20 October 2020

To litigate or arbitrate – that is the question

The Carey Olsen Singapore team considers a recent trend in cases involving the extent of the Court's jurisdiction to determine a just and equitable winding up petition when faced with a valid arbitration agreement between the parties.

The tension between the exclusive jurisdiction of the Court to determine whether a company should be wound up on the just and equitable ground and the contractual obligation to arbitrate disputes between shareholders exists in multiple jurisdictions. Two recent decisions by the Cayman Islands Court of Appeal and the Hong Kong Court of First Instance provide welcome clarification on the position. It remains to see whether those decisions will be mirrored in other common law jurisdictions such as the British Virgin Islands.

Cayman Islands

In a landmark decision by the Cayman Islands Court of Appeal in China CVS (Cayman Islands) Holding Corporation[1] ("China CVS"), it was held that the underlying issues raised in a just and equitable winding up petition are subject to the Court's exclusive jurisdiction and are not arbitrable. As such, the Court will not stay a just and equitable winding up petition in favour of arbitration.

In China CVS, the Court held that the winding up petition was founded on allegations of misconduct and loss of confidence which were inextricably connected to determination of the statutory question whether the company should be wound up on just and equitable grounds, and could not be distilled into discrete issues to be hived off to arbitration. The Court was required to evaluate all the circumstances of the case to determine whether there were sufficient grounds to justify a winding up on just and equitable grounds.

The China CVS decision has cemented the Cayman Islands Court's exclusive jurisdiction to determine whether there are just and equitable grounds to wind up a company and it is only in cases where discrete issues can be identified and hived off to arbitration that the Court may stay a winding up petition.

Hong Kong

In the recent Hong Kong case of Champ Prestige International Ltd v China City Construction (International) Co Ltd[2] ("Champ"), the Hong Kong Court of First Instance reached a similar conclusion in refusing to stay a just and equitable winding up petition in favour of arbitration, albeit the judgment did not refer to China CVS. In Champ, Harris J held that as the complaints in the petition all formed part of one continuing narrative, the Court will not exercise its discretion to stay the petition unless it is clear and obvious that the dispute forming the subject of the arbitration clause would be central and probably determinative of the factual issues raised by the petition.

It is important to note that the Court acknowledged there may be cases in which part of a dispute can sensibly be hived off and referred to arbitration, while the winding up petition is stayed until the arbitration is complete. However, given that the factual matrix in just and equitable winding up petitions often consists of closely interlinked issues, the Court may be slow to refer any disputes to an arbitral tribunal. 

Singapore

The issue of the arbitrability of a just and equitable winding up petition has not come for determination before the Singapore Courts. The Singapore Courts have generally adopted a pro-arbitration stance in establishing that minority oppression claims are arbitrable, adopting the prima facie standard of review in deciding whether a stay should be granted hence departing from the English position, and decoupling the issues of remedial jurisdiction and arbitrability where it held that a dispute may be arbitrable even if a tribunal cannot award the relief sought.

In Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals[3] ("Tomolugen"), the Singapore Court of Appeal remarked in obiter that it favoured the approach taken by the courts in England in Fulham FC v Richards[4] and in Hong Kong in Re Quicksilver Glorious Sun[5], of staying an application for winding up on the just and equitable ground in favour of arbitration. Once the arbitral tribunal had resolved that factual dispute, the petitioner could apply for the stay to be lifted and invite the court to grant any appropriate relief including the making of a winding up order, having regard to the findings of the tribunal.

Tomolugen was decided before the recent Cayman Islands and Hong Kong decisions of China CVS and Champ. The Singapore Court of Appeal did not have the opportunity to consider the issue with reference to facts before it. If an appropriate case comes before the Singapore Court, it may well adopt the same reasoning in China CVS and Champ, that is, to determine whether the underlying allegations and facts in a just and equitable winding up petition are inextricable with the question of whether a winding up order should be granted, which is a question within the exclusive jurisdiction of the Court.

BVI

In the BVI, just and equitable winding up petitions under section 162(1)(b) of the Insolvency Act 2003 are often brought in parallel with unfair prejudice proceedings under section 184I of the Business Companies Act 2004. While there have been several decisions of the BVI Court considering the relationship between a winding up petition on the ground of insolvency and an arbitration agreement[6], or the validity of an agreement to arbitrate unfair prejudice claims, the issue of the arbitrability of just and equitable winding up proceedings has not been tested.

It will be interesting to see the approach taken by the BVI Courts having regard to the recent cases of China CVS and Champ which evince an international trend of judicial reluctance to find that Courts do not have exclusive jurisdiction over just and equitable winding up petitions.

On the one hand, the BVI Courts will undoubtedly wish to prevent any abuse of process which might arise from a party seeking to circumvent the contractual obligations which it owes under a valid arbitration agreement. On the other, there will be a desire to avoid eroding the Courts' jurisdiction in such proceedings, as has occurred in cases elsewhere, such as in Fulham FC v Richards. The authors believe that the latter approach is more likely and that the Courts will find it increasingly difficult to determine that the subject matter of a dispute is something that can be hived off for arbitration and which does not give rise to the fundamental statutory question of whether it is just and equitable for the company to be wound up.

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[1] CICA (Civil) Appeal Nos: 7&8 of 2019

[2] [2020] HKCFI 355

[3] [2015] 1 SLR 373

[4] [2011] EWCA Civ 855

[5] [2014] 4 HKLRD 759

[6] C-Mobile Services Limited v Huawei Technologies Co. Limited (BVIHCMAP 2014/0017)

 

An original version of this article was first published by Asian Legal Business, October 2020.

© Carey Olsen 2020.

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