One of the key decisions that the contracting parties have to make when structuring transactions and entering into contracts, is whether or not to agree to resolve their disputes privately by way of arbitration with the inclusion of an arbitration clause. If the contracts involve BVI or Cayman Islands companies, when making such a determination, the contracting parties should, among other factors, consider the effect that an arbitration provision may have on their statutory rights to petition for the winding up of the offshore company.
Mandatory Stay of Proceedings
Both the BVI and the Cayman Islands have modern arbitration laws. The BVI Arbitration Act, 2013 and the Cayman Islands Arbitration Law, 2012 bring Article 8 of the UNCITRAL Model Law into effect in their respective jurisdictions, such that, if an action is brought before either the Eastern Caribbean Supreme Court in the BVI (the "BVI Court") or the Grand Court of the Cayman Islands (the "Cayman Court") in a matter which is the subject of an arbitration agreement, both the BVI Court and the Cayman Court shall, before the filing of any defence and upon the request of a party to an arbitration agreement, grant a stay and refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.
However, both the BVI Court and the Cayman Court have recently examined how broadly this mandatory stay should be applied where a shareholder or creditor is exercising its statutory rights to petition for the winding up of the company, whether on the basis of an underlying debt or on just and equitable grounds.
Winding Up as a Collective Remedy
The most recent case law emerging out of the BVI and the Cayman Islands is that an application to wind up a BVI company will not be automatically stayed because of an arbitration clause between the parties to the dispute in the relevant contract, on the basis that winding up proceedings are a collective remedy which fall outside the scope of a private dispute between the parties.
In C-Mobile Services Limited v Huawei Technologies Co. Limited (BVIHCMAP 2014/0017), the Court of Appeal upheld the BVI Court's decision to dismiss an application for a stay of winding up proceedings where the parties had agreed to submit any disputes arising out of the underlying contract to arbitration. Having agreed that "the court must always be astute to ensure that it is giving effect to the terms of the parties' bargain as it relates to their agreed forum for settling theirs disputes", Pereira CJ went on to say that "a wind[ing] up application, although it may be premised on the underlying debt, is not an action or proceeding on the debt or under the contract. Winding up is a class remedy. It is a collective remedy being undertaken for the benefit of all creditors who will no doubt rank according to any priority to be accorded to their proofs of debt in the scheme of the liquidation."
The decision in C-Mobile was followed by the Court of Appeal decision in Jinpeng Group Limited v Peak Hotels and Resorts Limited (BVIHCMAP 2014/0025) where the Court of Appeal set aside an order of the BVI Court striking out a winding up application on the basis, inter alia, that notwithstanding that the winding up application was presented on the just and equitable ground alleging misconduct, it was a creditor's petition and therefore, the applying creditor was seeking a collective remedy on behalf of itself and all the other creditors. Additionally, it was not a claim by the applicant seeking to recover its debt from the respondent company and it could therefore be distinguished from a private dispute between the contracting parties. The Court of Appeal found that a winding up proceeding is not a form of proceeding covered by the arbitration clauses in the agreements or section 18(1) of the BVI Arbitration Act, 2013, and therefore the BVI Court should not grant an automatic stay of the application under section 18(1) just because the respondent had raised a dispute over the appellant's status to apply for a winding-up order. The Court of Appeal restored the winding up application for further hearing by the BVI Court.
In the Cayman Islands' matter of In re Cybernaut Growth Fund L.P.  CILR 413, the respondents to a winding up petition sought to have the petition struck out as an abuse of process on the grounds that: (i) it had been presented in breach of a valid and binding arbitration agreement; (ii) an alternative remedy, namely arbitration, was available to the petitioners, who were acting unreasonably by not pursuing it; and (iii) on a true construction of the limited partnership agreement, the petitioners had contracted out of their right to present a winding up petition or apply to the Cayman Court for the appointment of an independent liquidator. Alternatively, the respondents sought a stay of the petition pending the outcome of an arbitration, which was commenced in New York shortly after the presentation of the winding up petition. Having dismissed the respondents' summons, in his judgment Jones J commented that a winding up order is an order in rem which is capable of affecting third parties (unlike an order of an arbitral tribunal which will only be binding on the contracting parties) and that any dispute about who should be appointed as liquidator of a company or exempted limited partnership is a matter involving the public interest which is not suitable for determination in private by an arbitral tribunal. He went on to say that he regarded "winding-up orders, supervision orders and orders for the appointment/ removal of liquidators as class remedies, which in turn leads me to the conclusion that such proceedings fall within the exclusive jurisdiction of the [Cayman Court]."
Genuine Dispute on Substantial Grounds
Another issue the Courts have considered when determining whether they must grant a mandatory stay of a winding up petition in favour of arbitration proceedings is whether there exists a bona fide dispute on substantial grounds.
The BVI Court has taken the view that, in contrast to the English law position (adopted by the English Court of Appeal in Salford Estates (No.2) Ltd v Altomart  EWCA 1575 Civ), the BVI Court has a statutory jurisdiction to wind up a company under section 162 of the BVI Insolvency Act, 2003 (as amended) and that a petitioner does not have to prove exceptional circumstances to invite the BVI Court to exercise its discretion to make a winding up order. It will be sufficient for the petitioner to show that there is no genuine dispute on substantial grounds for this purpose.
In Alexander Jacobus de Wet v Vascom Trading Ltd  BVIC, Bannister J held that the BVI Court, when considering whether to make a winding up order, should decide, on the balance of evidence before it, whether there is indeed a good faith dispute on substantial grounds. Provided that the evidence showed that the dispute was not frivolous, the BVI Court would give effect to the arbitration agreement.
This decision was followed by the later judgment of the Court of Appeal in C-Mobile Services Limited v Huawei Technologies Co. Limited (BVIHCMAP 2014/0006) (which was connected to and preceded the decision in C-Mobile referred to above), which affirmed the decision of the BVI Court to refuse an application to set aside a statutory demand on the basis that the debt was not a bona fide dispute on substantial grounds, and which consequently meant that there was no dispute upon which an application to stay the winding up proceedings could be based. The Court of Appeal's decision in Jinpeng affirmed this position.
The position in the Cayman Islands has not always been as clear. In re Times Property Holdings  CILR 223, Foster J, as the parties had agreed that any dispute would be referred to arbitration, held that "it is not appropriate for this court, even if minded to do so, to deprive the company of putting its case and pre-judging the issue by seeking to determine that the company's dispute with the alleged indebtedness has no real substance". However, two subsequent cases before Jones J took a different approach and one that was more in line with the position taken in the BVI.
In Re Duet Real Estate Partners 1 LP (unreported, 7 June 2011), Duet sought a declaration that there was a genuine dispute in relation to its debts and an injunction to restrain the presentation of a winding up petition where the underlying loan agreement contained an arbitration clause and an arbitration had already been commenced. Having considered the evidence presented to the Cayman Court, Jones J determined that there was no bona fide dispute of substance and that the arguments made by Duet in that regard were "nothing more than a disingenuous delaying tactic". He therefore refused to grant the declaration and injunction sought. Subsequently, in In re Ebullio Commodity Master Fund L.P. (unreported, 24 May 2013), Jones J took a similar position determining that the existence of an arbitration agreement and arbitration proceedings being on foot would only be relevant if the Cayman Court determined that the dispute was genuine and on substantial grounds. A similar approach has since been taken by other judges in the Cayman Islands.
Both the BVI Court and the Cayman Court have determined that they have broad discretion when it comes to granting a stay of winding up proceedings where the underlying grounds are said to be disputed and may be subject to an arbitration agreement between the parties. While some parties may attempt to use winding up petitions as a means of circumventing a previously agreed arbitration process, recent decisions from these courts should reassure shareholders and creditors that they retain their statutory rights to have a liquidator appointed and that, notwithstanding the mandatory wording of the relevant legislation, the threat of a stay to arbitration of winding up proceedings is likely to be an empty one where the only remedy sought is the collective appointment of a liquidator or where no genuine or substantial dispute between the contracting parties can be identified.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.