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Does an arbitration agreement protect a debtor from the threat of liquidation?
By Kent Phillips, James Kwan, Jonathan Leitch, Ben Hornan, Chris Dobby,
Bilshan Nursimulu, Dr Rishab Gupta and Mayuri Tiwari Agarwala
The English Court of Appeal’s invariable stay of winding up proceedings in favour of arbitration
In Salford Estates (No.2) Limited v Altomart Limited [2015] Ch. 589 [2014] EWCA Civ 1575, the alleged debtor invoked section 9 of the English Arbitration Act in its application for an order to stay a winding up petition. That provision requires a court to stay legal proceedings which are brought before a court in respect of a matter which is governed by an arbitration agreement, unless the court is satisfied that the arbitration agreement in question is null and void, inoperative, or incapable of being performed. The English Court of Appeal held that this provision is inapplicable to stay a winding up petition, which is not in itself a claim for payment due under a contract.
The Court nevertheless upheld the original stay order on alternative grounds. Because the Court’s power to order the winding up of a company under the English Insolvency Act (as in other Commonwealth jurisdictions) is discretionary in nature, the Court considered that it should exercise that discretion by taking into account the legislative policy behind the Arbitration Act, which is to uphold the principle of party autonomy and exclude a court’s summary determination of a dispute that is the subject of an arbitration agreement. As a result, the English Court of Appeal concluded that where a debt subject to an arbitration agreement is not admitted, the Court should stay or dismiss the winding up petition unless there are “wholly exceptional circumstances”[1], which the Court could not envisage.
In overturning the first instance decision granting a mandatory stay of proceedings, the English Court of Appeal endeavoured to uphold the policy of the Insolvency Act to a certain extent, noting that the intention of the Arbitration Act would not have been “to confer on a debtor the right to a non-discretionary order [to stay a winding up petition] striking at the heart of the jurisdiction and
ReSolution | Dec 2020
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 (a statutory demand). 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 case law.