Winding up petitions and arbitration

Statutory demands are routinely used as a pressure point in commercial disputes. But what if winding up proceedings are then brought, but the underlying contract is governed by an arbitration clause?

This has long been a confused area, and defendants have relied on the English courts' pro-arbitration stance to (try to) stay winding up proceedings against them if the debt is governed by an arbitration clause. The Privy Council has put paid to this ruse: English courts will allow a winding up petition to proceed – even if there is an arbitration clause in place – as long as the debt is not genuinely disputed.

Arbitration and insolvency

Section 9 of the Arbitration Act 1996 (AA 1996) allows the court to stay legal proceedings in favour of arbitration. This is generally what the courts will do if there is an arbitration clause in place – the court considers its role to be to implement and enforce the parties' prior agreement to arbitrate.

Section 9 does not require the courts to stay a winding up petition simply because an arbitration agreement applies to the debt. This is because a winding up petition is not considered a 'claim' for the purposes of section 9, as the basis for a petition is that a debt is undisputed. Where there is no dispute, there is nothing to refer to arbitration.

The old approach of English courts was to exercise their discretion to stay winding up petitions in favour of arbitral proceedings, except in exceptional circumstances (Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575). The unintended consequence of Salford Estates was to allow debtor companies to delay payment of genuinely undisputed debts by insisting upon the creditor pursuing the debt through arbitration.

The Privy Council provides guidance

Salford Estates was criticised by the Privy Council in Sian Participation Corp v Halimeda International Ltd [2024] UKPC 16. The Privy Council has clarified that the correct approach is for courts not simply to stay under section 9 because there is an arbitration agreement. Instead, they will now consider whether or not the debt is disputed on substantial grounds. If it is not – even if one side says it is – then the winding up petition will be allowed to continue.

The Privy Council held that if parties intend for the arbitration agreement to prevent winding up petitions in general, then they must say so. Although this was a British Virgin Islands (BVI) case, the Privy Council exercised its power to directly apply the decision to English law.

Consider your clauses carefully

Sian Participation Corp is a welcome clarification of the interaction between insolvency procedures and arbitral mechanisms – but it does demonstrate the tension between the party-led nature of arbitration on the one hand, and the class remedy that is the insolvency process on the other.

On one view, the approach of the Privy Council will prevent tactical usage of winding up petitions in circumstances where there is a genuine dispute over a debt which ought to be resolved by arbitration. On the other hand, it is an interference with party autonomy, introducing a circumstance in which an arbitration clause can be avoided in favour of the national courts.

Think carefully when examining a new arbitration clause. Whether you want the insolvency process to be available or not, make that decision now – and draft it into the agreement.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2025