The relationship between arbitration clauses and winding up proceedings is a contentious issue in many jurisdictions and the debate shows no sign of abating. In the BVI, a recent case has further clarified the effect of an arbitration agreement on creditor's winding up proceedings pursued on the basis of a company's insolvency.
In a recent case, , Rangecroft Ltd v Lenox International Holdings Ltd1, the BVI Commercial Court has further clarified the effect of an arbitration agreement on creditor's winding up proceedings pursued on the basis of a company's insolvency.
The basic facts of this case were that the creditor, Rangecroft Ltd, made an application for the appointment of a liquidator to the debtor, Lenox International Holdings Ltd, on the basis that the debtor was unable to pay its debt as they fell due. The debtor disputed that the debt was repayable and brought cross claims against the creditor.
The loan agreement between the debtor and the creditor contained a wide arbitration clause which covered "any disputes arising out of or connected with this Agreement, including a dispute as to the validity, existence or termination of this Agreement or this Clause 20 or any non-contractual obligation arising out of or in connection with this Agreement". It was not controversial that all of the debtor's defences and cross claims fell within the scope of the arbitration clause.
It is established in the BVI that the mandatory stay provision under section 18(1) of the Arbitration Act 2013, which is equivalent to section 9(4) of the Arbitration Act 1996 (UK), does not apply to winding up proceedings on the basis that arbitration agreements are designed to resolve disputes between the contracting parties and do not cover collective remedies such as winding up.2 Though the mandatory stay does not apply, the court retained a wide discretion under section 162 of the Insolvency Act 2003 to stay the proceedings and to require the parties to resolve the dispute by arbitration.3. The key issue in this case was whether the Court should exercise its discretion to grant a stay.
In exercising its discretion, the Commercial Court considered that:
- the creditor had, without good reason, failed to serve a statutory demand;
- the debtor only had one creditor which went to the collective nature of the proceedings and;
- it is more appropriate to have the question of whether a genuine and substantial dispute exists between the parties resolved by arbitration.
Having considered these factors, the Commercial Court granted a stay to require the parties to resolve the dispute as to the debt by arbitration.
In reaching its conclusion, the Commercial Court has given considerable weight to the policy considerations behind section 18 of the Arbitration Act. This is in line with the Court of Appeal judgment in C-Mobile, 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 their disputes".4 The Commercial Court was of the opinion that if it were to consider whether there exists a genuine and substantial dispute between the parties, it would result in precisely the prejudice section 18 of the Arbitration Act intended to avoid, and thus considered it to be inappropriate for the court to determine whether or not the debt is bona fide disputed on substantial grounds. This case suggests the mere existence of an arbitration agreement between the parties could weigh in favour of granting a stay
This marks a further clarification of the approach in the BVI. On the basis of previous decisions, it would perhaps have been expected that the Court would have determined for itself whether there was a genuine and substantial dispute before referring the matter to arbitration. The Lenox International decision is therefore necessary reading and illustrates that this area continues to develop.
As an additional takeaway, for debtors it is crucial that any issues regarding an arbitration clause should be raised when it seeks to set aside the statutory demand. By the time the court was considering the appointment of a liquidator, it would potentially be too late to rely on the arbitration clause if the issue had not been raised in the application to set aside the statutory demand.
1. BVIHC (COM) No 37 of 2020, unreported, 6 July 2020
2. C-Mobile Services Limited v Huawei Technologies Co Limited BVIHCMAP 2014/0017, unreported, 15 September 2015; Jinpeng Group Ltd v Peak Hotels and Resorts Ltd, BVIHCMAP 2014/0025 and 2015/0003, unreported, 8 December 2015.
4. C-Mobile Services Limited v Huawei Technologies Co Limited, BVIHCMAP 2014/0017, unreported, 15 September 2015
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