A retreat by the BVI Commercial Court in the battle between liquidation and arbitration
In Re Lenox International Holdings Ltd BVIHC (COM) 37/2020 (6 July 2020) and Re Fair Cheerful Ltd BVIHC (COM) 34/2020 (16 July 2020) the Court declined to appoint liquidators to companies on the grounds of their insolvency, in circumstances where the parties had previously entered into arbitration agreements which governed disputes over the petition debts. The Court stated that it was “highly desirable” for a creditor first to serve a statutory demand before applying for the appointment of liquidators, and noted that “no good reason for failing to serve a statutory demand has been provided”.
Despite there being no statutory requirement to serve a statutory demand prior to applying to appoint liquidators to a company under the Insolvency Act 2003, the decisions in Re Lenox and Re Fair Cheerful led some to question whether statutory demands would have to be served as a matter of course prior to any application to liquidate a company on the grounds of insolvency.
Two separate authorities weighed heavily on Justice Jack’s decisions in Re Lenox and Re Fair Cheerful. These were: (1) s18 of BVI’s Arbitration Act 2013, which provides for the mandatory stay of disputes that are subject to an arbitration clause; and (2) the English Court of Appeal decision in Salford Estates (No 2) Ltd v Altomart, which held that in England (save in wholly exceptional circumstances) where there is an arbitration provision applying to the underlying debt, a winding-up order should never be made.
The judge had accepted that it was settled law in BVI, following the Court of Appeal’s decision in C-Mobile v Huawei BVIHCMAP 2014/0017 (15 September 2015) that an application to appoint liquidators was a collective remedy undertaken for the benefit of all the creditors, which will not normally be caught by an arbitration agreement. However, he considered that an application to set aside a statutory demand – unlike an application to appoint a liquidator – would be a “pure party-to-party dispute”, which would allow the company to seek an automatic stay pursuant to s18 pending determination of the debt. Hence, the judge reasoned that service of a statutory demand would allow a company to seek a stay for arbitration, which would not be the case if a creditor proceeded directly to an application to appoint a liquidator.
Justice Jack considered that, where s18 was engaged, the question of whether the debt was bona fide disputed on substantial grounds (ie the Sparkasse Bregenz test) would not arise, as the Court should not determine the substance of any defence raised by the company: a question that was itself a matter for arbitration.
In the more recent case of A Creditor, Justice Jack was referred (apparently for the first time) to the Court of Appeal’s other decision on 15 September 2015 in C-Mobile v Huawei BVIHCMAP 2014/0006 (15 September 2015), in which the Court of Appeal refused an application – made on the grounds of a relevant arbitration agreement and the legislative provision regarding mandatory stays in favour of arbitration – to set aside a statutory demand.
Consequently, while not retreating entirely from his previous decisions, in A Creditor, Justice Jack:
- Refused to dismiss or stay the application to liquidate, despite no statutory demand having been served;
- Made a determination that the grounds on which the debt was disputed had “no substance” (ie was not substantial) and that the company did not “have any belief in its veracity” (ie was not bona fide); and
- Appointed a liquidator to the Company.
It remains to be seen whether the Commercial Court will require that future applicants have a “good reason” not to first serve a statutory demand, and whether it will apply the Sparkasse Bregenz test before referring a debt to determination by arbitration, but the approach taken in A Creditor indicates that the Commercial Court is moving back into line with the law as set out by the Court of Appeal in the C-Mobile cases.
