGM Courts and DIFC Courts 

There are very limited reported mentions of Salford Estates in ADGM and DIFC case law, and no cases (of which we are aware) directly on point as regards the question of a stay of a winding up petition in light of an arbitration clause. However, we have selected three cases of interest for the purposes of providing a broad comparative analysis.  

ADGM

In NMC, although not a winding up petition, the Court considered whether the defendant was able to rely on the arbitration agreement between the parties to stay a claim filed by the Joint Administrators before the ADGM Courts. The Court considered, inter alia: (i) whether the defendant’s propositions were covered by the arbitration agreement; (ii) whether it was reasonably foreseeable that the defendant’s propositions would become issues in the Joint Administrators’ claim unless a stay was ordered; and (iii) whether the defendant’s propositions were arbitral. 

In line with section 16(2) of the ADGM Arbitration Regulations 2015 (which closely follow section 9 of the English Arbitration Act), it was determined that where the above matters were established, the court proceedings should be stayed (on a mandatory basis) unless the Court was satisfied the arbitration agreement was “null and void, inoperative or incapable of being performed”, which it wasn’t and ultimately, the ADGM Court stayed claims by the Joint Administrators against Dubai Islamic Bank in favour of determination by arbitration.  

In his judgment, Justice Sir Andrew Smith stated that: “[u]nder the [ADGM] Arbitration Regulations, the Court has no jurisdiction to give summary judgment on a matter that is covered by an arbitration agreement...”,[v] and referenced Salford Estates following his conclusion that: “[i]t would be inconsistent with the principles governing the [ADGM] Arbitration Regulations for the Court to assess the strength of a parties’ case about a matter that the parties agreed should be referred to arbitration, and the Court will be wary of being drawn into making such an assessment in whatever procedural context the disputed question arises.”[vi] 

This is not inconsistent with SPC, in which the Privy Council stated: “…the process of seeking and obtaining an order for the appointment of a liquidator (or a winding up order in the UK) does not require or involve any pursuit or adjudication of the applicant’s claim to be a creditor, either as to liability or quantum. …If the debt is disputed by the liquidator that dispute may be referred to court or to arbitration…”,[vii] and further, that: “[s]ummary judgment is, as its name implies, a means of resolving a claim by final resolution in a judgment. But the light touch used by the Companies Court [in assessing whether the petitioner’s debt is genuinely disputed on substantial grounds][viii] resolves nothing either way, and does not lead to a judgment or anything similar.”[ix]

As stated, NMC was concerned with a mandatory stay under the ADGM Arbitration Regulations, it was not concerned with the Court’s discretion to order a stay of a winding up petition, however it will be interesting to see what approach the ADGM Courts take once that situation arises.

DIFC

Gauge involved the consideration by the DIFC Courts of a (failed) set-aside application for alleged non-arbitrability and/or conflict with UAE public policy on the premise that the arbitration’s regulatory subject matter (as pleaded by the applicant) was non-arbitrable and in conflict with UAE public policy within the meaning and effect of the DIFC Arbitration Law 2008. The Court’s reference to Salford Estates was made in the context of English policy considerations as regards giving effect to the autonomy of parties to agree to have disputes determined by arbitration rather than in court proceedings, of which Salford Estates was said to demonstrate the readiness of the English Courts to enforce arbitration agreements. The DIFC Court went on to draw a parallel between the English position and the underlying policy of the DIFC Arbitration Law. 

In Lakhan v Lamia[x] (Lakhan), although not directly on point in terms of the underlying context, the policy approach taken by the DIFC Court of Appeal to a stay of DIFC proceedings ordered further to a reference to the Joint Judicial Committee (JJC) (a now historical body which was, until recently, responsible for determining conflicts of jurisdiction between the onshore Dubai Courts and the DIFC Courts) [xi] might be instructive. H.E Justice Shamlan Al Sawalehi ordered a stay at first instance, and in his reasons given for granting permission to appeal the order, he “indicated that he followed the then practice of immediately staying proceedings upon application made to the JJC, under the prevailing understanding of the effect of the [relevant law]”.[xii] However, in his view, an automatic stay on reference to the JJC results in a situation where: “even if there is no genuine dispute as to jurisdiction or if the applicant’s position has no merit whatsoever. If this is what the law requires, so be it. But if the law does not require a stay on DIFC proceedings upon a litigant’s mere application to the JJC, then, in my view, it is time that this practice was abandoned.”[xiii] In setting aside the order staying the proceedings (and therefore lifting the stay), the DIFC Court of Appeal cited H.E Justice Al Sawalehi’s view as reproduced above. 

Accordingly, although remaining respectful of arbitration agreements, in the context of the ‘disputed debt’ threshold test for staying a winding up petition, the DIFC Courts’ approach may be more closely aligned with SPC than Salford Estates.  

Conclusion

Although not bound to follow English law, it will be interesting to see, in light of SPC, how the DIFC Courts will deal with an application to stay or dismiss a winding up petition founded on a disputed debt ordinarily referable to arbitration and in particular, how the DIFC Courts will deal with the ‘disputed debt’ threshold test in light of the decision in SPC, the comments made in Gauge, and the approach taken in Lakhan.

It will similarly be interesting to see how the ADGM Courts will approach the ‘disputed debt’ threshold test in the context of the ADGM Application of English Law Regulations 2015 (as amended) (which mandate that the ADGM Courts will (subject to certain conditions) follow English law) in light of SPC and the Willers v Joyce direction.

 
[i] [2014] EWCA Civ 1575; [2015] CH 589
[ii] [2023] ADGMCFI 0017
[iii] [2016] DIFC ARB-003-006
[iv] BVIHCMAP2014/0025 (8 December 2015) 
[v] ADGMCFI-0006-2021 [89]
[vi] ADGMCFI-0006-2021 [90]
[vii] [2024] UKPC 16 [33]
[viii] [2024] UKPC 16 [96]
[ix] [2024] UKPC 16 [96]
[x] [2021] DIFC CA-001
[xi] Recently replaced by the ‘Judicial Authority for Resolving Jurisdictional Conflicts between the DIFC Courts and the Judicial Bodies in the Emirate of Dubai’, established by Dubai Decree No. 29 of 2024
[xii] [2021] DIFC CA-001 [14] (8 April 2021)
[xiii] [2021] DIFC CA-001 [14] (8 April 2021)