Australian Federal Court stays winding up application to allow arbitration of underlying dispute

The Federal Court of Australia has recently held that a winding up application made in respect of a joint venture company should be stayed and the substantive underlying matters of dispute between the joint venture parties be referred to arbitration pursuant to the joint venture agreement.

The case of WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164 involved a joint venture between Woolworths (an Australian company) and WDR (a United States company) pursuant to which Hydrox Holdings (an Australian company) was formed to operate the Masters chain of hardware stores in Australia. Disputes arose between the joint venture parties regarding the operation of the joint venture, including in respect of provision of information to the WDR nominee directors, certain voting by the Woolworths directors and the purported termination of the joint venture agreement.

These matters resulted in WDR making an application to the Federal Court for the winding up (liquidation) of Hydrox pursuant to sections 233(1)(a) or 461(1)(k) of the Corporations Act 2001 (Cth) (Corporations Act). In either case this appears to have been based on the contention that the affairs of Hydrox had been conducted in a manner oppressive to, unfairly prejudicial to, or unfairly discriminatory against WDR, as a shareholder of Hydrox (there was no suggestion that Hydrox was insolvent). In response, Woolworths sought a stay of the winding up application on the basis that this was a dispute between Woolworths and WDR which should instead be determined by arbitration pursuant to the joint venture agreement between the parties, in accordance with section 7(2) International Arbitration Act 1974 (Cth) (IAA) or article 8(1) the UNCITRAL Model Law on International Commercial Arbitration. Under section 7(2) of the IAA, the Court must order a stay of court proceedings between parties to an arbitration agreement if the proceedings involve determination of a matter that is “capable of settlement by arbitration” under that agreement.

WDR argued that no part of the proceeding was arbitrable, as there was only one matter to be determined – whether Hydrox should be wound up on either of the statutory bases contended. It further submitted that a claim for a winding up order is not arbitrable because it effects the legal status of the company, it affects third parties, the creation and dissolution of a company is a matter uniquely subject to governmental authority and there is public interest in ensuring that the procedural steps by which a company is placed in liquidation is governed by the public court process rather than a private arbitration. It also relied on previous Australian cases.

In contrast, Woolworths argued that there were several matters comprising the proceeding for the purposes of section 7(2) of the IAA, namely the various instances of alleged wrongful conduct by Woolworths and in nominee directors which WDR advanced as grounds for the winding up Hydrox (i.e. evidencing oppressive, unfairly prejudicial or unfairly discriminatory conduct). Woolworths argued that such legal and factual disputes could be the subject to determination by arbitration, while leaving the court to make the ultimate decision as to whether the matters so determined were sufficient to persuade the court to make a winding up order.

The court agreed with Woolworths’ analysis that there were several matters to be determined. The court noted that these matters were not merely grounds for winding up Hydrox, but could be characterised as assertions of breaches of contract, wrongful conduct in a corporate governance sense and wrongful conduct in purporting to terminate the joint venture agreement in bad faith and grounds that did not justify termination.

The court also agreed that such matters were capable of arbitration. The court distinguished the present case from one where the parties seek to repose in the arbitrator the capacity to dissolve or wind up the joint venture company, and from cases involving insolvency. Instead, the court held that this was, in reality, a dispute between the shareholders of Hydrox as to their contractual and other obligations, and that there was no substantial public interest element in the determination of such a dispute. The court noted there were no solvency concerns and no creditor had sought to attend the court hearings or participate in the process (despite the winding up application having been advertised). Accordingly the court referred the matters identified by Woolworths for arbitration, and stayed the winding up application pending determination of that arbitration. The court would then take into account any arbitral awards in respect of those mattes when considering whether a winding up order would be made.

The decision is broadly consistent with the approach taken by English, Hong Kong and Singapore courts in cases such as Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, Re Quicksilver Glorious Sun JV Ltd (2014) 4 HKLRD 759 and Tomolgen Holdings Ltd v Silica Investments Ltd [2015] SFGA 57 (all of which were cited by the Court).

For further information, please contact Brenda Horrigan, Partner, Paul Apáthy, Partner, Anne Hoffmann, Senior Associate, or your usual Herbert Smith Freehills contact.