Arbitrating the underlying “matters” to a winding up petition: Privy Council makes seminal ruling

Arbitrating the underlying “matters” to a winding up petition: Privy Council makes seminal ruling

At the end of 2022, we foreshadowed in a prior article this seminal ruling of the Privy Council concerning the broader question whether certain underlying “matters” to a winding up petition could be made subject to arbitration in the context of a shareholder dispute.

We have extracted below some of the key findings made by the Privy Council in FamilyMart China Holding Co Ltd (Respondent) v Ting Chuan (Cayman Islands) Holding Corporation (Appellant) (Cayman Islands) [2023] UKPC 33.

1. Following a review of case law from several jurisdictions, there is a general consensus among leading arbitration jurisdictions in the common law world that, where a country is a signatory of the New York Convention, domestic courts will take a pro-arbitration approach, giving priority to the parties’ agreement to arbitrate.

• There is also a general consensus that, in determining which “matters” must be referred to arbitration, the court will adopt a two-stage test. First, the court determines what the matters are which the parties have raised, or foreseeably will raise, in the court proceedings. Secondly, the court determines in relation to each such matter whether it falls within the scope of the arbitration agreement.

• The following principles are relevant to the two-stage test: (1) the court must ascertain the substance of the dispute, including any raised and possible defences; (2) stays may be granted in relation to a part of the court proceedings; (3) a “matter” is a substantial issue that is legally relevant to a claim or a defence which is susceptible to determination by an arbitrator as a discrete dispute, rather than an issue which is peripheral or tangential; and (4) the test entails a matter of judgment and the application of common sense [34]-[65].

• Whilst giving effect to the parties’ bargain by this approach may involve the fragmentation of the parties’ disputes, the effects of such fragmentation can be mitigated by effective case management by both the court and the arbitral tribunal.

• There is a general consensus in the common law world that the power to wind up a company lies within the exclusive jurisdiction of the courts. An arbitral tribunal can, however, grant certain remedies, such as ordering a share buy-out, where no third party has a legal interest, and there is no public element. In an application to wind up a company there may be matters in dispute, such as allegations of breaches of a shareholders’ agreement, which can be referred to an arbitral tribunal notwithstanding that only a court can make a winding up order.

• Finally, while the arbitration agreement in this case required certain matters to be determined by arbitration, that obligation did not amount to a contractual prohibition against the initiation of winding up proceedings as contemplated by section 95(2) of the Companies Act in the Cayman Islands.

Considered alongside the recent UK Supreme Court decision in Republic of Mozambique v Credit Suisse International [2023] UKHL, what constitutes “matters” susceptible to arbitration has now been thoroughly discussed and developed by authoritative Appeal tribunals and is sure to have a material impact on arbitrable commercial disputes in the common law world going forward.