When arbitration and liquidation collide—Philpott v Lycee Francais Charles de Gaulle School

Does the Arbitration Act 1996 trump the taking of an account under the Insolvency Rules? Lydia Pemberton of St Philips Chambers comments on a ruling of the High Court that highlights the importance of arbitration clauses and agreements in commercial disputes.

Original news

Philpott and another (as joint liquidators of WGL Realisations 2010 Ltd) v Lycee Francais Charles de Gaulle School [2015] EWHC 1065 (Ch), [2015] All ER (D) 175 (Apr)

A company in voluntary creditors’ liquidation was engaged in a construction dispute with a school. The school put in a proof of debt, which the company’s liquidators had yet to approve. The school contended that an arbitration clause in the construction contract was binding and continued to apply despite the company being in liquidation. The liquidators of the company applied for directions, contending that the court had power, under the Insolvency Rules 1986, SI 1986/1925, r 4.90 in connection with the proof of debt process, to give directions as to the taking of an account of the balance due between the company and the school. The Chancery Division ruled, among other things, that the arbitration clause trumped the taking of an account under the court's directions as envisaged by the Insolvency Rules. The arbitration agreement had not become inoperative following liquidation of the company.

What was the background to the application?

WGL Realisations 2010 (formerly Welconstruct Limited) went into creditors’ voluntary liquidation in 2010. In July 2008 WGL had entered into a JCT Intermediate Building Contract (the contract) with the respondent (the Lycee Francais Charles De Gaulle School (the school)).

It was common ground that the parties had ‘mutual dealings’ with each other prior to the liquidation (rule 4.90 Insolvency Rules 1986), resulting in a claim by WGL for approximately £615,000 and from the school for approximately £270,000. The school had submitted a proof of debt in around the £270,000 mark, which, at the date of judgment, was yet to be accepted or rejected by the joint liquidators.

Rule 4.90 is silent as to the mechanism by which an account can be taken. The joint liquidators argued that Part 9 of the Insolvency Rules allowed them to seek directions as to the taking of an account of the balance due between the parties.

However, the contract contained an arbitration clause and an adjudication clause. The school argued that, pursuant to the Arbitration Act 1996, s 9 (AA 1996), any proceedings taken by the joint liquidators, which were not arbitration proceedings, must be stayed unless the said arbitration clause is ‘null and void, inoperative, or incapable of being performed’ (AA 1996, s 9(4)). There was no suggestion by the joint liquidators that the exceptions contained within AA 1996, s 9(4) applied.

What were the legal issues that the judge had to decide in this application?

The ‘real issue’ for the court was whether AA 1996 ‘trumped’ the taking of an account under the Insolvency Rules.

What did the judge decide, and why?

The judge concluded that since the case did not fall within the statutory exceptions and the school had indicated that it would invoke the obstacle, which was AA 1996, s 9, any proceedings brought by the joint liquidators would be stayed (para [28]).

Further, the judge confirmed that the arbitration clause/agreement did not become inoperative following the liquidation or in consequence of the statutory set-off. The judge rejected any notion that the fact that claims existed on both sides should be determinative of whether or not the arbitration clause applied.

Were there any further issues, and what were the main legal arguments put forward?

Firstly, the joint liquidators appear to have dipped their toes into the argument that by submitting a proof of debt, the school had compromised its position on AA 1996, s 9. The judge considered that a compromise would only arise if AA 1996, s 9(3) applied—ie the party seeking to enforce the arbitration clause had taken ‘any step in proceedings to answer the company’s claim’. Since the proof of debt (and any appeal from a rejection) would be the school making its own claim and not a step in answer to WGL’s claim, the judge did not consider that the school had compromised its right to arbitration.

Secondly, the judge acknowledged that it remains open to the parties to follow the adjudication process. The judge commented that it seemed inconceivable that any court would enforce any order obtained in an adjudication as this would offend the pari passu distribution and as such would be likely to be met by an application for a stay by the joint liquidators. If the joint liquidators were to invoke the adjudication route, the question of a stay would not arise. The judge determined that this issue was a matter upon which others should make a commercial judgment.

To what extent is the judgment helpful in clarifying the law in this area?

It is clear that a claim for an account in the context of r.4.90 involves the resolution of a dispute, and as such it will strike at the heart of AA 1996, s 9.

What practical lessons can those advising take away from the case?

This case brings to the fore the continued importance of arbitration clauses/agreements in commercial disputes. Whether acting for liquidators or creditors, the mandatory nature of AA 1996, s 9 means that in the absence of the statutory exceptions, the arbitration clause will prevail.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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First published on LexisPSL Restructuring and Insolvency

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