After ten years of following the English Court of Appeal’s decision in Salford Estates (No.2) Limited v Altomart Limited , the Privy Council has directed courts in England & Wales to consider, before entertaining winding-up proceedings, whether the petitioning debt is disputed on genuine and substantial grounds.

The decision overturns the landmark 2014 judgment; that a winding-up petition should be dismissed in favour of arbitration (as long as the debt is not admitted). This position would only shift in “wholly exceptional circumstances.”

The Privy Council on 19 June 2024 in Sian Participation Corp (In Liquidation) v Halimeda International Ltd  (on appeal from the British Virgin Islands) found that Salford Estates  had been wrongly decided. The English Court of Appeal was wrong to have introduced “a discretionary stay of winding up petitions “where an insubstantial dispute about the creditor’s debt was raised by parties to an arbitration agreement”. In doing so, the Privy Council held that there was “an impermissible and unexplained leap in the reasoning of the Court of Appeal as to the extent of the legislative policy behind the [arbitration legislation]”.

In arriving at its decision, the Privy Council carefully examined the policy behind the legislation and held, that “none of the general objectives of arbitration legislation…are offended by allowing a winding up to be ordered where the creditor’s unpaid debt is not genuinely disputed on substantial grounds.”

Further, and pragmatically, it was found that a creditor should not be required “to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose”.

The correct test for the court to apply where the disputed debt on which the application is based is subject to an arbitration agreement or an exclusive jurisdiction clause, is whether it “is disputed on genuine and substantial grounds”.

Much of the common law world has gravitated towards the pro-arbitration stance of Salford Estates. It was seen as a means of protecting companies from overtly zealous creditors leveraging their position by issuing winding up proceedings without first establishing their debt.

Whilst the Privy-Council was keen to stress that the decision was not “anti-arbitration”, the reinstatement of the need to show a “genuine and substantial dispute,” will certainly be seen as a bonus to creditors, who will now see a quicker and more direct route to recourse.

The importance of the decision was underlined by the unanimous decision of the Board to extend the BVI position to England & Wales under a Willers v Joyce  direction. Importantly, the decision was also deemed applicable to exclusive jurisdiction clauses.

Undoubtedly, the decision will receive a lot of attention in other common law jurisdictions. It will also have a considerable impact on creditor strategy and the future drafting of disputes clauses.

A link to the full judgment can be found here.