English Court of Appeal considers whether the mandatory stay provisions of s9(1) of the Arbitration Act of 1996 apply to winding-up petitions

The English Court of Appeal dismissed an appeal brought against a recent High Court decision to stay a winding-up petition in favour of arbitration proceedings, in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 575 Civ.

Agreements to arbitrate are generally strictly enforced under s9(1) Arbitration Act 1996. This provision enables a party to an arbitration agreement, against whom legal proceedings in the High Court or county court are being brought (whether by way of claim or counterclaim), to apply to the court to stay the proceedings where they relate to a matter which was to be referred to arbitration under the agreement. The Court of Appeal recently clarified in Salford Estates (No. 2) Limited v Altomart Limited that the mandatory stay provisions of s9(1) do not apply to winding-up petitions brought on the basis that a company is unable to pay its debts where what is in dispute is whether the company is unable to pay its debts.

Facts and Decision

Salford Estates (No. 2) Limited ("Salford") entered into an underlease with Altomart Limited ("Altomart") on 29 April 1974 (the "Lease"), for the use of commercial premises in a shopping centre in Salford. Altomart, the lessee, was under an obligation to pay an annual service charge to Salford, and a portion of the insurance premium on the property. The Lease contained a broad arbitration agreement which provided that "any dispute or difference" arising out of or in connection with the Lease would be referred to arbitration.

A dispute subsequently arose between the parties regarding the scope of Altomart's obligation to pay the service charge and the insurance rent under the Lease, which was referred to arbitration in accordance with the terms of the Lease. The final arbitral award rendered in November 2013 established the fixed amount of arrears owed by Altomart to Salford from 1 April 2010 to 31 March 2013. When Altomart did not immediately pay the sums due, Salford threatened to issue winding-up proceedings unless Altomart paid not only the fixed amount of arrears set out in the award, but also further sums it claimed were due under the contract for the year ending on 31 March 2014 by 31 January 2014. Altomart sent a cheque to Salford for the fixed sum it owed under the award on 31 January. However, acting on its threats, Salford presented a winding-up petition on the same day before the cheque arrived, on the grounds that Altomart was unable to pay its debts as they fell due (ss122(1) and 123(1)(e) of the Insolvency Act 1986).

Altomart applied to strike out or stay the petition on several grounds, including that part of the debt was subject to a genuine dispute as Altomart considered it was being overcharged. Accordingly, it argued that proceedings should be stayed pursuant to s9 of the Arbitration Act for the disputed debt to be referred to arbitration. The High Court judge granted the stay on the basis that, even if he did not consider that there was a bona fide and substantial dispute regarding the alleged debt, the mere raising of a defence or of a dispute was sufficient to bring the arbitration provisions into play, and therefore trigger the stay provisions of s9 of the Arbitration Act (following Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Comm) and Halki Shipping Corp v Sopex Oils Ltd [1998] 1 W.L.R. 726).

Salford appealed against the order staying the winding-up petition, arguing that a winding-up petition based on an unpaid debt should not be stayed in favour of arbitration proceedings, unless the debt is bona fide disputed on substantial grounds. The appeal was dismissed.

Departing from the High Court judgment, the Court of Appeal held that the mandatory stay provisions in s9(1) of the Arbitration Act do not apply to winding-up petitions brought on the basis that a company is unable to pay its debts where what is in dispute is whether the company is, in fact, unable to pay its debts, or more specifically, whether there is outstanding and due a particular debt mentioned in the petition. Attention was drawn to the fact that, in contrast with the wording of s9(1) ("whether by way of claim or counterclaim"), the winding-up petition was not a claim for the payment of a debt, even if the making of a winding-up order might result in the right to payment of the debts mentioned.

However, it was noted that s122(1) of the Insolvency Act of 1986 confers on the court a discretionary power to wind up a company. The Court of Appeal considered that such discretion should be exercised consistently with the legislative policy embodied in the Arbitration Act. It held that, in the circumstances, it would not be appropriate for the companies' court to conduct a summary judgment type analysis of liability for an un-admitted debt on which the petition was grounded, when both parties had agreed contractually to refer any matters relating to the debt to arbitration. The parties should be compelled to resolve their dispute over the debt by their chosen method of dispute resolution. For courts to exercise their discretion otherwise would inevitably lead to parties with a payment dispute bypassing arbitration agreements and the provisions of the Arbitration Act by presenting winding-up petitions. This would encourage creditors to apply pressure on alleged debtors to pay debts immediately under the threat of liquidation.

Comment

This recent judgment may seem to mark a departure from previous case law, by emphasizing that the mandatory stay provisions in s9(1) of the Arbitration Act are not necessarily triggered where winding-up petitions are brought for the non-payment of debts. However, the ruling indicates that, in practice, where the debts forming the basis of the winding-up petitions are disputed and fall within the scope of matters the parties agreed to refer to arbitration, then the courts will nonetheless exercise their discretion to stay or dismiss the petition.

For further information, please contact Nicholas Peacock, Partner, Maguelonne de Brugiere, Associate, or your usual Herbert Smith Freehills contact.