Approach of offshore jurisdictions in matters of liquidation vis-à-vis arbitration agreements
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December 3, 2021 – It has become increasingly common for shareholders to agree that disputes over the ownership or management of a business should be referred to arbitration. This often means that courts in a company’s jurisdiction of incorporation have a limited role in overseeing corporate governance matters. However, the liquidation of offshore companies is usually the prerogative of their home courts, and this can often provide an important safeguard for investors in companies that are poorly managed or used for harmful purposes when contractual provisions relating to litigation. do not offer protection.
When arbitration clauses are used, they tend to leave no other method of settling disputes. Article 8 of the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law, which takes effect in the arbitration law of the British Virgin Islands and the Cayman Islands, has the effect of requiring automatically a stay when a party initiates legal proceedings that infringe on the scope of an arbitration agreement.
The ability and discretion to liquidate companies remains a matter that cannot be left to an arbitral tribunal. However, when a claimant seeks to wind up a business because it cannot pay its debts, the underlying debt issues can always be arbitrable at first.
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A business will generally be able to withstand insolvency liquidation if the claim (s) underlying the insolvency are disputed on substantial grounds. This principle is implemented in BVI in accordance with the decision Sparkasse Bregenz Bank AG v Associated Capital Corporation (BVIHCMAP2002 / 0010) (judgment delivered on June 18, 2003). This has the effect of dividing two questions: (i) whether there is a debt due and payable that the company has not paid; and (ii) if so, should the court exercise its discretion to wind up the company.
In Salford Estates (No. 2) Ltd v Altomart ( EWCA 1575 Civ,  1 Ch 589), the English Court of Appeal adopted what is considered in offshore jurisdictions to be “an uncompromising approach”: while accepting that the court retains discretion whether or not to stay the liquidation claim in favor of arbitration, if the debt is the subject of a dispute and the facts giving rise to it are covered by an arbitration clause, then the court should suspend the request to allow arbitration of the debt issue, except in “very exceptional” circumstances.
The courts in the BVI have not taken such a hard-line approach. Although the Eastern Caribbean Court of Appeal (“CE CoA”) upheld the Salford Estates decision (No 2) as it provided that the courts will still have the discretion to decide whether the liquidation proceedings should be stayed , it did not consider that a dispute over an underlying debt should almost always justify a stay.
In C-Mobile Services Limited v Huawei Technologies Co. Limited (BVIHCMAP2014 / 0017), the EC held that any dispute could be resolved at the time an applicant makes a legal request (i.e. before the request for liquidation be issued) and at this stage, proof of a referral to arbitration would be a factor to be considered in exercising the court’s discretion as to whether to dismiss the legal claim. Otherwise, a claim for liquidation would not be stayed in favor of arbitration if it could not be shown that there was a substantial dispute as to the debt.
In two decisions of the BVI Commercial Court in 2020, the court had to examine the relevance of an arbitration clause on claims for liquidation for which no prior legal request had been issued – Rangecroft v Lenox International (BVIHCOM2020 / 0037) (judgment delivered on July 6, 2020) and IS Investment Fund v Fair Cheerful (BVIHCOM2020 / 0034) (judgment delivered on July 16, 2020).
The court ruled in both cases that the claim should be stayed or expunged so that the debt issue could be arbitrated, leading some to question whether the BVI courts were realigning themselves with the Salford Estates approach ( No 2).
However, in early 2021, the Commercial Court declared in Re A Creditor v Anonymous Company Ltd (judgment delivered January 28, 2021) that BVI courts did not accept the hardline approach favored by the English Court of Appeal. in that case.
As it stands, the courts of the BVI will not stay or set aside claims for compulsory liquidation in favor of arbitration unless the Respondent demonstrates that there is an actual dispute as to the matter giving rise to insolvency (i.e. the alleged debt) arises and this issue falls under a valid arbitral award. The BVI tribunal will therefore examine the merits of any claim that the debt is in dispute before concluding that the case is stayed, which differs from the approach taken in England.
Fair and equitable liquidation requests can work in totally different circumstances from those presented on insolvency grounds, and the issues to be decided by the court can often be more complex.
Fair and equitable “pure” liquidation claims (where there are no insolvency claims) are more common abroad than in England. They can be used in a variety of scenarios, including when there has been serious business mismanagement or when the business has lost its bedrock. While there can often be considerable overlap with unjust prejudice claims, a fair and equitable liquidation claim is made on behalf of an entire class (eg, all members or creditors) and the entire claim is centered on whether liquidators should be appointed, rather than just a form of possible relief.
In Re China CVS (Cayman Islands) Holding Corp (CICA Civil Appeal Nos 7 & 8 of 2019), the Grand Cayman Court considered whether, as is the case with insolvent liquidation claims, certain questions or problems could be “Distributed” to arbitration when there is an applicable clause. He held that this would not be appropriate because the issues raised as justifying a winding-up are relevant to the exercise of the discretion of the tribunal to grant the relief sought and, therefore, the tribunal would not rely on the findings. of another tribunal on these matters. Such requests are therefore not divisible.
The CVS decision was recently applied to BVI in Hydro Energy Holdings BV v Zhaoheng (BVI) Limited et al (BVIHCOM20201 / 0091) (judgment delivered on August 16, 2021). Although the courts of the BVI have historically made it clear that undue hardship claims are arbitrable and may engage the mandatory stay provisions of the arbitration law (Ennio Zanotti v Interlog Finance Corp et al (BVIHCV2009 / 0394) (judgment delivered February 8, 2010)), the Commercial Court made it clear in Hydro that the question of whether the company should be liquidated on a fair and equitable basis was not arbitrable.
The Hydro case provides a good example of why a shareholder may need to seek redress in the courts of the jurisdiction of incorporation. In this case, the member alleged numerous misappropriation of group assets by the majority shareholder and de facto controller of the company. However, the arbitral tribunal and the reviewing court had not been quick enough to grant remedies that would prevent further misappropriation. BVI courts, on the other hand, were able to appoint provisional liquidators to “hold the ring” pending the determination of the underlying liquidation claim.
In cases where a member or creditor of a company suspects that management has misappropriated company assets, the appointment of liquidators can be a powerful tool as they will be ideally placed to thoroughly investigate the affairs of the company. both at the time of appointment and with respect to historical operations. Where appropriate, they can of course also bring actions against current or former directors to recover the wrongly misappropriated assets, which may have the effect of ensuring that creditors are fully paid and / or shareholders receive appropriate distributions. . The ability to put in place provisional liquidators prior to liquidation is also essential to ensure that any prejudice is mitigated and can be likened to the imposition of a freezing order and the appointment of a receiver to support a claim. conventional.
When an arbitration clause does apply, it should therefore be considered whether the objectives of a potential plaintiff would be better served by seeking to liquidate the company in the jurisdiction of incorporation, as this can provide more powerful and appropriate tools to prevent and reverse any wrongdoing.
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