Does an arbitration agreement protect a debtor from the threat of liquidation?

In several Commonwealth jurisdictions, the corporate legislation allows creditors to petition a court to order the winding up of a debtor in circumstances where that debtor is unable to pay its debts as they fall due. Such legislation generally presumes that the debtor is insolvent if it has failed to comply with a statutory notice requiring the debtor to pay a certain debt within a given period of time.

Where the debtor disputes that debt, the court ordinarily determines whether that dispute is genuine; that is, whether the debtor has a substantial and bona fide defence to the creditor’s claim. If the dispute is genuine, the court sets aside the winding up petition. The purpose of the exercise is to ensure that a statutory demand or winding up petition is not defeated by a debtor’s spurious or frivolous defences.

The question arises, however, whether the court is precluded from proceeding with that determination where the alleged dispute is governed by an arbitration agreement. The judgments recently delivered in different Commonwealth jurisdictions show that the matter is far from being settled. Even where courts in different jurisdictions have reached the same conclusion, their reasoning differed to some extent. This article, which is co-authored by arbitration practitioners from different jurisdictions, considers the approach taken by the courts in some parts of the Commonwealth, as well as the practical commercial implications of the current caselaw.

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