Introduction
The recent decision of the BVI Court of Appeal in the case of C-Mobile Services Limited v Huawei Technologies Co. Limited BVIHCMAP 2014/0006 deal with the issue of whether the court has jurisdiction to wind up a company on the basis that a debt, on which the winding up petition is based, which arises out of a contract containing an arbitration clause.

Background
C-Mobile Services Limited (“C-Mobile”) entered into a Supply Contract with Huawei Technologies Co. Limited (“Huawei”). Disputes arose and Huawei presented a winding up petition against C-Mobile, relying on an unsatisfied statutory demand. C-Mobile applied to stay the winding up proceedings on the ground that the Supply Contract under which the underlying debt arose contained an arbitration clause, which provided that “all disputes arising out of or in connection with the formation, construction and performance of this contract … shall be finally settled under the rules of arbitration and consultation of the International Chamber of Commerce…” C-Mobile argued that by section 6(2) of the BVI Arbitration Ordinance, the court shall stay any proceedings that were commenced in respect of any matter agreed to be referred to arbitration.

BVI Courts decision
The trial judge dismissed the application for a stay, holding that the petition to wind up was not proceedings which came within the scope of the arbitration clause, because the winding up proceedings were not brought for the resolution of any dispute arising out of or in connection with the formation, construction, or performance of the Supply Contract. Further, the trial judge pointed out that if a court was to allow the stay in favour of arbitration, in the absence of a bona fide defence, it would enable a respondent to by-pass the requirement to show the existence of a genuine dispute on substantial grounds, rather than any dispute, in order to strike out a petition.

On appeal, the Court of Appeal was in full agreement with the trial judge’s decision, holding that the liquidation proceedings were not caught by section 6(2) of the BVI Arbitration Ordinance, because the proceedings were not brought to recover a disputed debt which had arisen under an agreement containing an arbitration clause. In particular, the BVI Court of Appeal considered that in winding up proceedings based on insolvency, one is always considering a class remedy being undertaken for the benefit of all creditors in the scheme of liquidation, thereby engaging public interest consideration. As such, the Court of Appeal also refused to stay the winding up petition in favour of arbitration.

Hong Kong position
The position adopted by Hong Kong courts is in fact in line with the BVI approach. Section 20 of the Arbitration Ordinance (Cap 609) provides that “a court, before which an action was brought in a matter which was the subject of an arbitration agreement, shall refer the parties to arbitration.” In Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, Harris J considered that winding-up proceedings were not an “action”, therefore the court is not required by the Arbitration Ordinance to refer parties to arbitration. However, the court had a discretionary power to stay the petitions. In this regard, Harris J distinguished between a winding-up petition on the grounds of insolvency and a just and equitable petition. In the former case, the petitioner invoked a class right available to all creditors, whilst in the latter case, it was common that the company was solvent and the class interested was limited to shareholders. Citing the decision of Yuen J (as she then was) in Re Sky Datamann (Hong Kong) Ltd [2002] HKLRD (Yrbk) 22 with approval, Harris J held that a winding-up petition on the ground of insolvency will not be stayed in favour of arbitration, because the creditor is not seeking to recover the sum due to him; rather he seeks to put an insolvent company into liquidation for the benefit of all its creditors.

English position
On 8 December 2014, the English Court of Appeal handed down its judgment in Salford Estates (N0.2) Limited v Altomart Limited [2014] EWCA Civ 1575, in which the court considered whether it shall stay a winding up petition, due to the fact that the debt which was the subject of the petition arose out of a lease that contained an arbitration clause. The Chancellor, Sir Terence Etherton, who gave the leading judgment in the Court of Appeal, held that the Arbitration Act 1996 had no application to a winding up petition presented on the ground of insolvency. Attention was drawn to the fact that, in contrast with the wording of section 9(1) of the Arbitration Act 1996 (“whether by way of claim or counterclaim”), the making of a winding up petition was not a claim for the payment of a debt.

Etherton C, however, went on to say that the court had a discretionary power to wind up a company. The Chancellor considered that such discretion should be exercised, save in exceptional circumstances, consistently with the legislative intent embodied in the Arbitration Act 1996. The Court of Appeal held that it would not be appropriate for the companies’ court to conduct a summary judgment type analysis of liability for an un-admitted debt on which the petition was grounded, when both parties had agreed to refer any dispute relating to the debt to arbitration. The parties should be compelled to resolve their dispute over the debt by their chosen method of dispute resolution rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds. For courts to exercise their discretion otherwise would inevitably encourage parties to seek to by-pass arbitration agreements by presenting winding up petitions. This would encourage the creditors, through the draconian threat of liquidation, to apply pressure on the alleged debtors to pay up immediately. As such, the English Court of Appeal held that the petition should be stayed or dismissed.

What’s the future?
There is clearly a tension between the court’s statutory power to wind up a company based on a company’s inability to pay a debt, and the contractual agreement to arbitrate any dispute in relation to that debt.[1] Either approach has its advantages and drawbacks. On the one hand, while winding up of insolvent companies is clearly in the public interest, such approach also encourages parties to arbitration agreements to present a winding up petition so to by-pass an agreed dispute resolution mechanism. Moreover, in determining whether the debt is genuinely disputed, the court essentially undertakes a merits-based assessment of the dispute, which is arguably outside of the court’s jurisdiction. On the other hand, the pro-arbitration approach could be used to delay or frustrate appropriate substantive relief being granted where it is appropriate, or could even be used as a ruse to avoid winding up petition being brought against companies which failed to pay their debts on time.

Salford Estates was decided after Quiksilver. It is therefore interesting to wait and see whether the courts of Hong Kong and other common law jurisdictions would be persuaded to follow the approach in Salford Estates in the future. For now, it is advised that parties who wish to make use of arbitration should have the arbitration agreement so drawn as to clearly encompass winding up proceedings.

[1]   Jeremy Walton and Anna Gilbert, “The remedy for non-payment of a contractual debt: arbitration or winding Up? Conflicting approaches taken by The courts of The UK, Cayman Islands and the BVI”, MEALEY’s International Arbitration Report, Vol. 30 #9 September 2015