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Knowledge

BVI Court demonstrates it is likely to set aside statutory demand where underlying debt is subject to an arbitration agreement

17 May 2024

Background

In Waterfront Property Investment Limited v Arius Litigation Funding Limited BVIHCM 2023/0192, the BVI Commercial Court (the "Court") has demonstrated that it is likely to set aside a statutory demand and find that the underlying debt is disputed on substantial grounds if that liability is subject to an arbitration agreement.

The Court handed down judgment in this case on 27 March 2024. Waterfront Property Investment Limited ("WPIL") was a BVI company involved in property investment and development in the United Arab Emirates. Arius Litigation Funding LLC ("Arius") was a Delaware corporation which was used as a vehicle for the provision of third party litigation funding. Arius provided funding to WPIL. On 29 September 2023, Arius served a statutory demand on WPIL concerning an alleged debt that Arius claimed was due under the funding agreement. 

On 12 October 2023 WPIL applied to set aside the statutory demand under s.156 of the BVI Insolvency Act, 2003 claiming that the alleged debt was disputed on substantial grounds, including, in particular, because the funding agreement contained a governing law and jurisdiction clause which provided that any dispute "arising out of or in connection with it are amongst other things to be settled by arbitration in accordance with the provisions set forth under the DIAC Arbitration Rules (…)" and also because an arbitration had in fact been commenced by Arius on 26 March 2023, in which Arius sought declarations as to its alleged entitlement to the sums said to be due to it under the funding agreement. Those were the same sums claimed in the statutory demand. WPIL also claimed that there were substantial grounds on which the debt was disputed, including in relation to the interpretation and termination of the funding agreement.

The judgment

Mangatal, J., held that:

"it is plain to me that Arius cannot be permitted to on the one hand issue an Arbitration seeking, amongst other things, payment of sums alleged to be due under the Funding Agreement, and on the other serve a statutory demand for sums alleged to be due under the same Funding Agreement. This before the issues have been ventilated before the arbitral tribunal and properly tested, in accordance with UAE law, on the facts. This is being done in the face of the contractually agreed dispute resolution procedure, i.e. arbitration." 

The learned judge also found that "whilst Arius sought to argue that the main purpose of commencing the Arbitration was to obtain disclosure of the Settlement Agreement, it is plain, on a reading of the terms of the request to arbitrate that this is not so, as what was sought was far more wide-ranging". This included declarations, orders for payment for alleged breaches of the funding agreement and for quantification of amounts allegedly due. 

Moreover, the Court accepted the argument of WPIL that it was not for the Court to look at the dispute that is currently the subject of an arbitration, which would  "turn this Court into a supervisor of the other proceedings"  The Court further agreed with the submissions that  the BVI case law in the area needs to "be seen through the lens of the decision of the Privy Council" in Family Mart China Holding Ltd. v Ting Chuan (Cayman) [2023] UKPC, 33 (delivered 20 September 2023) in which Lord Hodge held:

"It is important in cases which arise out of domestic legislative provisions implementing the New York Convention to have regard to jurisprudence in other contracting states to promote legal certainty in the jurisprudence relating to international arbitration."

Arius relied on a number of authorities, which, they argued, cut across the "internationalism" of the approach put forward in Family Mart. However, Mangatal, J., said that she was able to distinguish these from the facts of the instant case, particularly because most of the authorities cited related to an application to appoint a liquidator, rather than an application to set aside a statutory demand. The Court concluded:

"In my judgment, it is patently clear that this Court should exercise its discretion under sub-section 157(2) of the Insolvency Act on the basis that substantial injustice would otherwise be caused if the Court does not do so. This is because there is an ongoing arbitration, brought by Arius itself, prior to serving the Statutory Demand and the Arbitration remains on foot. Courts must respect the autonomy of parties to choose the particular dispute mechanism that they agree upon, and in this case, the dispute resolution process freely chosen was arbitration."

Comment

This case will be of interest to parties who are seeking to enforce monies due under a contract where the agreement in question contains an arbitration clause. The judgment makes it clear that the Court will respect the rights of the parties to determine, at the outset of their negotiations, how they will resolve disputes. The authority supports the proposition that the Court may be willing to find that a debt, which is the subject of a statutory demand, is disputed on substantial grounds if there remains an extant right to arbitrate a dispute relating to it, or at the very least where there are ongoing arbitration proceedings concerning the same.

The BVI team has a great deal of experience in all aspects of complex insolvency disputes, including applications to set aside statutory demands. Please do not hesitate to contact us if you require any assistance.