When Arbitration Meets Insolvency: Insights From Common Law Systems

When a company is unable to meet its debt obligations, a creditor's natural course of action is to file a winding-up petition. If granted, the company goes into liquidation and its assets are distributed among creditors.

Across common law jurisdictions, the standard for opposing such a petition is largely consistent: the company cannot simply deny the debt, it must demonstrate a bona fide dispute on substantial grounds.

The situation becomes more complex when the debt in question arises under a contract containing an arbitration clause. In such cases, two competing public policy considerations come into play:

• On one hand, there is a public interest in ensuring that companies unable to meet their debts are promptly placed into an insolvency process, ensuring their assets are equitably distributed among creditors.
• On the other hand, there is a strong policy favoring the enforcement of arbitration agreements, whereby parties who have agreed to resolve disputes through arbitration should be held to their bargain, free from judicial intervention.

The tension between insolvency and arbitration has prompted courts across common law jurisdictions to adopt divergent approaches to a key question: should a winding-up petition be stayed or dismissed when the disputed debt is covered by an arbitration clause?

This article explores how courts in the UK, Hong Kong and Singapore have addressed this issue, and considers the implications of their differing stances for both creditors and companies.

English Court

For over a decade, the law in England and Wales was guided by the Court of Appeal's decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575. The courts adopted an arbitration-friendly approach: where the petitioning debt was disputed and subject to an arbitration clause, the winding-up petition would typically be stayed or dismissed, save for wholly exceptional circumstances.

This approach was significantly redefined by the Privy Council in Sian Participation Corp (in liq) v Halimeda International Ltd [2024] UKPC 16. In overturning Salford Estates, the Privy Council held that a debtor must demonstrate a genuine and substantial dispute over the debt before a winding-up petition will be stayed or dismissed in favour of arbitration.

The Privy Council clarified that while an arbitration agreement obliges parties to resolve disputes through arbitration rather than litigation, a winding-up petition does not determine the merits of the creditor's underlying claim. Accordingly, it does not contravene the contractual obligation to arbitrate.

The Privy Council also criticised the Salford Estates approach, noting that it enabled debtors to raise insubstantial or tactical disputes, resulting in delays, unnecessary costs, and procedural obstacles without legitimate justification.

Hong Kong Court

Hong Kong has adopted a different approach from that taken inSian Participation. The landmark case is Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP [2022] 4 HKLRD 793 (a bankruptcy matter involving exclusive jurisdiction clauses), in which the Court of Final Appeal endorsed a test closely aligned with Salford Estates.

The Court of Appeal later confirmed in Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 and Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 that the principles in Re Guy Lam extend to winding-up petitions involving disputed debts subject to arbitration clauses. (For further detail, see our earlier article "The Dust Settles - The Interplay Between Arbitration Clauses and Winding-Up Petitions"). Under this framework, unless countervailing factors exist, such as the risk of insolvency affecting third parties or disputes that verge on the frivolous or abuse of process, a petition should ordinarily be stayed in favour of arbitration.

Where Hong Kong diverges sharply from the UK position is in its characterisation of winding-up proceedings. In Re Guy Lam (Court of Appeal), G Lam JA (whose reasoning was later endorsed by the Court of Final Appeal) held that when a petitioner seeks a winding-up order on the basis that there is no bona fide dispute on substantial grounds, the court is effectively being asked to determine the debt. On this view, arbitration or exclusive jurisdiction clauses governing the disputed obligation are directly engaged.

A notable development has recently emerged in Hyalroute Communication Group Limited v Industrial and Commercial Bank of China (Asia) Limited [2025] HKCFI 2417. For the first time, the Hong Kong court was asked to assume the role of the Tribunal at the seat of arbitration (rather than the winding-up court) to decide whether to grant an anti-suit injunction restraining prospective Cayman winding-up proceedings.

Mr Recorder William Wong SC dismissed the application. He held that the key question in granting an anti-suit injunction is whether the foreign winding-up proceedings would have the effect of finally resolving the dispute over the plaintiff's indebtedness under the arbitration agreement. That question, he reasoned, must be answered by reference to Cayman law. Since Cayman law follows Sian Participation and does not treat a winding-up petition as a final determination of the debt unlike the position in Hong Kong), the arbitration agreement was not engaged, and no injunction should be granted.

Hyalroute appears to be the first decision in Hong Kong to address whether an anti-suit injunction should be granted to restrain foreign winding-up proceedings in favour of arbitration. Parties to arbitration agreements should be mindful that when winding-up proceedings are challenged on the basis that they would finally determine a dispute subject to arbitration, Hong Kong courts will apply the Re Guy Lam approach only if the proceedings are brough in Hong Kong. Where foreign winding-up proceedings are involved, the court will defer to how the foreign jurisdiction characterises its own insolvency process.

Singapore Court

The Singapore legal position firmly balances a pro-arbitration stance with the prevention of abuse of the court's process. The Singapore Court of Appeal's landmark decision in Founder Group (Hong Kong) Ltd v Singapore JHC Co Pte Ltd [2023] SGCA 40, decision affirms the AnAn approach, where a winding-up petition based on a debt subject to an arbitration agreement will typically be stayed or dismissed. This is contingent on a tripartite test: (i) there is a prima facie valid arbitration agreement, (ii) the dispute falls within its scope, and (iii) the debtor is not abusing the court's process.

The critical clarification from Founder Group lies in the "abuse of process" element. The Court of Appeal held that a party cannot adopt a manifestly inconsistent position. A debtor cannot simultaneously argue that the entire underlying contract is a sham, null and void, and not meant to be enforced, while also seeking to rely on the arbitration clause contained within that very same contract to stay proceedings. Such a position is fundamentally contradictory.

Invoking an arbitration clause from a contract one claims never created valid obligations constitutes an abuse of process. In such circumstances, the court will find that the debtor cannot rely on the arbitration agreement. Consequently, the court will not apply the prima facie standard of review. Instead, it will revert to the general test for disputed debts: whether the dispute is raised in good faith and on substantial grounds.

In essence, while Singapore law robustly upholds agreements to arbitrate, the Founder Group decision establishes that this principle cannot be used as a shield by a party that denies the very existence of the contract from which the arbitration clause derives its power. This protects the integrity of both the arbitration and insolvency regimes from cynical delaying tactics.

Conclusion

The interplay between insolvency and arbitration continues to be a topical issue across jurisdictions. Notably, English, Hong Kong, and Singapore courts have reached divergent conclusions based on how they characterise winding-up proceedings. While Hong Kong and Singapore courts have adopted a distinctly pro-arbitration stance, English courts have been comparatively restrained. A key takeaway is that even in cases where there appears to be no genuine and substantial dispute over a debt, the debtor's place of incorporation plays a pivotal role. For enforcing parties, this factor often determines how readily creditors can initiate and pursue winding-up proceedings against a debtor company. As such, the debtor's jurisdiction should be a central consideration in any enforcement strategy—and kept front of mind when negotiating loan terms and arbitration clauses.

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.