Competing interests: Arbitration clauses & winding-up proceedings in common law jurisdictions

In recent years, courts in various common law jurisdictions have taken divergent approaches to the standing of creditors to pursue a winding-up application against a counterparty where the relevant contract under which the purported debt arises contains an arbitration clause. The issue is particularly important in cross-border matters where parties may find themselves having to consider issues across multiple jurisdictions. This article seeks to examine the differing approaches and offer guidance to practitioners on how best to manage the potential pitfalls.

Broadly speaking, common law courts have adopted one of two approaches where a debtor seeks to oppose a winding-up application on the basis that the underlying debt is subject to an arbitration clause. The first applies the usual standard for determining whether a debt that is disputed can be used to wind up a company, namely whether the debt is disputed on genuine and substantial grounds. The second, more restrictive (or pro-arbitration) approach essentially only looks to whether a valid arbitration clause applies to the disputed debt, and that in raising the dispute the debtor is not abusing the court’s process.

From a purely conceptual point of view, there are good arguments in favor of both positions.

In jurisdictions that recognize arbitration agreements, it may be seen at odds with public policy if one party can utilize the insolvency regime to effectively override party autonomy and avoid needing to engage with the agreed dispute recognition mechanism. Presumably the parties both agreed to resolve disputes by way of arbitration—as they are entitled to do—and it should not, therefore, be open for one party to bypass this agreed mechanism and utilize the courts to effectively resolve a dispute.

On the other hand, the nature of insolvency as a collective process is an important bulwark against debtors depleting assets when the interests of creditors should come first. Importantly, why should the inclusion of an arbitration agreement in a contract result in different treatment in an insolvency scenario than for parties who do not elect to arbitrate? In such a scenario, the commencement of insolvency would (arguably) not finally resolve any dispute about the debt in question, rather the courts have developed a threshold to assess whether the relevant creditor has standing to wind up a debtor, and this should not differ just because a contract contains an arbitration agreement. Is it really best practice to force parties to incur additional time and costs to arbitrate a dispute when the debtor in question would, if unsuccessful, be placed into liquidation anyway?

Theory aside, it is important for counterparties to understand the positions in different jurisdictions when entering into contracts—it is particularly incumbent on legal advisors to apprise their clients of the differing positions at the negotiation stage—and for insolvency professionals to recognize the likely differing outcomes when considering how to advise a client in distress (or its creditor or a potential investor). We will now go into a bit more detail on how the approaches taken differ in three main jurisdictions: Singapore, Hong Kong, and England and Wales.

The Singapore approach

The Singapore approach, often described as pro-arbitration, can be summarized as follows:

Where a disputed debt is prima facie subject to an arbitration agreement, winding-up proceedings will be stayed or dismissed as long as:

1. There is a valid arbitration agreement between the parties.
2. The dispute falls within the scope of the arbitration agreement.
3. The dispute is not raised by the debtor-company in abuse of the court’s process.

This approach was recently confirmed by Singapore’s Court of Appeal in Singapore Commodities Group Co, Pte Ltd v Founder Group (Hong Kong) Ltd. In that case, Singapore’s Court of Appeal confirmed that where a disputed debt is prima facie subject to a valid arbitration agreement, the court will ordinarily dismiss the winding-up application (or, in exceptional circumstances, grant a stay). Central to this is the premise that a creditor who relies on a disputed debt that falls within the scope of an arbitration agreement has not established standing to present a winding-up application. The dispute must be resolved by the agreed means (i.e., arbitration) and the court will not engage in any merits review of the dispute.

Genuine dispute on substantial grounds

The Singapore approach stands in contrast to the standard applied in England and Wales, as well as other common law jurisdictions including the British Virgin Islands, Cayman Islands, and Malaysia—a winding-up application should proceed based on whether the debt is "genuinely disputed on substantial grounds" even if there is an arbitration agreement between the parties, as decided in Sian Participation Corp (in liquidation) v Halimeda International Ltd.

Sian Participation was a decision of the Privy Council arising from a claimed creditor’s winding-up application in the British Virgin Islands. For its winding-up application, the claimed creditor relied on a substantial unpaid debt under a facility agreement containing an arbitration clause. The debtor disputed the claim on the basis of a crossclaim and/or set-off. The Privy Council in Sian Participation held that the English Court of Appeal’s decision in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) and cases that followed it were "wrong to introduce a discretionary stay of creditors’ petitions where an insubstantial dispute about the creditor’s debt is raised between parties to an arbitration agreement." The appropriate test was therefore the one that had been used by the Eastern Caribbean Court of Appeal (from an appeal from the BVI): whether the debt is disputed on genuine and substantial grounds. Given the findings by the courts below that there was no dispute over the claim on substantial grounds, in applying this test, the debtor failed to prevent a winding-up.

For England and Wales, in view of the Board of the Privy Council’s finding that Salford was wrongly decided, it issued a Willers v Joyce direction that Salford no longer be followed in England and Wales and that Sian Participation now represents the law of England and Wales.

Underlying difference: Standing & court’s role

To better understand how these different approaches were arrived at, insolvency professionals should consider a logically anterior question— whether a dispute over the debt affects the applicant’s standing to invoke the court’s winding-up jurisdiction.

The Singapore approach starts from the premise that a prima facie dispute over the debt falling within the scope of an arbitration agreement will deprive the applicant of standing. As explained by the Singapore Court of Appeal in Founder Group (Hong Kong) Limited (in liquidation) v Singapore JHC Co Pte Ltd, where a debt is subject to a dispute that falls within the scope of an applicable arbitration clause, "it cannot be assumed at that point that the defendant company is in fact a debtor, that being the precise question that the parties have agreed to refer to arbitration." Because the arbitration agreement would also generally prevent the court from exercising any discretion pursuant to its general civil jurisdiction to decide the dispute in the winding-up application, the applicant will be required to establish its standing by obtaining a resolution of the dispute in arbitration as the parties’ agreed forum.

The decision in Sian Participation, by contrast, treats the question of standing as conceptually distinct from the question of whether to give effect to the arbitration agreement. On this view, the court retains a discretion to exercise its general civil jurisdiction to assess whether the debt is disputed on bona fide and substantial grounds. As stated by the board in Sian Participation, a winding-up petition does not seek to and does not resolve or determine anything about the petitioner’s claim to be owed monies by the company, nor "the existence or amount of the debt." Instead, the petition simply initiates insolvency proceedings, and accordingly the mere presentation of a petition is not in breach of the agreement to have disputes determined by arbitration.

The key difference appears to be the extent to which the courts of the jurisdiction consider themselves capable of exercising their general civil jurisdiction to assess any dispute between the applicant and the debtor in the face of a valid arbitration agreement.

Further, insolvency professionals should consider how the courts assess the obligation imposed by an arbitration agreement.

The Sian Participation approach starts from the premise that an arbitration agreement prevents parties from obtaining a final adjudication on the merits of their dispute in a forum other than arbitration. On this view, it would not be inconsistent with the parties’ agreement to arbitrate for the court to assess if the debt is disputed on bona fide and substantial grounds and subsequently place the debtor into liquidation if this question is answered in the negative.

The Singapore courts, however, have stated that the court should not engage in any form of merits review as that is a matter which the parties have reserved absolutely to the arbitral tribunal.

This fundamental divergence of approach to arbitration agreements has led to a divergence between jurisdictions on whether to apply a triable issues standard to the arbitration agreement between parties, or a prima facie standard.

The Hong Kong approach

Hong Kong has adopted a position that appears closer to that taken in Singapore and has not adopted the approach taken in Sian Participation.

In Re Simplicity & Vogue Retailing (HK) Co, Limited, the Hong Kong Court of Appeal adopted a "multifactorial" approach, holding that a winding-up petition will generally be dismissed where:

1. The company disputes the debt.
2. The contract giving rise to the debt contains an arbitration clause covering the dispute.
3. The company evidences a genuine intention to arbitrate (for example, though not determinatively, by taking steps required under the arbitration clause to commence arbitration).
4. That any defence is not frivolous or an abuse of process.

However, the Hong Kong courts have shown their willingness to recognize the application of the Sian Participation decision where winding-up proceedings have been brought in an offshore jurisdiction. In Hyalroute Communication Group Limited v Industrial and Commercial Bank of China (Asia) Limited, the debtor sought to obtain an anti-suit injunction to prevent the creditor from presenting a winding-up petition in the Cayman Islands on the basis that the facility agreement governing the debt contained an arbitration clause. The Hong Kong court refused to grant such an injunction, finding that, notwithstanding the divergent approaches taken between courts of Hong Kong and the Cayman Islands on this issue, it was appropriate to apply the relevant test that would be used in the Cayman Islands, and that winding-up proceedings in the Cayman Islands would "not have the effect of finally resolving the dispute within the meaning of [the arbitration clause]," hence the creditor would not be in breach of its obligations thereunder.

Utility of multiple approaches

While it is perhaps confusing that fundamentally different approaches are taken in different common law jurisdictions, particularly given the prevalence of cross-border investment and lending transactions, understanding the differing approaches has the advantage of giving counterparties the ability to negotiate the terms of their contracts in the knowledge that effectively submitting to one approach or the other allows a better reflection of their respective commercial objectives. In short, these different approaches should be seen simply as negotiating positions at the time of entering into a contract and can be reflected in pricing where one party is uncomfortable with the possible outcome of one choice over another.

If parties, for example, value the privacy of arbitration above all else, the Singapore approach is likely preferable. Alternatively, a lender may place the importance of being able to wind up a defaulting borrower above any privacy considerations and so seek to ensure that the approach taken in Sian Participation will apply. It may be worthwhile to also consider the impact of the choice on any secondary sale that may occur of the debt. For instance, inclusion of arbitration clauses and jurisdiction clauses may impact whether a potential purchaser of the debt would need more time to conduct due diligence on the debt to consider whether there is a dispute that would prevent them from making a winding-up application.

Depending on the industry, the type of assets involved, and the nature of the transaction, the preferred choice of forum and approach may differ.

This approach can be compared to the operation of the rule in Gibbs when selecting the governing law of a financing arrangement. Parties may prefer to select a governing law and jurisdiction, such as England and Wales, that would not allow their debts to be restructured other than using that law. Alternatively, a debtor may want to retain the flexibility to restructure in other jurisdictions, and a lender can price the debt accordingly depending on its risk appetite. Ultimately, both approaches should be seen as protecting party autonomy in cross-border transactions, albeit that perhaps greater certainty would assist in making these decisions at the contract formation stage when disputes may not arise for several years.

This area of the law remains a developing one, and interestingly, Singapore’s Court of Appeal did not close off the possibility of the Singapore position on dealing with such disputed debts changing. Instead, the Court of Appeal said, in Singapore Commodities, that "until a party mounts a successful challenge against AnAn and Founder Group (CA) before this court, the position under Singapore law continues to be as set out in those cases." Time will tell if common law jurisdictions will align their approaches, but in the meantime, parties and insolvency professionals will need to remain aware of the impact of the differing approaches.

Authors: Rob Child, Partner; Kai Yun Tan, Partner; Peter Madden, Counsel; Ismail Noordin, Senior Associate

This article was originally published in the Journal of Corporate Renewal July/August 2026 edition which could be accessed here.