Can winding-up proceedings be stayed under the Arbitration Act 1996?

Where a party presents a winding-up petition against another party, where the debt upon which the petition is based arises out of a contract containing an arbitration agreement, can the stay provisions contained in the Arbitration Act 1996, s 9 (AA 1996) be invoked?

Original news

Salford Estates (No.2) Ltd v Altomart Ltd [2014) EWCA Civ 1575, [2014] All ER (D) 102 (Dec)

On appeal from the decision of His Honour Judge Nigel Bird QC, the Court of Appeal (Sir Terence Etherton (Chancellor of the High Court), Longmore and Kitchin LJJ) was faced with the issue of whether a winding-up petition was capable of being stayed pursuant to AA 1996, s 9 in circumstances where the petition debt arose pursuant to an underlease that incorporated an arbitration agreement.

The Chancellor, with whom Longmore and Kitchin LJJ agreed, held that AA 1996, s 9 did not apply to a winding-up petition where the ground of the petition is that the company is unable to pay its debts and what is in dispute is that issue generally or, more specifically, whether there is outstanding and due a particular debt mentioned in the petition. However, when considering the legislative policy behind AA 1996, s 9, it was right that the winding-up petition in the current case should be stayed.

Why is this case of interest?

It is common for arbitration agreements to be incorporated into all kinds of commercial agreements. Therefore, this case provides some useful guidance on whether winding-up proceedings are available where the petition debt is not admitted and where the dispute comes within the scope of a prior arbitration agreement entered into between the parties.

What does AA 1996, s 9 say?

Where parties enter into an agreement, they are free to include provisions dealing with how disputes arising under that agreement can and should be determined. One such option is for the dispute to be referred to arbitration, where an arbitrator or panel of arbitrators will determine the dispute and make an arbitration award.

In order to prevent one party from pursuing an alternative option in relation to the determination of a dispute (for example, by issuing court proceedings), and to enforce what the parties have previously agreed, the party seeking to rely upon the arbitration agreement can apply to the court pursuant to AA 1996, s 9 for the alternative option to be stayed. So long as the court finds there is a binding arbitration agreement and that it covers the matters in issue, it has no discretion as to whether to grant a stay. A stay in that situation is therefore mandatory.

What were the key facts of the case?

Terms of the underlease

Salford Estates (No 2) Limited (Salford Estates) is the landlord of a shopping centre in Salford, where Altomart Limited (Altomart) occupies part of the shopping centre pursuant to an underlease. The terms of the underlease are seemingly unremarkable—Altomart covenants to pay an annual service charge, and Salford Estates covenants to insure the premises (with the ability to recover the premium from Altomart as rent) and carry out the services in an efficient and economical manner.

The underlease further provides that any dispute arising between Salford Estates and Altomart in connection with the underlease shall be referred to a single arbitrator in accordance with AA 1996.

The arbitration

Salford Estates and Altomart referred to arbitration a number of disputes concerning Altomart’s obligation to pay the service charge and insurance rent. The arbitrator issued a lengthy and detailed final award—finding on some issues for Salford Estates and on others for Altomart—and determined that Altomart was liable to pay £64,431.79 to Salford Estates in respect of arrears of service charge and insurance rent, and 50% of Salford Estates’ costs in the arbitration.

In the absence of payment, Salford Estates threatened to issue winding-up proceedings against Altomart unless the £64,431.79 sum awarded, and further sums, were paid. Those further sums were for service charge and insurance rent for a period following those which had been referred to arbitration. Salford Estates claimed that Altomart’s liability to pay those further sums followed from the arbitration award, or the reasoning contained in it.

Altomart did not accept it was liable for those further sums, but tendered a cheque in the sum of £64,431.79—the amount of the arbitration award. However, before Salford Estates received that cheque, it issued a winding-up petition against Altomart for a petition debt of £92,032.33.

Objection to the winding-up petition

Altomart objected to the petition and accordingly applied to have the petition struck out or stayed on the following grounds:

  • that the petition constituted an abuse of process
  • Altomart was solvent on both the balance sheet and cash-flow bases
  • the part of the petition debt that had not been paid was subject to a genuine dispute
  • in any event, the petition was liable to be stayed pursuant to AA 1996, s 9

HHJ Bird QC granted Altomart’s application and stayed the petition. He did this solely on the basis of the arbitration agreement contained in the underlease. The judge considered he was bound by the decisions in Rusant Limited v Traxys Far East Limited [2013] EWHC 4083 (Ch), [2013] All ER (D) 236 (Dec) and Halki Shipping v Sopex Oils [1997] EWCA Civ 3062, [1998] 2 All ER 23. Absent those decisions, the judge stated that he would have dismissed Altomart’s application on the ground that there was not a bona fide and substantial dispute as to the petition debt.

The appeal

Salford Estates appealed the decision on the broad ground that a winding-up petition based on an unpaid debt should not be stayed pursuant to an arbitration agreement unless the debt is bona fide disputed on substantial grounds and that, insofar as Rusant decided otherwise, it was incorrect. A winding-up petition is not a claim for payment. Instead, it is a class action in the public interest and brings into operation the statutory regime for realising and distributing the assets of a company for the benefit of its creditors.

What did the Court of Appeal decide?

In giving the sole judgment, and disagreeing with the view expressed by Warren J in Rusant, the Chancellor held that, while winding-up proceedings were ‘legal proceedings’ within the definition of AA 1996, s 82, the mandatory stay provided for at AA 1996, ss 9(1), (4) does not apply to a winding-up petition where the ground of the petition is that the company is unable to pay its debts and what is in dispute is that issue generally or, more specifically, whether there is outstanding and due a particular debt mentioned in the petition.

Notwithstanding that, the Chancellor dismissed Salford Estates’ appeal. In doing so, he referred to the Insolvency Act 1986, s 122(1) which confers on the court a discretionary power to wind-up a company, and that it is entirely appropriate that the court should, save in wholly exceptional circumstances (which did not apply in this case), exercise its discretion consistently with the legislative policy embodied in AA 1996, which was the alternative analysis of Warren J in Rusant, at para [19].

In Halki Shipping, Henry and Swinton Thomas LJJ considered that the intention of the legislature in enacting AA 1996 was to exclude the court’s jurisdiction to give summary judgment. The Chancellor’s view was that it would be anomalous for the Companies Court to conduct a summary judgment–type analysis of liability for an unadmitted debt, on which a winding-up petition is based, when the creditor has agreed to refer any dispute relating to the debt to arbitration. To decide otherwise would inevitably encourage parties to an arbitration agreement to use the draconian threat of a winding-up petition to apply pressure, and by-pass the arbitration agreement and undermine legislative policy. In this case, the petition debt fell within the wide terms of the arbitration agreement in the underlease, and the mere fact that the debt was disputed by Altomart—irrespective of the substantive merits of any defence—was sufficient to trigger the arbitration agreement.

In summary, therefore, the decision of the Court of Appeal in this case is that a winding-up petition will not be automatically stayed under AA 1996, s 9, where the petition debt arises under an agreement that contains an arbitration clause. However, where the petition debt would otherwise fall within the scope of the arbitration agreement—and it is not admitted—the court should exercise its discretion against the petitioning creditor and dismiss the petition in the absence of any other creditor willing to be substituted as the petitioner.

What does this decision mean for commercial and insolvency lawyers?

It is common for arbitration agreements to be incorporated into all kinds of commercial agreements. However, as with any contractual provision, proper consideration needs to be given to the drafting of the arbitration agreement and whether it is intended for all disputes to be referred to arbitration. As this case demonstrates, and by reference to the decision in Halki Shipping, if a debt is not admitted, then there is on the face of it a dispute. Where the arbitration agreement is drafted widely, the dispute will likely fall to be determined by an arbitrator.

For those involved in the presentation of winding-up petitions on behalf of creditors, it is of course important to ensure that the petition debt is not disputed. If the petition debt is disputed, and the dispute is not caught by an arbitration agreement, then the court can still decide on a summary judgment basis whether the dispute is genuine.

If, however, the dispute is caught by an arbitration agreement then, in the absence of any creditor who wishes to be substituted as the petitioner, the petition is liable to be struck out so that the matter can be arbitrated on—the likelihood being that the petitioner will be ordered to pay the other party’s costs. A prudent step would be to consider whether the contract under which the petition debt is alleged to arise contains any arbitration agreement. If it does, then ideally an acknowledgement of liability to pay the petition should be sought from the debtor prior to the issue of any winding-up petition.

Further Reading

If you are a LexisPSL Subscriber, click the links below for further information:

When a winding-up petition can be issued and a company wound up by the court

Practice and procedure for the drafting, presentation, service and advertisement of a winding-up petition to the court by a creditor of a company registered in England or Wales

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First published on LexisPSL Restructuring and Insolvency

Stephen Leslie, solicitor in the Lexis®PSL Restructuring & Insolvency team

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