Sian v Halimedia: Insolvency vs Arbitration – Article by Ernest Leung cited in recent Privy Council decision

In Sian Participation Corp v Halimedia International Ltd [2024] UKPC 16, Lords Briggs and Hamblen considered the issue of whether insolvency proceedings should be stayed where the underlying debt was covered by an arbitration agreement. In an appeal from the BVI, the Privy Council rejected the approach in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 where the English Court of Appeal stated that insolvency proceedings should be stayed in favour of arbitration proceedings unless there are exceptional circumstances (“the Salford Approach”). This means that even if the debtor company could not show that the debt is genuinely disputed on substantial grounds (a relatively low threshold), the petitioning creditor will still have to go through the arbitration process to establish the debt before seeking a winding-up order.

As noted by the Board, the Salford Approach has had a significant impact on the rest of the common law world and has been cited with approval by courts at the highest level; the approach has been adopted in relation to arbitration clauses in Singapore (AnAn Group (Singapore) LTE Ltd v VTB Bank [2020] SGCA 33), and Malaysia (in Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd [2019] MLJU 1365); and the very same approach was adopted in relation to exclusive jurisdiction clauses in Hong Kong recently (Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9).

In the courts of England and Wales, however, whilst the Salford Approach has been followed in relation to arbitration clauses, a different approach has been adopted in relation to EJCs. The Court of Appeal in BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997 held that the presence of an EJC did not preclude the English Court from considering whether the debt was genuinely disputed on substantial grounds. The same course was recently followed by the high court in City Gardens Ltd v Dok82 Ltd [2023] EWHC 1149 (Ch) (Bobby Friedman acted for the successful party in that case (City Gardens v Dok 82: High Court confirms that a winding up petition may be brought notwithstanding a foreign exclusive jurisdiction clause – Wilberforce)).

In rejecting the Salford Approach, the Board stated that “[n]one of the general objectives of arbitration legislation […] are offended by allowing a winding up to be ordered where the creditor’s unpaid debt is not genuinely disputed on substantial grounds…To require the creditor to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose” (at [92]). The Board further directed that the Salford Approach should not be followed as a matter of English law and that the same principles should apply in relation to exclusive jurisdiction clause, thereby putting an end to the divergence between the approach taken in relation to EJCs and arbitration clauses (at [125]-[126]).

In support of the position that the Salford Approach should be abolished, an article co-authored by Ernest Leung and Alvin Cheung (pupil barrister at Temple Chambers) in the Journal of Business Law was cited at [86] of the Board’s judgment. The article titled “To Stay or Not to Stay – Asking the Right Questions: Re Guy Kwok Hung Lam” [2022] JBL 653 argues that Salford Estates was wrongly decided and that the concern for the abuse of insolvency proceedings to place illegitimate pressure on the debtor company in circumvention of the arbitration clause is largely overstated.

Read the full judgment