Privy Council recommends stay of winding up application in favour of arbitration

In FamilyMart China Holding Co Ltd (Respondent) v Ting Chuan (Cayman Islands) Holding Corporation (Appellant) (Cayman Islands) [2023] UKPC 33, the Privy Council has provided useful guidance about the interplay between an arbitration agreement and exercise of the Cayman court’s powers and discretion to wind up a company on just and equitable grounds. This case will have relevance in Australia, given the persuasiveness of Privy Council decisions, the consideration the court gave to leading common law judgments, and Australia’s similar statutory provisions.

This case may also have relevance beyond a member’s application to winding up a company on just and equitable grounds, for example, in considering whether a court should set aside a statutory demand where there is a dispute about a debt which the court would have jurisdiction to hear under the set aside application but which is also justiciable under the arbitration agreement.  Similarly, this decision may also be relevant in the court’s exercise of its discretion to grant leave to proceed in an arbitral proceeding against a company in external administration – rather than (for example) merely relying on the administrator’s adjudication power.   

The central question in the appeal was whether a shareholders’ agreement containing an agreement to arbitrate any disputes in connection with or arising out of the agreement would apply to a petition to wind up the company on just and equitable grounds – in other words, could the winding up petition be heard by the arbitral tribunal, and whether the court must grant a stay of the winding up application for the underlying dispute to be arbitrated. The Privy Council, which overturned the Court of Appeal of the Cayman Islands’ judgment, held that (i) an arbitration agreement does not amount to a contractual prohibition against the commencement of winding up but (ii) the court must grant a stay of the winding up for matters falling within the arbitration agreement to first be decided.

Background facts

Ting Chuan Holding Corporation (Ting Chuan) owned 59.65% of the shares in China CVS Holding Corporation (Company) and FamilyMart China Holding Co Ltd (FamilyMart) owned the remaining 40.35%. Ting Chuan and FamilyMart were party to a shareholders’ agreement which contained an arbitration agreement with a clause stating that “any and all disputes in connection with or arising out of… [the Shareholders’ Agreement shall be] submitted for arbitration” under International Chamber of Commerce (ICC) rules, seated in Beijing.

In 2018, FamilyMart petitioned the Grand Court of the Cayman Islands to wind up the Company, arguing that it was just and equitable for the court to grant the order. The grounds of the petition considered by the Grand Court were:  

1. Whether FamilyMart had lost trust and confidence in Ting Chuan in connection with the conduct and management of the Company’s affairs;
2. Whether the fundamental relationship between FamilyMart and Ting Chuan had irretrievably broken down;
3. Whether it would be just and equitable to wind up the Company;
4. Whether FamilyMart should be granted alternative relief, namely an order requiring Ting Chuan to sell its shares in the Company to FamilyMart, and, if so, the value of those shares; and
5. Whether, if such alternative relief was not appropriate, an order winding up the Company should be made and whether the persons identified by FamilyMart should be appointed as joint official liquidators.

Ting Chuan sought a mandatory stay of the winding up petition under section 4 of the Cayman Islands’ Foreign Arbitral Awards Enforcement Act (1997 Revision) (FAAEA) which gave effect to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (New York Convention). 

Both section 4 of the FAAEA and section 7 of the International Arbitration Act 1974 (Cth) in Australia allow for a stay in legal proceedings of matters that are subject to an arbitral agreement. Section 4 of FAAEA states:

“If any party to an arbitration agreement, or any person claiming through or under him, commences any legal proceedings in any court against any other party to the agreement, or any person claiming through or under him, in respect of any matter agreed to be referred, any party to the proceedings may at any time after appearance, and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings; and the court, unless satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings.”

Privy Council judgment

Issues for determination

The issues which fell to the Privy Council to determine were:

1. The rights of parties to arbitration generally;
2. The interpretation of section 4 of the FAAEA: (a) the meaning of “legal proceedings”, (b) “matters” and (c) “the arbitration agreement is…inoperative”;
3. Whether there should be a partial stay under the FAAEA so that matters within the scope of the arbitration agreement are dealt with first;
4. Whether a discretionary stay of the winding up petition should be granted; and
5. Whether the arbitration agreement is a contractual prohibition against a party applying to wind up the Company.

1. The rights of parties to an arbitration agreement

The Board (being the judges of the Privy Council) held that primacy should be provided to arbitration agreements unless there is a statute that prohibits arbitration of a particular matter or if it is incapable of resolution by arbitration. This derives its source from the New York Convention which prioritises the parties’ freedom to contract and enter into arbitration agreements (which is also a central feature of English and Australian contract law).

2a. The meaning of “legal proceedings”

Having analysed several judgments in various common law jurisdictions, the Board found that “legal proceedings” in section 4 of the FAAEA includes a petition to wind up a company on just and equitable grounds of which the parties to the arbitration agreement are members (shareholders).

2b. Meaning of “matter” in domestic legislation implementing the New York Convention

Based on the authorities in a number of jurisdictions, including the Australian cases WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 and Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332, the Board concluded that there is a broad consensus on how to determine which ‘matters’ must be referred to arbitration.

The two-step process of determining the scope of the stay (if any) involves the court determining:  

1. what matters the parties have raised or will foreseeably raise in the court proceeding; and
2. whether each such matter falls within the scope of the arbitration agreement.

The court must ascertain the substance of the dispute between the parties. This involves looking at the claimant’s pleadings, but not overemphasising pleadings which may be aimed at avoiding a reference to arbitration. It also involves a consideration of the defences, including any reasonably foreseeable defences to the claim or part of the claim.

The Board held that it is not sufficient to merely identify that an issue can constitute a dispute within the scope of an arbitration agreement without also deciding whether the issue is reasonably substantial and whether it is relevant to the outcome of the legal proceedings. As stated above, a winding up on just and equitable grounds started by a petition of a shareholder constitutes a legal proceeding.

2c. Meaning of “the arbitration agreement…is inoperable”

Article II(3) of the New York Convention provides exceptions to the obligation of a court of a contracting state to refer a ‘matter’ to arbitration if the arbitration agreement is “null and void, inoperative or incapable of being performed”.

There are two broad circumstances in which an arbitration agreement may be inoperative.

First, “subject matter non-arbitrability” occurs where certain types of disputes are excluded by statute or public policy from determination by an arbitral tribunal. The example provided by the Board was in the context of UK employment disputes.

Secondly, “remedial non-arbitrability” arises where the arbitration tribunal has the power to hear a matter but cannot provide certain remedies.

In the common law world (including Australia) there is a consensus that an arbitration agreement cannot confer on an arbitral tribunal the power to make an order to wind up a registered company on the application of a creditor where the company is insolvent. There is strong authority in support of a similar exclusion where the application is made by a contributory where the company is solvent. This is because the power to wind up a company lies within the exclusive jurisdiction of the courts, which alone have the discretion as to whether to make such an order.

However, short of a winding up order, parties can still obtain a range of remedies from an arbitral tribunal. An arbitral tribunal has the power to grant inter-party remedies, such as ordering a share buy-out in proceedings for unfairly prejudicial conduct or shareholder oppression. Matters, such as the question of whether one party has breached the shareholders’ agreement or whether it has rights arising out of the relationship can be arbitrated notwithstanding that there is an application to wind up a company. The arbitration agreement itself is not inoperative simply because the arbitral tribunal cannot make a winding up order.

3. Whether there should be a partial stay under the FAAEA so that matters within the scope of the arbitration agreement are dealt with first

Both parties had accepted that FamilyMart’s first two allegations – namely that it had lost trust and confidence in the conduct and management of the Company’s affairs and that its relationship with Ting Chuan had irretrievably broken down – fell within the scope of the arbitration agreement.

Therefore, they were “matters” as defined in section 4 of the FAAEA for which a stay pro tanto of the winding up proceeding is mandated.

4. Whether a discretionary stay of the winding up petition should be granted

There is a general principle that a winding up process is intended to be expedient, and the court will rarely grant a stay of such proceedings. However, the Board stressed that a stay for arbitration is a special case. Where there are inter-party disputes between the shareholders which are governed by an arbitration agreement and a resolution of those disputes is an “essential precursor to the determination of a winding up petition on the just and equitable ground”, then there are strong reasons for granting a stay of the hearing of the winding up application.

Therefore, the Bench opined that there should be a stay for grounds 3-5 (being that it is just and equitable to wind up the Company, that FamilyMart should be entitled to a buy-out or in the alternative, an order winding up the Company should be granted) of FamilyMart’s petition to first resolve grounds 1 and 2 (being that FamilyMart had lost trust in the Company’s leadership and the relationship between FamilyMart and Ting Chuan had irrevocably broken down) in an arbitral tribunal.

In determining whether it was just and equitable to wind up the company, the court could rely upon the determinations and agreed upon statement of agreed facts after the arbitration. Therefore, there would not be any inconsistent findings or duplication of effort between the tribunal’s and later court’s decision.

5. Whether the arbitration agreement is a contractual prohibition against a party applying to wind up the Company

This particular arbitration agreement provided an obligation to arbitrate certain matters, but it was silent as to the presentation of a winding up petition against the Company. Without an express contractual prohibition, the courts will not read an artificial prohibition into the shareholders’ agreement.

Key takeaways

1. This decision will be relevant in other common law jurisdictions, especially noting that the Privy Council reviewed authorities from multiple jurisdictions including Australia, Canada, the United Kingdom, the United States, Hong Kong and Singapore.
2. In relation to winding up applications on just and equitable grounds, courts need to determine which (if any) reasonably substantial matters or defences that have been raised or will foreseeably be raised in relation to the application fall within the scope of the arbitration agreement between the parties. These matters will be referred to an arbitral tribunal and a stay granted for any other issues in the winding up application whose determination are contingent on the resolution of issues in arbitration.
3. There are two circumstances where arbitration would not be possible and a stay not granted – (i) where certain types of disputes are excluded by statute from the tribunal’s jurisdiction, and (ii) where the tribunal does not have the power to make appropriate orders, such as to wind up a company.
4. An arbitration agreement, without an express clause to the contrary, does not prohibit either of the parties from commencing a winding up application against the company on just and equitable grounds.
5. This decision may be relevant to how a court exercises its discretion in cases based on a statutory demand, where the debt is subject to an arbitration agreement.
6. This decision may be relevant to how a court exercises its discretion in granting leave to proceed against a company in liquidation or its property, where the dispute is subject to an arbitration agreement.
7. Parties negotiating a shareholders’ agreement may wish to consider the inclusion of an arbitration agreement, which might serve to limit the court’s jurisdiction to find facts giving rise to a just and equitable winding up of the company where such finding would be subject to an arbitral agreement. This could be useful where, for example, the parties wish the decision maker to have particular expertise, or in international cases – be of a particular nationality.