Privy Council Clarifies When Arbitration Can Delay Liquidation: Sian Participation Corp v Halimeda International Ltd [2024]

In a significant ruling with implications for businesses, creditors, and legal practitioners alike, the Privy Council has provided guidance on the intersection of arbitration clauses and insolvency proceedings.

The decision in Sian Participation Corp v Halimeda International Ltd [2024] redefines the boundaries between contractual arbitration rights and statutory insolvency remedies, making it clear that winding-up petitions will not automatically be derailed by the mere existence of an arbitration agreement.

Background: Arbitration and Insolvency – A Legal Tug of War

This area of law has long been marked by tension. A company facing a winding-up petition based on unpaid contractual debt may rely on an arbitration clause to argue that the matter must first be referred to arbitration, asserting that the debt is “disputed.” This tactic often served to delay or derail liquidation, regardless of whether the dispute had real substance.

Following Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575, courts generally declined to examine the merits of the alleged dispute if it fell within the scope of an arbitration agreement, staying or dismissing winding-up petitions even where the dispute appeared insubstantial or tactical.

What the Privy Council Decided

In Sian Participation, the Privy Council sought to recalibrate this balance. It held that courts are not bound to stay or dismiss winding-up petitions simply because there is an arbitration clause in the underlying agreement. Instead, the court must ask a fundamental threshold question:

Is there a real, genuine, and substantial dispute as to the existence or amount of the debt?

If no such dispute exists, the presence of an arbitration clause is irrelevant; the court may proceed with the winding-up petition.

Crucially, this decision distinguishes between genuine disputes and mere procedural manoeuvres. Judges are encouraged to conduct a limited, fact-based inquiry into whether the alleged dispute has real substance.

As a result, a debtor seeking to invoke arbitration must now demonstrate a credible and substantive challenge to the debt in addition to a valid arbitration agreement between the parties. Bald assertions or tactical references to arbitration will no longer suffice.

Implications for England and Wales

While Privy Council decisions are generally not binding on English and Welsh courts, Sian Participation is an exception. The case originated in the BVI, however, the Privy Council was interpreting English law (as the governing law of the arbitration clause) and made an authoritative declaration of English law on that basis. In doing so, it expressly held that the previous leading authority, Salford Estates adopted the wrong approach, and that the correct position is now as set out in Sian Participation. English courts are expected to follow it as an authoritative statement of the law of England and Wales.

Key Takeaways from Sian Participation

• Arbitration clauses do not automatically bar winding-up petitions.
• Courts must assess whether there is a real, genuine, and substantial dispute.
• Debtors cannot rely on arbitration clauses to delay or frustrate legitimate debt recovery.
• Bald or tactical references to arbitration will not suffice; there must be a credible defence.

Saunders Law regularly advises on complex debt disputes, as well as advising on arbitration clauses, and winding-up proceedings. If you or your company needs specialist legal guidance in this area, our commercial litigation team is here to assist.