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.

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


Co-authors:

Dr Rishab Gupta, Partner - Shardul Amarchand Mangaldas & Co

Ms Mayuri Tiwari Agarwala, Senior Associate - Shardul Amarchand Mangaldas & Co

Mr Bilshan Nursimulu, Barrister - 5 Fifteen Barristers


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