Worldwide: Arbitration Clauses & Insolvent Winding Up Proceedings: The Cayman Anomaly

Much has been written in the wake of the Privy Council's decision in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corp about how Cayman is a pro-arbitration jurisdiction. In this article, we consider the recent Grand Court decision in Re BPGIC Holdings Ltd and ask whether Cayman is as pro-arbitration in the context of insolvent winding up proceedings.Much has been written in the wake of the Privy Council's decision in FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corp about how Cayman is a pro-arbitration jurisdiction. In this article, we consider the recent Grand Court decision in Re BPGIC Holdings Ltd and ask whether Cayman is as pro-arbitration in the context of insolvent winding up proceedings.

Introduction

In FamilyMart the Privy Council confirmed that distinct legal and factual issues raised in just and equitable winding up proceedings are arbitrable.¹ It follows that arbitration clauses covering such matters are enforceable, and the proceedings brought in breach of arbitration clauses will be stayed.²

FamilyMart did not address insolvent winding up proceedings. The issue there surfaces when a creditor seeks to wind up a company in reliance on a debt arising from a contract containing an arbitration clause. The Grand Court has recently addressed that issue in Re BPGIC Holdings Ltd.³ In following earlier cases which held that the Court should inquire into the genuineness of a dispute raised by the debtor company,⁴ this decision conflicts with the pro-arbitration tenor of FamilyMart and exposes an unfortunate anomaly in Cayman's arbitration regime which is bifurcated, between foreign and domestic arbitrations.

This article begins by providing an overview of relationship between arbitration and insolvency. It then describes the approach that the English Courts have adopted, as this is vital context for what follows. Next, it summarises BPGIC Holdings and the cases that precede it. It then compares and contrasts the Cayman approach with that of other jurisdictions. Finally, it suggests some factors the Courts ought to consider in future cases.

The Inherent Tension Between Arbitration and Insolvency

It has long been recognised that arbitration and insolvency do not sit comfortably together. One US Court of Appeals has described their relationship as "a conflict of near polar extremes." Insolvency policy "exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution." ⁵

This tension is particularly acute during winding up proceedings. If a recalcitrant party ignores an arbitration clause and files proceedings, arbitration law is meant to intervene. In most jurisdictions, the Court must stay proceedings unless it finds that the arbitration clause is "null and void, inoperative, or incapable of being performed" (referred to below as the "mandatory stay"). That language has its origins in the New York Convention,⁶ and was carried through to the UNCITRAL Model Law on International Commercial Arbitration.

This consistency in wording across jurisdictions is helpful, and Courts often refer to decisions in other jurisdictions to see how they have approached similar issues. The Privy Council did just this in FamilyMart. But this approach can also be apt to mislead. That is because in some jurisdictions, the mandatory stay includes some variation of the following additional italicised words: "null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred". As noted below, this wording suggests that the Court should engage in at least a cursory review of the merits before referring a dispute to arbitration. Cayman finds itself in an unusual position. Intentionally or not, the law governing foreign arbitrations – the Foreign Arbitral Awards Enforcement Act (1997 Revision) ("FAAEA") – contains these addition italicised words.⁷ The more modern law governing domestic arbitrations – the Arbitration Act (2012) – does not.

Subject to how widely the Courts apply it, the mandatory stay serves as a significant impediment to the presentation of a winding up petition. Ordinarily, a party seeking to enforce a debt does not need to prevail in full-blown civil proceedings before filing a petition. A putative creditor⁸ can serve a statutory demand and effectively shift the burden to the alleged debtor to satisfy the Court that the debt is disputed in good faith and on substantial grounds.⁹ Even if the debt is genuinely disputed, the alleged debtor may still be in trouble. The Court has a residual discretion to wind up a company on the basis of a disputed debt if there is other evidence of insolvency.¹⁰ Moreover, the procedural rules allow for the substitution of the petitioner, meaning another creditor can take over the proceedings if the first creditor settles or hits a road-block.¹¹

In contrast, if the alleged debtor can rely on an arbitration clause, it materially changes the dynamic. They can halt the winding up proceedings before any of those procedural disadvantages are engaged. In arbitration, they are entitled to a full adjudication of their dispute, in private, with the burden remaining on the putative creditor throughout. What's more, the practical reality is that completing an arbitration is likely to take many months, if not years. Contrast that with a winding up petition that can, in the insolvency context, usually be heard in short order. In Cayman, creditors' winding up petitions are supposed to be heard within six weeks of filing.¹² If, on the other hand, the arbitration clause is enforced, it is only once an award has been issued that a winding up petition can finally be filed.

The English Approach

Regardless of which jurisdiction the issue arises, it is impossible to escape the decision of the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd.¹³ There, the Court held that the mandatory stay in the UK Arbitration Act 1996 does not technically apply to winding up proceedings. However, it noted that the Courts retain a discretion under insolvency laws to stay or dismiss winding up proceedings.¹⁴ Importantly, that discretion had to be exercised with the Arbitration Act – and its policy aims – firmly in mind. Accordingly, a stay would be granted whenever a debt was disputed, even if the summary judgment standard could be met. Put differently, a stay would be granted even if the creditor could satisfy the Court that the debtor company did not have an arguable defence.

In some ways that result is striking. In others, it makes perfect sense: If a summary judgment type analysis was permitted, it would encourage parties to use winding up proceedings to attempt to by-pass their agreement to arbitrate.¹⁵ The Court did leave open the possibility that stay could be refused in "exceptional circumstances", but such circumstances were "difficult to envisage".¹⁶

Following Salford Estates, the English approach is unyieldingly pro-arbitration. The High Court has noted that the effect of Salford Estates is to "place a very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause."¹⁷ The approach is so uncompromising that even a previous admission that a debt is owing does not constitute "exceptional circumstances", meaning that it needs to be arbitrated first if winding up proceedings are to follow.¹⁸

From a Cayman perspective, it is important to understand the limitations of Salford Estates. The UK Arbitration Act's mandatory stay has the standard narrow framing and does not contain the additional italicised words discussed above. Importantly though, prior to 1996, the UK Act did contain these additional words. In its decision, the Salford Estates Court relied heavily on an earlier decision in Halki Shipping Corp v Sopex Oils Ltd, which held that by choosing to remove these words from the 1996 Act, Parliament decided to limit the Court's ability to engage in a summary judgment type analysis.¹⁹ As discussed, the Salford Estates Court obliged. The Cayman legislature has followed that approach for the Arbitration Act but not the FAAEA. And as we return to below, it logically follows that Salford Estates could only cleanly be relied on by a Cayman Court deciding a domestic arbitration case under the Arbitration Act.

BPGIC Holdings and the Earlier Cayman Cases

That leads neatly to the decision of Chief Justice Ramsay-Hale in BPGIC Holdings.

The Facts and Issue

In the case, a company applied to strike-out a winding up petition on the basis that the predicate debt was disputed, and that the proceedings were brought in breach of an arbitration clause requiring arbitration in London.²⁰ Because the seat of the arbitration was not in Cayman, the FAAEA applied. In response, the petitioner argued that the debt was not bona fide disputed on substantial grounds, meaning the Court should refuse to stay the proceedings.²¹

The Court, in deciding this legal point as a preliminary issue, lucidly summarised the issue as: "whether the petition should be stayed or dismissed pending resolution of the disputed debt by a foreign arbitral tribunal without an inquiry by this Court as to whether the debt is genuinely disputed on substantial grounds."²²

The Arguments

In support of its argument that the Court should not inquire into whether the debt is bona fide disputed on substantial grounds, the company relied on Salford Estates and on the decision of Foster J in Re Times Property Holdings Ltd.²³ There, a company had allegedly defaulted on a subscription agreement containing an arbitration clause. In finding that winding up proceedings ought to be stayed pending arbitration, Foster J reasoned that:²⁴

Where, as here, parties have expressly agreed that any dispute between them arising out of the relevant contract is to be determined in a particular forum by a particular tribunal, it is not obvious to me why they should not be held to that agreement.

The company did not address the difference in language between the FAAEA and the Arbitration Act, save for arguing that it would "produce incoherent and inconsistent results" if different standards of review were adopted.²⁵

The petitioner responded by relying on the decision of Parker J in Re Grand State Investments Ltd.²⁶There, the Judge cited the above passage from Times Property Holdings and noted that "the freedom of parties to choose dispute resolution mechanisms" underpinned Salford Estates.²⁷ His Lordship then recorded that "the starting point for the court in assessing how to exercise its discretion will be to ensure that the parties' freedom to choose a dispute resolution mechanism is respected".²⁸ Nevertheless, Parker J then defaulted to concluding that the Court would still need to be satisfied as to the existence of a bona fide dispute on substantial grounds before exercising its discretion to stay proceedings in favour of arbitration.²⁹ We return to this reasoning below.

The petitioner also pointed out that the FAAEA's mandatory stay is framed in different terms to the UK provision and that this appeared to reflect a different legislative policy choice in this jurisdiction.³⁰

Footnotes

1. FamilyMart China Holding Co Ltd v Ting Chuan (Cayman Islands) Holding Corp [2023] UKPC 33.

2. Note that the cases generally use the term "arbitration agreements" but this typically refers to an arbitration clause in a substantive contract. The term "arbitration agreements" is used to signify that the validity of an arbitration clause is assessed separately from the validity of the substantive contract containing it. This is called the doctrine of separability.

3. Re BPGIC Holdings Ltd (unrep., 20 November 2023, Ramsay-Hale CJ).

4. As discussed below, the Chief Justice followed the approach adopted in Re Duet Real Estate Partners 1 LP (unrep., 7 June 2011, Jones J) and Re Grand State Investments Ltd [2021] CIGC J0428-2. Her Lordship declined to follow Re Times Property Holdings Ltd [2011(1) CILR 223], and implicitly Re Adenium Energy Capital Ltd (unrep., 29 July 2020, Richards J), albeit that latter case does not appear to have been brought to the Judge's attention.

5. In re US Lines Inc 197 F 3d 631(2nd Cir 1999) at 640. For a recent discussion of the relationship between arbitration and insolvency, see the decision of the Supreme Court of Canada in Peace River Hydro Partners v Petrowest Corp 2022 SCC 41 at [44]-[74].

6. Also known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

7. FAAEA, s 4. By foreign arbitrations, we mean arbitrations that are seated outside of Cayman. This does not refer to where the arbitration is physically held but rather which jurisdiction's laws govern the procedure of the arbitral process.

8. We use terms like "putative creditor" and "apparent debtor" to signify that the existence of a debtor-creditor relationship remains at issue in these disputes.

9. See for example Parmalat Capital Finance v Food Holdings [2008] UKPC 23 at [9]; and Re GFN Corp Ltd [2009] CILR 650 at [94].

10. In Parmalat Capital Finance v Food Holdings [2008] UKPC 23 at [9], Lord Hoffman noted at that "there is no doubt that the court retains a discretion to make a winding up order, even though there is a dispute".

11. Order 3, r. 3 of the Companies Winding Rules provides that "The Court may, on such terms as it thinks just, substitute as petitioner any creditor who in its opinion would have a right to present a petition and who is desirous of doing so."

12. Financial Services Division Guide (2nd ed) at [C5.1].

13. Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575, [2015] 3 WLR 491.

14. At [39].

15. At [40].

16. At [39].

17. Eco Measure Market Exchange Ltd v Quantum Climate Services Ltd [2015] EWHC 1797 (Ch) at [10].

18. Fieldfisher LLP v Pennyfeathers Ltd [2016] EWHC 566 (Ch), [2016] BCC 697 at 704. See also Telnic Ltd v Knipp Medien Und Kommunikation GmbH [2020] EWHC 2075 (Ch) at [27] and [31].

19. Halki Shipping Corp v Sopex Oils Ltd [1997] EWCA Civ 3062.

20. Re BPGIC Holdings Ltd at [1].

21. At [2].

22. At [3].

23. While not cited in BPGIC Holdings, we note for completeness that there is a further judgment which applied Salford Estates in Re Adenium Energy Capital Ltd (unrep., 29 July 2020, Richards J). The Judge did, however, find at [73] that the circumstances in that case were sufficiently exceptional not to refer the parties to arbitration.

24. Re Times Property Holdings Ltd [2011(1) CILR 223] at [19].

25. Re BPGIC Holdings Ltd at [20].

26. The petitioner also relied on the earlier decision in Re Duet Real Estate Partners 1 LP (unrep., 7 June 2011, Jones J), which reached a similar result albeit in a more summary fashion.

27. Re Grand State Investments Ltd [2021] CIGC J0428-2 at [70].

28. At [73].

29. At [74].

30. BPGIC Holdings Ltd at [16]-[19].

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