Tuesday, December 9, 2014

Winding-up Petitions and Arbitration Clauses

The relationship between the statutory remedies provided by the Companies Act and the Arbitration Act has proven to be controversial in recent times. The difficulty arises usually because the basis on which the statutory remedy is invoked (eg oppression, winding-up) is often an underlying commercial dispute which is the subject matter of an arbitration clause. The courts have given different answers to this depending in particular on the nature of the statutory remedy: thus, in Fulham, which this Blog discussed, the Court of Appeal held that an arbitration clause is effective even if a claim is made for unfair prejudice claim (oppression and mismanagement). The Court there expressly distinguished between unfair prejudice and winding-up; and the latter question was considered in a judgment given yesterday in Salford Estates v Altomart.

Altomart was the lessee of commercial premises in the Salford Shopping Centre in Manchester. The Shopping Centre was owned by the lessor, Salford Estates. The Lease Deed, which contained an arbitration clause, provided that Salford would provide certain facilities, such as the insurance of the premises, for which the tenant would pay by way of a service charge over and above the annual rent. In 2012 a dispute arose about Altomart’s liability to pay this service charge and this was referred to arbitration. The sole arbitrator held that Altomart was liable to pay about £64,000 for the three years from April 2010 to March 2013. Salford claimed, in addition, a sum of about £22,000 towards the service charge for the year ending 31 March 2014. As this was not paid immediately, Salford presented a winding-up petition on the ground that Altomart was unable to pay its debts. In India, this ground, of course, was formerly section 434(1)(a) of CA 1956 and is presently to be found in section 271 of CA 2013 (in England it is section 122(1)(f) of the Insolvency Act 1986). Altomart claimed that since the underlying debt was disputed the court was required to stay the winding-up petition by virtue of section 9 of the English Arbitration Act, 1996. Section 9 of that Act roughly corresponds to section 8 of the Indian Act, which provides that a ‘judicial authority’ seized of a matter which is the subject matter of an arbitration agreement shall stay those proceedings.

Salford argued that section 9 did not apply because a winding-up petition is either not arbitrable or because it is not a ‘claim’ for the payment of the debt that was the subject matter of the arbitration agreement. The Chancellor, Sir Terence Etherton, who gave the leading judgment in the Court of Appeal, agreed that section 9 does not apply to a winding-up petition presented on the ground of inability to pay debts but reached this conclusion on a different ground. His Lordship held that non-payment of the underlying debt is only evidence of the company’s inability to pay its debts: a winding-up petition is not, therefore, a claim for payment of that debt. Indeed, it is an abuse of process—in England as in India—to institute a winding-up petition to compel the payment of a disputed debt. Etherton C gave two other reasons in support of the conclusion that section 9 does not apply. First, and it is submitted that this is correct, the making of a winding-up order need not result in an order for the payment of the petitioner’s debt. Whether it does depends on the value of the company’s assets and claims by other creditors. Secondly, if the winding-up petition alleges non-payment of more than one debt, and some of these debts are the subject matter of an arbitration agreement while others are not, the mandatory stay contemplated by section 9 (in India section 8) is essentially unworkable: the petition as a whole obviously cannot be stayed, and if the petition is not stayed, the arbitration cannot proceed because the winding-up order, if any, can extinguish or modify the debt. This, Etherton C held, was another indication that Parliament could not have intended to fetter the jurisdiction of the Company Court by requiring a mandatory stay of a winding-up petition. His Lordship pointed out that the problem in Fulham was different because there:

No order was sought to wind up the FAPL.  Furthermore, that case, typical of the usual section 994 petition, was essentially a private dispute in relation to the affairs of a solvent company which, therefore, neither engaged any public policy objective of protecting the public where a company continues to trade despite being unable to pay its debts nor involved a class remedy for the company’s creditors.

However, it does not follow that the arbitration clause is irrelevant either, because the court—under the Companies (in England, Insolvency) rather than the Arbitration Act—has a discretionary jurisdiction to stay a winding-up petition, and Etherton C held that it would be wholly exceptional to not take into account the legislative policy of the Arbitration Act in exercising this discretion. That is, if the company disputes the debt (whether bona fide on substantial grounds or not), and there is an arbitration clause, that constitutes a ‘dispute’ for the purposes of the Arbitration Act ‘irrespective of the substantive merits of any defence’, and the Court would exercise its discretion to stay the winding-up petition in favour of arbitration. The main difference between the analysis of the judge below and that of the Court of Appeal is that the stay is discretionary rather than mandatory, although Etherton C could not envisage circumstances in which it would be appropriate to not exercise the discretion consistently with the policy of the Arbitration Act.

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