BVI insolvency dispute decision changes English law

The power of the BVI !


The Judicial Committee of the Privy Council has updated the test the courts must apply when there is a conflict between arbitration agreements and insolvency proceedings.

In a judgment handed down on Wednesday (19 June) the Judicial Committee of the Privy Council (JCPC), the highest court for British Overseas Territories, has definitively settled the appropriate test for courts in the British Virgin Islands (BVI) to consider when insolvency proceedings clash with arbitration agreements. The unanimous decision, delivered by Lords Briggs and Hamblen, clarifies the rights of creditors pursuing liquidation orders against companies with outstanding debts subject to arbitration.


The case centred on BVI-registered company Sian Participation Corp (In Liquidation), the appellant, that defaulted on a USD 140 million loan from creditor Halimeda International, the respondent. The loan agreement contained a comprehensive arbitration clause, mandating that “any claim, dispute or difference” arising from the agreement be settled through arbitration. Despite this clause, Halimeda, upon non-repayment of the loan, opted to bypass arbitration and petitioned the BVI Commercial Court to place the appellant into liquidation. The appellant contested this action, arguing that the existence and amount of the debt were in dispute and should be resolved through arbitration as per the agreement.


The BVI Commercial Court rejected the appellant’s arguments and ordered liquidation. This decision was upheld by the Eastern Caribbean Court of Appeal (ECCA). The crux of the disagreement between the parties revolved around the appropriate test for courts to apply when an arbitration agreement exists alongside an insolvency application. Some jurisdictions, including England and Wales at the time, had adopted a relatively debtor-friendly approach following the 2014 Court of Appeal case of Salford Estates. This approach, known as the ‘insubstantial dispute’ test, could potentially lead to a stay of insolvency proceedings even if the company’s challenge to the debt lacked merit.


The JCPC roundly rejected the ‘insubstantial dispute’ test, holding that it creates unnecessary delays and expense for creditors by forcing them to navigate arbitration proceedings in situations where the debtor’s challenge to the debt is weak. The Board clarified that the purpose of arbitration agreements is to enforce the positive and negative aspects of those agreements, which only come into play for matters genuinely encompassed by the agreement itself. A winding-up order based on an uncontested or insubstantial debt challenge, the JCPC reasoned, does not interfere with the underlying debt or the arbitration process. It simply enforces the creditor’s right to seek repayment through liquidation as envisaged in the BVI Insolvency Act.

The JCPC, therefore, established that BVI courts should only dismiss or stay liquidation proceedings if the company can demonstrate a genuine and substantial dispute about the debt’s validity or amount. This aligns with the existing BVI practice and strengthens the creditor’s ability to enforce liquidation orders in cases where the debtor’s defences are weak or non-existent.


The JCPC explicitly directed that the Salford Estates decision should no longer be followed in England and Wales, effectively importing the ‘genuine and substantial dispute’ test into English insolvency proceedings and bringing greater certainty and consistency to how courts handle the interplay between arbitration agreements and winding-up petitions.

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