Practice and procedure – Insolvency – Stay of winding-up petition – Section 9 of Arbitration Act 1996 – Terms of lease providing for referral of disputes to arbitration – Appellant landlord presenting winding-up petition against respondent tenant for unpaid debts – Whether that petition properly stayed for determination of dispute by arbitration – Whether section 9 of 1996 Act applying so as to require mandatory stay – Whether stay to be granted in exercise of court’s discretion – Appeal dismissed
The appellant was the landlord and the respondent was the tenant under a lease of commercial premises in a shopping precinct in Salford, Greater Manchester, under a lease dating from 1974. A dispute over the appellant’s entitlement to service charges and insurance rent was referred to arbitration pursuant to an arbitration clause in the lease. An award was issued in favour of the appellant, which then presented a winding-up petition against the respondent claiming that sum. By that time, however, the respondent had already sent a cheque to the appellant in the relevant amount, which the appellant cashed immediately on receipt.
The respondent applied to have the petition stayed or dismissed on the grounds that the amount due under the award had been paid and that there was a bona fide and substantial dispute about the amounts said to be due in respect of service charges and insurance rent. It further contended that the dispute should properly be referred to arbitration, as a dispute falling within the arbitration clause in the lease. The judge accepted the latter argument and, while he found that there was no bona fide and substantial dispute over the service charges or insurance rent, he stayed the winding-up petition for the matter to be determined in arbitration.
The appellant appealed. The central issue on the appeal was whether section 9 of the Arbitration Act 1996, dealing with stays of proceedings “whether by way of claim or counterclaim” in respect of matters that were the subject of an arbitration agreement, applied to the winding-up petition. The appellant contended that it did not apply, since the winding-up petition was not a “claim” for payment within the meaning of that section, and that a court should not stay a petition to wind up a company on the ground of its inability to pay its debts unless the debt was bona fide disputed on substantial grounds.
The respondent filed a respondent’s notice, raising further issues, after applying successfully for an extension of time in which to do so: see [2014] EWCA Civ 1408; [2014] PLSCS 298.
Held: The appeal was dismissed.
(1) Although proceedings commenced by a winding-up petition were “legal proceedings” within the definition in section 82 of the 1996 Act, section 9(1) of that Act did not apply to a winding-up petition where the petition was made on the ground that the company was unable to pay its debts and the dispute concerned that issue generally or, more specifically, whether a particular debt mentioned in the petition was outstanding and due.
The appellant was relying on non-payment of the specific debt mentioned in the petition as evidence that the respondent was unable to pay its debts as they fell due, within the meaning of section 123(1)(e) of the Insolvency Act 1986, so as to invoke the ground in section 122(1)(f) for the exercise of the court’s jurisdiction to wind up a company that was unable to pay its debts.
By contrast with the wording of section 9(1), which concerned proceedings “whether by way of claim or counterclaim”, the petition was not a claim for payment of the debt. The making of a winding-up order might or might not result in the right to payment of an amount equal to the debt specified in the petition. All would depend on the value of the assets available for distribution in the liquidation to the respondent’s body of creditors and the respective priority ranking of the creditors, including the appellant, under the statutory framework. Further, by contrast with a “claim” for a debt, it was an abuse to present a winding-up petition in order to put pressure on a company to pay a genuinely disputed debt. The court would dismiss a petition based on an alleged debt where the debt was bona fide disputed on substantial grounds. If several alleged debts were stated in the winding-up petition as evidence of the company’s inability to pay its debts within section 122(1)(f) of the 1986 Act, and only some arose out of a transaction containing an arbitration agreement, the concept of a mandatory non-discretionary “stay” of the winding-up petition pursuant to section 9 (1) and (4) of the 1996 Act made no sense. In such a case, there was no basis for staying the petition itself and, if the petition proceeded, there could be no reference to arbitration of any of the debts because the making of a winding-up order brought into effect the statutory scheme for proof of debts, which superseded any arbitration agreement.
It was improbable that parliament, without any express provision to that effect, intended section 9 of the 1996 Act 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 those companies were not able to pay their debts. It followed that the mandatory stay provisions in section 9 of the 1996 Act did not apply in the instant case: Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855; [2012] Ch 333 distinguished.
(2) However, even where section 9 of the 1996 Act did not apply, the court’s discretionary power to wind up a company under section 122(1) of the 1986 Act should, save in wholly exceptional circumstances, be exercised consistently with the legislative policy embodied in the 1996 Act. In enacting the 1996 Act, the legislature had intended to exclude the court’s jurisdiction to give summary judgment. It would therefore be anomalous for the Companies Court to conduct a summary judgment-type analysis of liability for an unadmitted debt, on which a winding-up petition was grounded, when the creditor had agreed to refer any dispute relating to the debt to arbitration. Exercise of the discretion otherwise than consistently with the policy underlying the 1996 Act would inevitably encourage parties to an arbitration agreement to by-pass the arbitration agreement and the 1996 Act by presenting a winding-up petition. That would enable one party, through the draconian threat of liquidation, to apply pressure on the alleged debtor to pay up immediately or face the burden, often at short notice on an application to restrain presentation or advertisement of a winding-up petition, of satisfying the court that the debt was bona fide disputed on substantial grounds. That would be entirely contrary to the parties’ agreement as to the proper forum for the resolution of such an issue and to the legislative policy of the 1996 Act.
In the instant case, the debt mentioned in the petition fell within the very wide terms of the arbitration clause in the lease. The debt was not admitted. That was sufficient to constitute a “dispute” within the 1996 Act, irrespective of the substantive merits of any defence, and, had there been proceedings on foot to recover the debt, the automatic stay provisions in section 9(1) would have been triggered. It was therefore appropriate, in the exercise of the court’s discretion under section 122(1)(f) of the 1996 Act, 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 to require the court to investigate whether or not the debt was bona fide disputed on substantial grounds: Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Comm) considered; Halki Shipping Corp v Sopex Oils Ltd [1997] EWCA Civ 3062; [1998] 1 WLR 726 applied.
In the absence of any evidence that there was another creditor of the respondent who was willing to be substituted as the petitioner, it would have been better to dismiss the petition rather than to stay it; however, the appellant had not taken that point on the appeal. Moreover, in all the circumstances, it was not necessary to address the further grounds or evidence put forward in the respondent’s notice.
Lesley Anderson QC (instructed by Woodcocks Haworth & Nuttall, of Bury) appeared for the appellant; Peter Knox QC (instructed by Vyman Solicitors Ltd) appeared for the respondent.
Sally Dobson, barrister
