36 February 2015 Corporate Rescue and Insolvency

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Case ReporterIqbal Mohammed of St Philips reports on a recent insolvency law case

Salford Estates (No. 2) Limited v AltoMart Limited

[2014] EWCA 1575

INTRODUCTION

n In Salford Estates (No. 2) Limited v AltoMart Limited [2014] EWCA 1575, the Court of Appeal held that the mandatory stay provisions under s 9 of the Arbitration Act 1996 (AA 1996) do not apply to winding up petitions based on a companys inability to pay its debts, as such a petition is not a claim for payment, rather, it is an invocation of the statutory scheme, designed to dissolve insolvent companies for the benefit of all creditors.

However, under s 122(1)(f) of the Insolvency Act 1986 (IA 1986), the courts discretionary power to wind up a company should be exercised consistently with the legislative policy of AA 1996, by dismissing the petition and compelling the parties to resolve their dispute by their chosen method.

The Court of Appeal left open the possibility of a court exercising its discretion in a manner inconsistent with the legislative policy of AA 1996, but described such a possibility as one of wholly exceptional circumstances which were presently difficult to envisage.

BACKGROUNDHHJ Bird, sitting as a High Court judge, ordered that a winding up petition presented by the appellant be stayed under s 9 of AA 1996. On appeal, the issue was whether or not a petition to wind up a company amounts to civil proceedings in the High Court.

Section 9 of AA 1996 states:

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter (4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

Section 82 of AA 1996 defines legal proceedings as civil proceedings in the High Court or a county court.

FACTSSalford Estates, the petitioner, let commercial premises to Altomart under a lease, which required the payment by Altomart of service charges, insurance and rent without deduction.

The lease contained an arbitration clause, which stated:

Any dispute or difference arising between the Lessor and the Lessee as to their respective rights duties or obligations or as to any other matter arising out of or in connection with this Underlease shall be referred to a single arbitrator provided the parties are able to agree on one or otherwise to two arbitrators one to be appointed by each party or their umpire in accordance with and subject to the provisions of the Arbitration Act 1950 or any statutory modification or re-enactment thereof for the time being in force.

The parties referred to arbitration a number of disputes over Altomarts obligation to pay the service charge and insurance rent. Ultimately, the arbitrator found that there was a liability to pay the sum of 64,431 in respect of arrears over the last three years and also, that half of the costs of the arbitration were also payable by Altomart.

The award was not immediately paid. Salford Estates threatened to issue winding up proceedings and sought payment of a further 27,000 due in respect of services charges and insurance rent since the award was made, arguing that this sum was due following the award or the reasoning contained within it.

Salford Estates then presented a petition for the total of 92,000, comprising the arbitration award and additional sums due. The respondent applied for a stay or strike out of the petition on various grounds, including under s 9.

DECISIONHHJ Bird heard the application and gave immediate judgement staying the petition. The judge considered Rusant Limited v Traxys Far East Limited [2013] EWHC 4083 (Ch), in which a petition was restrained despite the absence of a bona fide dispute, on the grounds that there was an arbitration clause. The judge also considered Halki Shipping v Sopex Oils [1997] EWCA Civ 3062, in which it was held that there is a dispute for the purposes of AA 1996 where a party simply does not admit liability.

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Accordingly, unless the arbitration agreement is null and void, inoperative or incapable of being performed pursuant to s 9(4) of AA 1996, the mandatory stay provisions in s 9(1) and (4) are engaged, even if, absent an arbitration agreement and s 9, the claimant could have obtained summary judgment.

The judge held that but for the binding authorities above, he would have dismissed the application, as there was no bona fide and substantial dispute.

APPEALOn appeal, the appellant argued that the judge was wrong to follow Rusant and that Halki was wrongly decided. It was argued that unlike an ordinary money claim where the proceedings are for payment of what is due, a winding up petition is not a claim for payment.

It was argued that winding up is in the nature of a class action in the public interest; it brings into operation the statutory regime for realising and distributing the assets of the company for the benefit of its body of creditors. It does not, in principle or in fact, result in the payment of the sum owed. As an arbitrator has no power to wind up a company, it was submitted that a winding up petition is, accordingly, not arbitrable and not a claim within s 9 of AA 1996.

On this basis, it was contended that, in accordance with long established jurisprudence, the court should only stay or dismiss a petition based on an unpaid debt if the debt is subject to a bona fide dispute on substantial grounds.

JUDGMENTSir Terence Etherton, the Chancellor of the High Court, giving judgment for the Court of Appeal, held that proceedings to wind up a company are legal proceedings within the meaning of s 82. However, applying the provisions of IA 1986, specifically the grounds on which a company may be wound up under s 122(1), it was held that s 9 of AA 1996 does not apply to a petition brought on the grounds that a company is unable to pay its debt.

The respondent did not dispute that a failure to pay an undisputed debt is evidence of an inability to pay under s 122(1)(f) of IA 1986, or that even if a debt is substantially disputed, so long as the undisputed sum exceeds the statutory minimum of 750, a petition would not be dismissed.

In essence, non-payment is evidence of a companys inability to pay its debts, to invoke the courts jurisdiction under s 123(1)(e) , rather than a claim or counterclaim. It was held that a petition to wind up is not a claim for payment of a debt, but a petition to exercise the courts power to wind up an insolvent company (see para 31-32). The granting of such relief would not result in the sums sought being paid, rather, winding up results in a class remedy and distribution to all creditors, necessarily reducing the money available to the petitioner.

This was an important and significant distinction between winding up petitions and claims within the meaning of AA 1996. Only claims and counterclaims are subject to a mandatory stay.

Futhermore, on the interplay between arbitration clauses and the statutory scheme, it was held that (emphasis added):

If several alleged debts are stated in the winding up petition as evidence of the companys inability to pay its debts within IA 1986, s 122(1)(f) and only some arise out of a transaction containing an arbitration agreement, the concept of a non-discretionary stay of the winding up petition pursuant to s 9(1) and (4) of the 1996 Act makes no sense. Plainly, there is no basis for staying the Petition itself; and, if the Petition proceeds, there can be no reference to arbitration of any of the debts because the making of a winding up order brings into effect the statutory scheme for proof of debts which supersedes any arbitration agreement.

Considering parliamentary intent, the Chancellor considered it improbable that Parliament without any express provision to that effect, intended s 9 of [AA 1996] to confer on a debtor the right to a non-discretionary order striking at the heart of the jurisdiction and discretionary power of the court to wind up companies in the public interest where companies are not able to pay their debts.

Consequently, s 9 is not capable of depriving the court of its discretion, even where there is an arbitration clause in place.

For this reason, the conclusion of Warren J In Rusant, that any issue between the parties on presentation of a petition becomes a claim within the meaning of s 9, was expressly disapproved.

However, the Court of Appeal was conscious that to exercise its discretion inconsistently with AA 1996 would encourage parties to bypass an arbitration agreement and present a winding up petition to pressurise another to pay up, in contrast to the scheme and purpose of AA 1996 and the parties own agreement. This would undermine the intention of Parliament and the legislative scheme of AA 1996.

The court considered that the debt in this case was subject to the very wide terms of the arbitration clause. It was also not admitted and therefore constituted a dispute within the meaning of AA 1996, following the approach of Halki. While there is no automatic stay as a result of s 9, the Court of Appeal considered that:

As a matter of the exercise of the courts discretion under IA 1986 s 122(1)(f), it was right for the court either to dismiss or to stay the Petition so as to compel the parties to resolve their dispute over the debt by their chosen method of dispute resolution rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds.

It therefore dismissed the appeal.

CONCLUSIONThis was the first time the Court of Appeal specifically grappled with the inconsistency between the schemes operating in AA 1996 on the one hand and IA 1986 on the other. Interpreting s 9 restrictively to keep intact the judicial discretion afforded by s 122(1)(f) was perhaps the only option available to allow for each scheme to be interpreted consistently with the other. However, for practical purposes, the Court of Appeal has confirmed that winding up petitions cannot be used to thwart arbitration clauses and the statutory stay provided by s 9. n

Biog boxIqbal Mohammed is a barrister at St Philips. Email: imohammed@st-philips.com