‘Arbitration deals do not bar winding-up petitions’
The High Court has provided clarity on the interaction between arbitration clauses and insolvency proceedings in the case of San Leon v Brightwaters, writes lawyer Declan Keane of William Fry.
Following the Privy Council’s Sian Participation decision, the court confirmed that arbitration agreements do not bar winding-up petitions unless the debt is genuinely disputed on substantial grounds.
This aligns Ireland with leading international jurisprudence and underscores the importance of precise drafting and proactive risk-management for businesses.
In Sian Participation, the Privy Council clarified that arbitration agreements do not bar winding-up petitions unless the debt is genuinely disputed on substantial grounds.
This marked a decisive shift away from the earlier England-and-Wales approach in Salford Estates.
Case background
San Leon Energy PLC had a commercial interest in Energy Link Infrastructure (Malta) Ltd (ELI), the owner of a Nigerian pipeline project.
Brightwaters Energy Ltd, the construction contractor, was owed a substantial sum under a Nigerian consent judgment.
In October 2023, as part of efforts to refinance the wider project and progress construction, San Leon entered into an agreement with Brightwaters governed by Nigerian law.
Under that agreement, San Leon undertook to pay US $16,652,608 within four business days on ELI’s behalf.
The agreement also contained an ICC arbitration clause requiring disputes to be resolved under the International Chamber of Commerce Rules.
Although a separate refinancing transaction with a third-party funder was expected to generate sufficient funds, no payment was made. Over the following 14 months, the Brightwaters debt remained outstanding, despite repeated assurances that payment was imminent.
Brightwaters indicated its intention to present a winding-up petition. San Leon responded by applying for an injunction restraining presentation of the petition. It relied on three principal arguments:
- That its payment obligation had not crystallised,
- That there was therefore a bona fide and substantial dispute, and
- That any dispute fell within the scope of the ICC arbitration clause and had to be referred to arbitration.
Mr Justice Kennedy refused the injunction. At a threshold level, the court was not satisfied that there was a genuine dispute on substantial grounds as to whether the debt was due.
In circumstances where payment had not been made for over a year and no credible dispute had been established, Brightwaters was entitled to invoke the statutory insolvency regime.
From injunction to arbitration
San Leon argued that, even if Brightwaters had a prima facie debt, the existence of an ICC arbitration clause required the dispute to be resolved through arbitration and justified restraining the winding-up petition in the interim.
The court rejected that submission, adopting the Privy Council’s reasoning in Sian Participation.
An arbitration clause does not, of itself, prevent a creditor from presenting a winding-up petition; the decisive question is whether the debt is genuinely disputed on real and substantial grounds.
As the judge observed, a winding-up petition does not resolve or finally adjudicate the underlying debt and, therefore, falls outside the scope of arbitration clauses.
Although Nigerian law governed the interpretation of the contract, including the arbitration clause, Mr Justice Kennedy determined that the threshold question as to whether there was a real and substantial dispute justifying the restraint of presentation of the petition, was a matter of Irish law.
On the facts, San Leon failed to establish a genuine dispute as to whether its payment obligation had arisen. In the absence of a real and substantial dispute, there was no basis to restrain Brightwaters from presenting the petition.
The court also noted unchallenged prima facie evidence of insolvency – failure to file accounts for three years, suspension of its AIM listing (the London Stock Exchange’s market for smaller, growth companies), and no averment of solvency, indicating it would have been disinclined to restrain the petition on foot of the arbitration clause, even if a genuine dispute existed.
Key takeaways
1) Arbitration is not a shield against insolvency: Irish courts will not stay or restrain winding-up petitions solely because an arbitration clause is in place.
A winding-up petition will be restrained only if there is a genuine dispute on substantial grounds that would be subject to the arbitration clause.
This endorses Sian Participation and moves away from the older Salford Estates approach.
This is consistent with the orthodox Irish position that a winding-up petition may be restrained where the debtor establishes a bona fide dispute on substantial grounds.
2) Insolvency proceedings sit outside arbitration clauses: Winding-up petitions do not determine the underlying debt and therefore do not breach or fall within the scope of typical arbitration clauses.
3) Public policy and creditor protection matter: Where insolvency indicators exist, courts will be slow to restrain a petition. Kennedy J noted that even if San Leon had established a bona fide and substantial dispute, he would still have been disinclined to restrain the petition given the unchallenged evidence of insolvency.
This underscores that the Companies Act’s protective framework and the collective interests of creditors can override contractual autonomy.
4) Consistency with persuasive international authority: Ireland now joins an increasing list of international jurisprudence – including the Hong Kong Court of Appeal’s decision in Hyalroute Communication Group Ltd v ICBC (Asia) Ltd – that similarly held that arbitration could not be used as a delay tactic and that anti-suit injunctions required a genuine dispute on substantial grounds.
The international trend indicates that arbitration and insolvency will continue to collide, but for Irish businesses and creditors, the message is clear: arbitration clauses do not bar winding-up petitions absent a substantial bona fide dispute.