Arbitration and Insolvency: A Comparative View from England & Wales, Singapore and Hong Kong

If the agreement between a creditor and debtor refers disputes to arbitration, what limits should be placed on the creditor to pursue winding-up proceedings based on an unpaid debt under that agreement? Should a court simply stay the winding-up proceedings to allow the debt to be disputed in arbitration?

In the recent decision of Sian Participation, the Privy Council held that winding-up proceedings will only be dismissed or stayed in favour of arbitration if the debt is "genuinely disputed by the company on substantial grounds", determining that the previous leading English authority of Salford Estates was wrongly decided.¹ This is a pro-arbitration decision that is likely to encourage the use of arbitration among finance parties.

There are two competing public policy considerations at the intersection of arbitration and insolvency. On one hand, it is in the public interest for an insolvent company to be put into liquidation without undue delay. This is to ensure that its remaining assets are safeguarded and distributed equitably among its creditors. On the other hand, it is also in the public interest that, where parties have agreed to resolve any disputes by arbitration, the courts should uphold this agreement.

There currently are different ways of striking this balance across the common law world. In some jurisdictions, courts will stay the winding-up proceedings in favour of arbitration only if there is a genuine dispute over the debt on substantial grounds. In other jurisdictions, courts will stay the winding-up proceedings in favour of arbitration provided there is any dispute over the debt, thereby allowing that dispute to be resolved in arbitration.

Before Sian Participation, the English Court of Appeal in Salford Estates held that, where parties have agreed to an arbitration clause, the court should, "save in wholly exceptional circumstances", dismiss or stay the winding-up proceedings until the debt was resolved in arbitration.² This principle would apply as long as the debt was disputed; it did not matter whether the debtor could demonstrate that it was disputing the debt on genuine grounds, or whether it simply was refusing to admit liability for tactical reasons.³

In Sian Participation, the Privy Council overruled Salford Estates. The Privy Council also directed that Salford Estates should no longer be followed by the English courts. Therefore, under English law, a winding-up petition for a disputed debt, which is subject to an arbitration agreement, will now be stayed or dismissed only when there is a genuine dispute over the debt on substantial grounds.

The Decision in Sian Participation

In Sian Participation, Halimeda International Ltd ("Halimeda") advanced a US$140 million loan to Sian Participation Corp ("SPC"). Under the facility agreement, the parties agreed that "any claim, dispute or difference of whatever nature arising under, out of or in connection with this Agreement" shall be referred to arbitration.

SPC did not repay the loan, so Halimeda commenced winding-up proceedings against SPC. In response, SPC claimed that the debt was disputed because it had a cross claim against Halimeda in other ongoing proceedings. SPC thus wanted to set-off its liability for the debt against the sums allegedly due under the cross claim. On this basis, SPC claimed that the debt was disputed, so the winding-up petition should be dismissed or stayed in line with the decision in Salford Estates.

The Privy Council disagreed with SPC's argument. Rejecting the approach in Salford Estates, the Privy Council clarified that the courts should only dismiss or stay the winding-up proceedings if the debt was "genuinely disputed on substantial grounds".⁴ The Privy Council also took the opportunity to direct that this was the correct approach to be taken under English law.⁵ Its reasoning was as follows:

• An order for the winding up of a company would not involve the resolution of any dispute over the debt.
• In any case, the objective of arbitration is to resolve substantive issues in dispute. If there is no genuine or substantial dispute over the debt, the arbitration agreement would not be engaged to begin with.⁷
• There is also no good reason to require a creditor to go through an arbitration where there is no genuine or substantial dispute over the debt. This would only cause unnecessary delay and expense.⁸
• In fact, this approach would encourage the use of arbitration, as creditors may otherwise refrain from selecting arbitration for their dispute resolution clause, if there is a risk that winding-up proceedings could be frustrated in circumstances where there is no genuine or substantial dispute over the company's debts.⁹

On the facts of Sian Participation, the first instance judge found that the debt was not disputed on genuine and substantial grounds. Since this finding of fact was not challenged on appeal, the Privy Council refused to dismiss or stay the winding-up proceedings. 

Singapore – the Approach is Broadly Similar to Sian Participation

The decision in Sian Participation is broadly in line with the current approach taken by the Singapore courts.

Under Singapore law, the courts will typically dismiss or stay the winding-up proceedings if the following requirements are satisfied: 

• there is an arbitration agreement that appears prima facie to be valid; 
• the dispute appears prima facie to fall within the scope of the arbitration agreement; and 
• the court is satisfied that the defendant is not abusing the court's process by raising the dispute, (together, the "AnAn Requirements").¹⁰

In other words, the Singapore courts will first consider whether there is a prima facie case that the dispute falls within the scope of a valid arbitration agreement. After that, the courts would also consider whether the defendant's attempt to dispute the debt or to raise a cross claim amounts to an abuse of process. And while the threshold for abusive conduct is "very high",¹¹ the Singapore Court of Appeal in AnAn also expressly identified several specific fact patterns that would meet this threshold, including where:

• the debtor had "clearly admitted to the claim as regards both liability and quantum, but seeks a stay for no reason other than its alleged inability to pay";¹²
• the debtor had waived or is estopped from asserting on his rights to insist on arbitration, such as where the parties subsequently agreed that disputes may be resolved by litigation^;13 or 
• the debtor is trying to stave off substantiated concerns that justify the invocation of the insolvency regime, such as where assets have gone missing or there is a need to engage the fraudulent preferences or avoidance provisions under the insolvency regime.¹⁴

In a subsequent decision, the Singapore Court of Appeal applied the AnAn Requirements and refused to dismiss or stay the winding-up proceedings because the debtor had not "raised a dispute in good faith and on substantial grounds".¹⁵ This test is thus comparable to the one applied by the Privy Council in Sian Participation.

As a practical matter, therefore, where a debtor does not dispute a debt in good faith and on substantial grounds, the courts in England & Wales and Singapore would now reach the same conclusion – the winding-up proceedings would not be dismissed or stayed in favour of arbitration. That said, the "abuse of process" test adopted by the Singapore courts may in practice be slightly broader than the test in Sian Participation. It accordingly remains to be seen whether the positions in England & Wales and Singapore might converge further as the courts in both jurisdictions consider the Privy Council's conclusions in Sian Participation.

Hong Kong – a Middle-Ground Approach which May Shift in the Future

As to Hong Kong, the earlier position in Salford Estates had provoked considerable debate across several decisions at first instance and also at the appellate level. The current position follows Salford Estates in large part, albeit with certain adjustments which set stricter limits on a debtor seeking to resist a winding-up petition.

The Hong Kong position was established in Re Southwest Pacific Bauxite (HK) Ltd¹⁶ ("Lasmos"), the Hong Kong court held that a winding-up petition will generally be dismissed if three requirements are met:

• the company disputes the debt claimed by the petitioner;
• the contract giving rise to the debt contains an arbitration clause that covers a dispute over the debt; and
• the company takes the steps required under the arbitration clause to commence the arbitration process. 

Moreover, in a more recent decision, the Hong Kong Court of Appeal in Re Simplicity clarified that it would adopt a "multi-factorial" approach when deciding whether to stay or dismiss winding-up proceedings.¹⁷ This requires the Hong Kong courts to consider whether the dispute "borders on the frivolous or abuse of process" and whether the debtor is merely "raising an arbitration clause as a tactical move with no genuine intention to arbitrate".¹⁸ However, in the absence of any "strong reasons", it remains the case that a Hong Kong court will usually stay or dismiss a winding-up petition where the debt is disputed and subject to an arbitration clause.¹⁹

Nevertheless, the approach in Salford Estates has received far from unanimous backing in Hong Kong. 

• In But Ka Chon v Interactive Brokers LLC,²⁰ the Hong Kong Court of Appeal cast considerable doubt over the approach in Salford Estates. It was stated that nothing in the Hong Kong Arbitration Ordinance, nor in its travaux préparatoires, required a large curtailment of the court's existing statutory discretion to wind up. Kwan V-P also observed that the Eastern Caribbean Court of Appeal had not followed Salford Estates.
• Similarly, in Dayang (HK) Marine Shipping Co Ltd v Asia Master Logistics Ltd,²¹ William Wong SC (sitting as deputy judge) expressed the view – without reaching a decision – that the Salford Estates approach should not be adopted in Hong Kong. 

Both these Hong Kong cases were cited by the Privy Council in Sian Participation.

In the recent decision of Re Mega Gold, the Hong Kong Court of First Instance also had the opportunity to consider the Privy Council's decision in Sian Participation.²² In its decision, however, the court declined to follow the approach in Sian Participation. Rather, the court considered that it was bound by precedent and preferred the "multi-factorial" approach in Re Simplicity "as a matter of stare decisis".²³ Despite the decision in Re Mega Gold, where the court was clearly bound by existing precedent, there is a strong likelihood that the Hong Kong Court of Appeal will follow the approach in Sian Participation in due course. This is especially in view of the reservations expressed against Salford Estates in Hong Kong.

Key Takeaways

Overall, Sian Participation is a decision that is likely to further promote the use of arbitration as a dispute resolution mechanism, especially among finance parties. The benefits of arbitration are already well-known. Among other reasons: 

• under the New York Convention, arbitral awards are enforceable in more than 170 countries and jurisdictions;
• the existence and outcome of the arbitral proceedings are confidential;
• the parties have the autonomy to appoint the arbitrators and to influence the way that the proceedings are conducted; and
• the arbitral award is usually final and binding, i.e., it is not subject to appeal. 

Based on the previous approach in Salford Estates, finance parties may well have had justifiable concerns that agreeing to an arbitration clause would allow a debtor to frustrate and delay any winding-up proceedings, even where the debtor had no genuine or credible basis to do so. This in turn could have a material impact on the creditor's ability to put the debtor in liquidation and to safeguard the debtor's assets.

The decision in Sian Participation is thus a very welcome development for finance parties, alleviating these concerns and providing added certainty for finance parties that the adoption of an arbitration clause will not substantially restrict their ability to pursue winding-up proceedings against debtors.

By reaching a firm conclusion on the interaction between arbitration and insolvency in this context, this Privy Council decision may provoke greater consistency in the outcomes seen across common law jurisdictions. With England & Wales and Singapore now broadly aligned, a further shift along the same lines in Hong Kong would bring greater certainty for parties operating in major common law financial centres.

Comparative Approach in England & Wales, Singapore and Hong Kong

_{1 Sian Participation Corp (in Liq.) v Halimedia International Ltd (Virgin Islands) [2024] UKPC 16 at [100] ("Sian Participation").
2 Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 at [39] ("Salford Estates"). 
3 Salford Estates at [41]. 
4 Sian Participation at [99]-[100] (emphasis added). 
5 Sian Participation [125]-[127]
6 Sian Participation at [92]. 
7 Sian Participation at [57]-[62]. 
8 Sian Participation at [92].
9 Sian Participation at [93].
10 AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33 at [56] ("AnAn"). See also Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] SGCA 40 at [15] ("Founder Group").
11 AnAn at [99]. 
12 AnAn at [94] and [99(a)].
13 AnAn at [99(b)].
14 AnAn at [99(c)].
15 Founder Group at [68]. In that case, Founder Group (Hong Kong) ("FGHK") sold certain copper cathodes to JHC Co Pte Ltd ("JHC") for US$ 47.43 million. These cathodes were sold under three separate contracts, each of which included an arbitration clause. As JHC did not pay, the liquidators of FGHK commenced winding-up proceedings against JHC. While JHC argued that the cathodes were never delivered and the sale contracts were a sham, the Court of Appeal did not dismiss or stay the winding-up proceedings in favour of arbitration, as it was found that JHC had not disputed the debt in good faith and on substantial grounds. 
16 [2018] HKCFI 426.
17 Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 229 at [39] ("Re Simplicity").
18 Re Simplicity at [39] and [42].
19 Re Simplicity at [35(3)] and [39].
20 [2019] HKCA 873.
21 [2020] HKCFI 311.
22 Re Mega Gold Holdings Limited [2024] HKCFI 2286 ("Re Mega Gold")
23 Re Mega Gold at [70]-[72]. 
24 Sian Participation at [99]-[100].
25 AnAn at [56] and [99]-[100].
26 Founder Group at [68].
27 Re Simplicity at [39].
28 Lasmos at [31].}

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