WARNING: Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 ('Sian') has, in part, overruled, Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] BCC 306 (‘Salford Estates’). The part overruled is in respect to section 122(1) of the Insolvency Act 1986 and whether the Companies Court can, on a creditors winding up petition, determine whether or not the petition debt is genuinely disputed on substantial grounds. Salford Estates was not overruled in respect to whether section 9 of the Arbitration Act 1996 applies to creditors winding up petitions. See supplemental article, available here.
Contracting parties are generally free to agree that disputes that may arise between them in regard to, or under a contract, shall be resolved by arbitration rather than through the Courts[1]. Where the parties choose to incorporate an arbitration agreement[2]into their contract, and a dispute[3]about the contract arises, a question can arise where the alleged wrongdoer is a company - can the innocent party found a winding up petition upon the alleged debt/liability if it is not admitted by the alleged wrongdoer? To answer this question, this article will look at 2 relatively recent cases, Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306 (‘Salford Estates’) and Eco Measure Market Exchange Ltd [2015] BCC 877 (‘Eco Measure’).
Salford Estates and Winding-Up Petitions
In Salford Estates, the Court of Appeal considered whether a winding-up petition, founded upon a debt arising out of a contract which contained an arbitration agreement, was a proceeding or claim, that ought to be stayed under s.9 of the Arbitration Act 1996 or, if that section did not apply, whether the Court ought to stay or dismiss the petition pursuant to its jurisdiction not to make a winding-up order unless it was just and equitable to do so.
To consider this issue, Salford Estates noted the relevant provisions of Arbitration Act 1996. Those relevant provisions included section 1, entitled ‘General principles’, which reads:
‘The provisions of this Part are founded on the following principles, and shall be construed accordingly— (a) the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense; (b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest; (c) in matters governed by this Part the court should not intervene except as provided by this Part.’
And also section 9 of the Arbitration Act 1996, which is entitled ‘Stay of legal proceedings’; subsections (1) and (4) read:
“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.” [my bold]
“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.’
And section 82 of the Arbitration Act 1996, entitled ‘Minor definitions’, which contains:
‘In this Part— … ‘dispute’ includes any difference … ‘legal proceedings’ means civil proceedings in the High Court or a county court …’
As to the Salford Estates parties, the respondent company (Altomart) was an underlessee, and petitioning putative creditor (Salford Estates (No.2) Ltd) was the underlessor; the underlease being over commercial premises (the ‘Premises’). For brevity, they will respectively here be referred to as ‘Lessee’, ‘Lessor’ and ‘Lease’.
Covenants in the Lease provided for the Lessee to pay to the Lessor annual service charge, the sum being ‘a due proportion … of the expenses … reasonably and properly incurred by the lessor’ (paragraph 6) in the preceding year in connection with the works and services prescribed in the Lease. The Lessor covenanted to insure the Premises with, amongst other things, an insurer approved by the Lessee. The Lessee covenanted to pay to the Lessor an amount equal to the insurance premium by way of rent, without deduction.
Crucially, the Lease also contained a ‘wide and comprehensive’ (paragraph 10) arbitration agreement, which read:
‘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 [Lease] shall be referred to a single arbitrator...’
The Lessor and Lessee fell into dispute about Lessee’s obligation to pay service charge and insurance rent in respect to 3 years (from 1 April 2010 to 31 March 2013), and these disputes were referred to arbitration. During the arbitration procedure, the arbitrator made a decision to refuse a late application[4]by the Lessee ‘…to bring within the arbitration the issue of the reasonableness of Salford Estates' expenditure on management fees and marketing fees and the correctness of the due proportion based on rateable values.’ (paragraph 11). The arbitrator issued his final arbitral award (the ‘Award’) resolving that the Lessee was obliged to pay about £64,500 for services charges and for insurance rent, to the Lessor.
The Lessee did not immediately pay the Award, and the Lessor threatened to present a winding-up petition based on the Award, and importantly, on ‘some further sums claimed’ (paragraph 13) in respect to the year ending 31 March 2014 (so the year after the 3 years subject to the arbitration and Award), unless such were paid by a certain date. The Lessor said that:
‘Those further sums were ... necessarily to follow from the Award or the reasoning contained in it.’ (paragraph 13)
However,
‘[The Lessee] did not accept that it was liable for those further sums.’ (paragraph 13)
After the Lessor’s deadline passed, the Lessor presented a winding-up petition against the Lessee (the ‘Petition’), founded upon alleged indebtedness comprising: (a) the Award; and (b) the ‘further sums’ for the year ending 31 March 2014 of about £27,600. The Lessee resisted the winding-up petition on the ground that, apart from the Award sum, the ‘further sums’ were disputed and that dispute had to be referred to arbitration pursuant to the arbitration agreement. A cheque for the Award amount having been sent to the Lessor, the Lessee applied to strike out and/or stay the Petition on, amongst other things, the ground that the Petition was liable to be stayed pursuant to section 9 of the Arbitration Act 1996.
The Lessee argued that the ‘further sums’ were disputed as:
(a) the service charge part of the ‘further sums’ contained items of expenditure not reasonably and properly incurred. The Lessee argued that this related to a later service charge year (a year not having been subject to the previous arbitration and Award) and so, it seems, not subject to the arbitrator’s decision to refuse to allow this issue to be included and argued. The Lessee was in the process of obtaining expert evidence on the reasonableness of the Lessor's expenditure; and
(b) the insurance rent part of the ‘further sums’, was in respect to insurance obtained by the Lessor but not in conformity with the Lessor’s obligations to the Lessee. Though the arbitrator had ruled against the Lessee on whether or not the Lessor was still entitled to recover from the Lessee for insurance premiums paid, notwithstanding Lessor non-compliance, the Lessee contended that the Lessee was still entitled to argue that, for the year to 31 March 2014, a cheaper premium could have been obtained (and so the Lessee had been overcharged and had suffered loss).
And that such disputes must be determined exclusively by arbitration[5].
The Lessor responded, alleging amongst other things, that the evidence did not disclose any real or bona fide dispute or that there was a dispute or difference which was capable of being referred to arbitration.
At first instance, a deputy High Court Judge imposed a stay on the winding-up petition. The Lessor appealed to the Court of Appeal (Sir Terence Etherton, Chancellor, Longmore LJ and Kitchin LJ), which addressed two main issues:
(a) whether a winding-up petition is subject to section 9(1) of the Arbitration Act 1996, and so subject to its mandatory stay provision; and
(b) whether, when exercising its section 122(1) of the Insolvency Act 1986 discretionary power to order a company to be wound up, the Court should exercise that discretion consistently with the legislative policy embodied in the Arbitration Act 1996, unless ‘wholly exceptional circumstances’ exist.
Etherton C gave the only reasoned judgment of the Court.
(a) Winding-up Petitions not subject to section 9(1).
The Court held that while winding up petition proceedings are ‘legal proceedings’ within section 82 of the Arbitration Act 1996, section 9(1) does not apply to a winding up petition founded upon allegedly due but unpaid debt, as evidence that the respondent is unable to pay its debts as they fall due for the purposes of section 123(1)(e) of the Insolvency Act 1986, because the winding up petition is not a ‘claim’ for payment of the debt[6]. Issue (a) was answered in the negative.
Distinguishing a winding up petition from a ‘claim’ within the meaning of section 9(1), Etherton C held, at paragraphs 31 to 33, that:
‘…the Petition is 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 in the present case. It would depend on the value of the assets available for distribution in the liquidation to [the Lessee’s] body of creditors and the respective priority ranking of the creditors, including [the Lessor], under the statutory framework.
Further, by contrast with a “claim” for a debt, it is an abuse to present a winding up petition in order to put pressure on the company to pay a genuinely disputed debt…It was common ground between the parties before us that the court will dismiss a petition based on an alleged debt where the debt is bona fide disputed on substantial grounds…
Finding support for his decision that section 9(1) of the Arbitration Act 1996 does not apply to unpaid debt winding up petitions, Etherton C noted, at paragraphs 34 and 35, that:
If several alleged debts are specified 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 arise out of a transaction containing an arbitration agreement, the concept of a non-discretionary “stay” of the winding up petition pursuant to section 9(1) and 9(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.
Furthermore, it seems highly 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 companies are not able to pay their debts.’
Etherton C concluded, at paragraph 38 that:
‘…at least in respect of an alleged due but unpaid debt, I do not agree … that an issue on a winding up petition which is essential to the foundation of the petition becomes a claim and falls within section 9. That section has no application to the Petition in the present case.’
(b) Legislative Intent Behind Arbitration Act 1996
Where the Arbitration Act 1996 comes in is when the Court is exercising its discretion whether or not to make a winding up order against a company under section 122 (1) of the Insolvency Act 1986. When the Court is exercising that discretion, the Court is required to exercise that discretion consistently with the legislative intent behind the Arbitration Act 1996. Any ‘dispute’ as to the existence or quantum of the sum allegedly due and relied upon by the winding up petition, ought to be determined by arbitration not by the courts; such exclusion of the Court applies to a Court undertaking an analysis of the petition debt to determine whether the debt is bona fide disputed on substantial grounds.
Etherton C explained, at paragraphs 39 and 40:
‘Insolvency Act 1986 s.122(1) confers on the court a discretionary power to wind up a company. It is entirely appropriate that the court should, save in wholly exceptional circumstances which I presently find difficult to envisage, exercise its discretion consistently with the legislative policy embodied in the 1996 Act….
Henry and Swinton Thomas LJJ considered in Halki Shipping Corpn v Sopex Oils Ltd [1998] 1 WLR 726 that the intention of the legislature in enacting the 1996 Act was to exclude the court’s jurisdiction to give summary judgment, which had not previously been excluded under the Arbitration Act 1975. It would be anomalous, in the circumstances, for the Companies Court to conduct a summary judgment type analysis of liability for an unadmitted debt, on which a winding-up petition is grounded, when the creditor has 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––as a standard tactic––to by-pass the arbitration agreement and the 1996 Act by presenting a winding up petition. The way would be left open to 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 Companies Court that the debt is 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.’
Consequentially, Issue (b) was answered in the affirmative.
Applying this to the facts in Salford Estates, Etherton C, at paragraph 41, said that:
‘There is no doubt that the debt mentioned in the [Petition] falls within the very wide terms of the arbitration clause in the [Lease]. The debt is not admitted….that is sufficient to constitute a dispute within the 1996 Act, irrespective of the substantive merits of any defence, and, were there proceedings on foot to recover the debt, to trigger the automatic stay provision in s.9(1) of the 1996 Act. For the reasons I have given, I consider that, as a matter of the exercise of the court’s discretion under Insolvency Act 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.’
Dismiss or Stay Petition
Where this Salford Estates situation arises, the normal course this that the petition be dismissed, rather than stayed, unless there is evidence that a would-be substitute petitioner proposes to take over carriage of the petition as creditor[7].
Eco Measure
This guidance from Salford Estates was applied in Eco Measure, a decision of Mr Alan Steinfield QC sitting as a Deputy High Court Judge. In that case, the Court heard an application by a company (Eco Measure Market Exchange Ltd; the 'Company') for an order to strike out, or dismiss, a winding-up petition presented by Quantum Climate Services Ltd (‘Quantum’) against it. The petition was founded upon a debt allegedly due from the Company to the petitioning (putative) creditor Quantum for loft insulation services rendered by Quantum under a standard service agreement made between the two companies[8]. The Company disputed the sum was due and, pursuant to an arbitration agreement in the service agreement (in respect to “any dispute arising out of or relating to this agreement”[9]), confirmed that it wished to refer the dispute to arbitration.
In determining the strike out/dismiss application, the Deputy High Court Judge first considered Salford Estates. Summarizing the guidance in Salford Estates, at paragraph 10, he said:
‘The result of [Salford Estates]…is to place a very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause. The problem for such a petitioner is that the company is entitled to have the petition dismissed without having to show, as would normally be the case, that the debt upon which the petition is based is, to use the time-hallowed expression, bona fide disputed on substantial grounds. What the Court of Appeal decided in clear terms in the [Salford Estates] case was that, where there is an arbitration clause, it is sufficient to show that the debt is “disputed” and for that it is sufficient to show that the debt is not admitted.[10]
No 'Indisputably Due’ Exception
The Deputy High Court Judge then rejected a submission that the winding up petition could proceed on the basis that the Quantum’s claims were ‘indisputably due’ (paragraph 11). He held, at paragraph 12, that:
‘…the fact of the matter is that there is undoubtedly, a dispute which it is for the arbitrator and not for the court to determine…and it would be quite wrong, it seems to me, with the guidance that I have from the Court of Appeal, for this court to cast any view as to the merits of the submissions that have been made to me on behalf of Quantum by [counsel for Quantum] because, as it seems to me, that is a matter for the arbitrator. It will be for the arbitrator to decide what the terms of payment are, it would be for the arbitrator to decide whether there are sums that are indisputably due…These are not matters for the court…’
From this it is clear that there is no merits-based threshold for a ‘dispute’ to be a qualifying dispute for the purposes of an arbitration agreement. Whatever the merits, or apparent lack of merits to a defence contending that the alleged debt founding the petition isn't due, once a dispute has arisen about it, all merits based issues become issues left exclusively for the arbitral tribunal to determine; they are not for a judge to determine. Accordingly, in Eco Measure, the Court acceded to the application to dismiss the winding up petition; the winding up petition was dismissed.
The decision in Eco Measure that there is no exception to the Salford Estates guidance, for debts ‘indisputably due’, is consistent with the meaning and scope of ‘dispute’ in arbitration agreements, as set down in Halki Shipping Corp v Sopex Oils Ltd [1998] 1 WLR 726 ('Halki Shipping'). In Halki Shipping, the Court of Appeal was held that until the company positively admits[11]that the sum is due and payable (silence will not be enough), there is a dispute for the purposes of an arbitration agreement.
Conclusion
Where a contract contains an arbitration agreement, and a dispute covered by the arbitration agreement arises between the parties, and one party petitions for a winding up order against the other (corporate) party, founding the petition upon a debt allegedly due in respect to the contract but unpaid, the Court ought to dismiss the petition (or stay it, if there is potentially, a substitute would-be petitioner willing to take carriage) in the exercise of its discretion under section 122(1) of the Insolvency Act 1986, unless there are wholly exceptional circumstances[12]. Or to put it another way, a winding up petition will normally be dismissed if founded upon an allegedly due but unpaid debt arising from a dispute covered by an arbitration agreement. Parliament enacted the Arbitration Act 1996 with the intention to extend the exclusionary scope of arbitration to cover the Court's jurisdiction to grant summary judgment. It would be anomalous, in such circumstances, for the Court to conduct a summary judgment type analysis of liability for an unadmitted debt on a winding-up petition, when the creditor had agreed to refer any dispute relating to the debt, to arbitration. The proper forum for resolution of all arguments about the merits of a dispute caught by an arbitration agreement, is arbitration, not the Court, and this is notwithstanding any misgivings the Court might have about the (apparent) strength of the debtor company's defence to the petitioner's contention. The Court ought not to stray into investigating the merits at all. That would be to stray into an impermissible investigation, or determination. Rather, the Court will give effect to the legislative intent behind the Arbitration Act 1996 at the section 122(1) of the Insolvency Act 1986 discretionary stage.
Conversely, a winding up petition based on allegedly due but unpaid debt is not a ‘claim’ within the meaning of that section 9(1) of the Arbitration Act 1996 and its mandatory stay on claims. Consequently, winding up petitions are not automatically stayed by section 9(1).
Update
In Telnic Limited v Knipp Medien Und Kommunikation [2020] EWHC 2075 (Ch); [2021] 2 All ER (Comm) 328 ('Telnic 2075'), Vos C said, in paragraphs 26 and 27:
'Once it is accepted, as it must be in this case, that (i) the petition debt is alleged to arise under the Agreement, (ii) the Agreement includes a binding arbitration clause, and (iii) the debt is disputed or not admitted, the judge was plainly bound by the decision in Salford Estates .
As Sir Terence Etherton C made clear in Salford Estates, in a case where the debt is covered by an arbitration agreement, the judge sitting (now) in the Insolvency and Companies List of the Business and Property Courts should not "conduct a summary judgment type analysis of liability". It is not, therefore, appropriate, save in wholly exceptional circumstances, for that judge to inquire whether the debt is disputed in good faith on substantial grounds. Salford Estates decided that such an investigation should not be made unless wholly exceptional circumstances were established. Nugee J said in [Fieldfisher LLP v. Pennyfeathers Ltd [2016] EWHC 566 (Ch)], and I agree, that even past admissions of the debt (at least ones that are seemingly retracted by the time of the application) would not constitute such circumstances. That is because the court reasoned in Salford Estates that the discretion of the judge of the Insolvency and Companies List must be exercised so as to (a) uphold the policy of the Arbitration Act 1986, (b) discourage parties to an arbitration agreement from bypassing it as a tactic by presenting a winding up petition, (c) prevent one party applying pressure on an alleged debtor to pay up immediately or face the burden of satisfying the court that the debt was bona fide disputed on substantial grounds, and (d) require the parties to adhere to their agreement as to the proper forum for the resolution of such an issue.'
In Telnic 2075, Vos C went on to consider whether there were 'wholly exceptional circumstances' in the case before him. Affirming the existence of this exception, Vos C in Telnic said, at paragraph 31:
'As I said in my first judgment in this case at [12], Salford Estates does not establish that the court cannot under any circumstances enquire into whether or not the debt is disputed in good faith or on substantial grounds. It is a matter of discretion, as I made clear in The Commissioners for Her Majesty's Revenue and Customs v Changtel Solutions UK Limited [2015] EWCA Civ 29 (" Changtel ") at [48]. But as I also said in my first judgment the circumstances will be very rare for the reasons given in Salford Estates.'[13]
On the facts in Telnic 2075, Vos C said 'There is, in my judgment, nothing in the circumstances relied upon by [the petitioner] that takes this case out of the ordinary and into the realm of wholly exceptional circumstances.' (paragraph 30) and '...no very rare and wholly exceptional circumstances exist here that would justify the court in departing from its usual practice which is to dismiss or stay the petition.' (paragraph 31). What were the facts that were (unsuccessfully) argued amounted to 'wholly exceptional circumstances':
'(a) the debt was admitted in correspondence said by [the company] to have been without prejudice, (b) [the company] is anyway balance sheet insolvent and the judge was wrong to have held otherwise, (c) [the company] has made an unlawful distribution to its shareholders, and (d) [the company] has tried to slow down the arbitration, or failed to participate in it in good faith.' (paragraph 29)
Exclusive Jurisdiction Clauses
While similarities seemingly can be drawn between: (1) contracts that contain arbitration agreements; and (2) contracts that contain exclusive jurisdiction clauses (nominating a foreign court as having exclusive jurisdiction to determine disputes between the parties, arising from alleged non-compliance with the obligations contained in the contract)[14], HHJ Pearce sitting as a Judge of the High Court in City Gardens Ltd v DOK82 Ltd [2023] EWHC 1149 (Ch) ('City Gardens') has determined that the law is completely different in relation to exclusive jurisdiction clauses. HHJ Pearce in City Gardens held that an exclusive jurisdiction clause in a contract (nominating a foreign jurisdiction's courts as being the exclusive forum for determining disputes under the contract) is irrelevant to the Court's task of determining whether or not the company disputes, in good faith, the debt (to at least less than £750), on grounds which are substantial. In other words, the existence of a exclusive jurisdiction clause in the contract, does not prevent, or render impermissible, the Companies Court undertaking the task of determining whether or not the company disputes, in good faith, the debt (to at least less than £750), on grounds which are substantial (see paragraph 42 of City Gardens[15])
SIMON HILL © 2018-2023
BARRISTER
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
[1] There are constraints on contractual freedom. The Court retains certain limited powers in respect of matters that affect the public interest or public policy (though they overlap, public interest and public policy are not the same thing). In the Arbitration Act 1996, section 1 sets down the principles founding Part I, and subsection 1 (b) reads:
‘the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest.’
As will be apparent, unfettered contractual freedom is curtailed by the proviso ‘subject only to such safeguards as are necessary in the public interest’.
On arbitrability, the authors of Russell on Arbitration, 23rdEdition, state at paragraph 2-081:
‘The Act does recognize the right of the court to refuse recognition or enforcement of an award that is in respect of a matter which is not capable of settlement by arbitration. There are also well-recognized categories of dispute that may not be capable of being resolved by arbitration and certain underlying principles that can be identified in determining whether a matter is arbitrable. In particular, a dispute will generally not be arbitrable if it involves an issue of public policy, public rights or the interests of third parties, or where the dispute in question is clearly covered by a statutory provision which provides for inalienable access to the courts. In these cases, as the Court of Appeal has confirmed, “even the most widely drafted arbitration agreement will have to yield”.’
It should be noted that the ‘public policy’ element also comes into play at the arbitral award enforcement stage, where enforcement of the arbitral award can be opposed on the basis that it is contrary to public policy. See Arbitration Act 1996, section 103(3).
[2] The arbitration provisions in the main contract are known as the ‘arbitration agreement’, rather than, say, the arbitration clauses or clause. This is because, under the doctrine of separability, the arbitration provisions are actually separate from the main/underlying contract. The ‘arbitration agreement’ forms an agreement within the main/underlying agreement. In Union of India v McDonnell Douglas Corp [1993] 2 Lloyd’s Rep 48, Saville J said, 49-50:
‘An arbitration clause in a commercial contract…is an agreement inside an agreement. The parties make their commercial bargain…but in addition agree on a private tribunal to resolve any issues that may arise between them.’
An effect of this separability, is the arbitration agreement's ability to survive the termination of the main/underlying agreement. This attribute was briefly touched on in Eco Measure Market Exchange Ltd [2015] BCC 877, at paragraph 9, where Alan Steinfield QC sitting as a Deputy High Court Judge said:
‘At one stage it seems that there was being put forward on behalf of [petitioning putative creditor] an argument that the arbitration clause somehow did not survive what was contended was a termination of the agreement by what was contended was the wrongful repudiation of the agreement accepted by [petitioning putative creditor] by reason of the non-payment of amounts which it claims were due to it. But [counsel for the petitioning putative creditor] very correctly, in his submissions to me, did not advance that submission as it is clearly established on the authorities that an arbitration clause in an agreement will ordinarily encompass arguments as to whether or not an agreement has been properly terminated and disputes as to what the consequences of that wrongful termination, if there was any, might be.’
[3] As to what amounts to a ‘dispute’, see Halki Shipping Corp v Sopex Oils Ltd [1998] 1 W.L.R. 726 (‘Halki Shipping’), in which the majority were Henry LJ and Swinton-Thomas LJ (Hirst LJ dissenting). In short, a ‘dispute’ exists if any claim for a sum is not admitted. Silence did not mean consent and that until the alleged debtor admits that a sum is due and payable there is usually a ‘dispute’ within the meaning of the arbitration clause. Ellerine Bros Pty Ltd v Klinger [1982] 1 W.L.R. 1375 (‘Ellerine Bros’) is authority for the proposition that where a party simply does nothing, there is a dispute, which the other party is both entitled, and limited, to referring to arbitration rather than the Courts. Lord Templeman in Ellerine Bros stated, at 1380-1381:
‘…it seems to me that section 1(1) is not limited either in content or in subject matter; that if letters are written by the plaintiff making some request or some demand and the defendant does not reply, then there is a dispute. It is not necessary, for a dispute to arise, that the defendant should write back and say ‘I don't agree.’ If, on analysis, what the plaintiff is asking or demanding involves a matter on which agreement has not been reached and which falls fairly and squarely within the terms of the arbitration agreement, then the applicant is entitled to insist on arbitration instead of litigation.’
Swinton-Thomas LJ in Halki Shipping, at 757, agreed with this passage.
[4] Presumably, the application was made to the arbitral tribunal, requesting that it exercise its powers under Arbitration Act 1996, section 34(3), to extend the deadline for compliance with the arbitral tribunal’s earlier directions. Section 34(3) reads:
‘The tribunal may fix the time within which any directions given by it are to be complied with, and may if it thinks fit extend the time so fixed (whether or not it has expired).’
[5] The Lessee Altomart Ltd also argued that it was solvent on both a cash flow basis and on a balance sheet basis, see Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306, paragraph 17.
[6] Section 123(1)(e) of the Insolvency Act 1986 is the last of 5 grounds for engaging the deeming provision in section 123(1). At least one of these 5 grounds needs to be satisfied for section 122(1)(f) of the Insolvency Act 1986 to be satisfied, which in turn grants the Court jurisdiction to make a winding up order against the company. Section 122(1) of the Insolvency Act 1986 makes clear by using the word ‘may’ that this jurisdiction is discretionary. Section 122 (1) of the Insolvency Act 1986 reads: ‘The company may be wound up by the court if …’ [bold added]
[7] Etherton C said in Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306, at paragraph 42:
‘The judge stayed the Petition because, contrary to my conclusion, he thought that the mandatory stay provisions in section 9 were engaged. I consider that it would have been better to have dismissed the Petition rather than to stay it in the absence of any evidence that there was another creditor of Altomart who was willing to be substituted as the petitioner. That is not, however, a point taken by Salford Estates on this appeal.’
Given it was not a point taken in the appeal, the point might be considered obiter, though this guidance is still highly persuasive.
In Telnic Limited v Knipp Medien Und Kommunikation [2020] EWHC 2075 (Ch); [2021] 2 All ER (Comm) 328 ('Telnic 2075'), Vos C answered the question (as 'Issue 3'): 'Should the judge have dismissed the petition, stayed the petition, or allowed the petition to proceed?', from paragraphs 33 to 46.
(1) Firstly, he considered whether the Court had jurisdiction to stay rather than dismiss the petition. In Telnic 2075, Vos C said, at paragraphs 35 and 37-39:
'The starting point once again is Salford Estates . Sir Terence Etherton C said at [40] that "it would have been better to have dismissed the Petition rather than to stay it in the absence of any evidence that there was another creditor of Altomart who was willing to be substituted as the petitioner". Although he seems not to have thought that a stay was not open to the court.
...
In Tallington Lakes v. Ancasta International Boat Sales [2014] BCC 327 at [4]-[5], David Richards J described the principle that a petition founded on a debt that was genuinely disputed on substantial grounds would be struck out as "a statement of general practice". He said also that "the earlier practice of staying a winding-up petition while the issue of liability was determined in separate proceedings was abandoned in favour of striking it out". Moreover, in In Re a Company (No 006685 of 1996) [1997] BCC 830 at page 832, Chadwick J described the striking out of a disputed debt as a "rule of practice". Finally, in Jubilee Internationale v. Farlin Timbers TBE [2005] EWHC 3331 (Ch), Mr John Jarvis QC, sitting as a deputy judge of the High Court, adjourned a petition to allow an arbitration to proceed in Singapore, but for reasons that are far removed from the present case. Telnic argued that the decision was wrong because it did not consider whether the presentation of the petition had been an abuse of process and because very few cases were cited. I would regard it as an example of the flexibility that is available to the winding up court.
38. As it seems to me, the cases relied upon by [the company] such as Mann v. Goldstein [1968] 1 WLR 1091 , Re Claybridge Shipping [1997] 1 BCLC 572 (CA) and Re GFN Corporation [2009] CILR 650 are not concerned with the question of whether there is jurisdiction to stay or adjourn, rather than strike out, a petition (save, perhaps, where the company is obviously solvent). There plainly is such jurisdiction; the question is simply whether it was correctly exercised.
39. As Sir Terence Etherton C held in Salford Estates, the court's discretion in circumstances of this kind should be exercised consistently with the policy behind the Arbitration Act 1996.'
(2) Secondly, as to the first instance judge's decision to stay rather than dismiss the petition, Vos C said, at paragraph 42 'It seems a fair inference from what he did say...that he understood that the normal course would have been to dismiss the petition.' Later, Vos C said, at paragraph 44 'I can see no basis for the submission that the judge exercised his discretion on the wrong legal basis...' Consequently, Vos C agree that dismissal was the normal course.
[8] In Eco Measure Market Exchange Ltd [2015] BCC 877, the services rendered were said to be loft installation work in furtherance of a government scheme whereby households received grants for energy efficiency programs – to reduce carbon emissions. The company was a broker, with Quantum undertaking the relevant loft installation work. Quantum apparently did work on 47 properties, submitted invoices to the company, which went unpaid, as the company rejected any obligation to pay in regard to any of the properties, as in turn a 3rd party had rejected its obligation to pay the company because the 3rd party had discovered problems with the loft installation work.
[9] From Clause 25 of the service agreement between the Company and Quantum.
[10] An additional summary of Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306 was given by the Court of Appeal in Enta Technologies Ltd v Revenue and Customs Commissioners [2015] 1 W.L.R. 3911 (Vos LJ, Longmore LJ and Patten LJ). After hearing argument touching on Salford Estates, Vos LJ said at paragraph 48:
‘At para 26, Sir Terence Etherton C made clear that section 9 did not apply to a winding up petition where what was in issue was whether a debt was outstanding and due. In that case, however, the debt fell within the wide ambit of the arbitration clause, and Sir Terence Etherton C thought it was right as a matter of discretion for the court to stay or dismiss the petition so as to compel the parties to resolve their dispute, as to whether, in effect, summary judgment on the debt was appropriate, by their chosen method of dispute resolution rather than requiring the court to investigate whether the debt was disputed in good faith on substantial grounds: paras 40–41. In my judgment, the decision in the Salford Estates case supports the conclusion I have reached. Section 9 did not operate to deprive the Companies Court of jurisdiction. But the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding up before having it determined that the debt was due by the method that it had agreed.Section 9 did not operate to deprive the Companies Court of jurisdiction. But the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding up before having it determined that the debt was due by the method that it had agreed.’
Nugee J in Fieldfisher LLP v Pennyfeathers Ltd [2016] BCC 697 also gave a summary of Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306, adopting (seemingly) that put forward by counsel for the company, at paragraphs 15 and 16:
‘…the Court of Appeal held that where an alleged act was (a) disputed, and (b) subject to an arbitration provision, then although an application to wind up a company on the basis of such a debt was not barred by s.9 of the Arbitration Act 1996, the petition to wind up not being a claim within the meaning of s.9, nevertheless…
“It is entirely appropriate that the court should, save in wholly exceptional circumstances … exercise its discretion consistently with the legislative policy embodied in the 1996 Act.”
It should, therefore, in practice, in general, refuse to entertain an application for winding up.’
Nugee J in Fieldfisher here is quoting a passage from Etherton C's judgment in Salford Estates, paragraph 39.
[11] In Halki Shipping Corp v Sopex Oils Ltd [1998] 1 WLR 726, Henry LJ said at 753:
‘In my judgment Clarke J. was right to follow the line of authority from Tradax Internacional S.A. v. Cerrahogullari T.A.S. [1981] 3 All E.R. 344 to Ellerine Bros. (Pty.) Ltd. v. Klinger [1982] 1 W.L.R. 1375, which focused on the meaning of dispute in the arbitration agreement. As he put it in this case at first instance, at p. 1277:
“In Ellerine Bros. (Pty.) Ltd. v. Klinger the Court of Appeal was also considering a question of construction of an arbitration agreement, in which it was agreed that all disputes or differences whatsoever should be referred to arbitration. The plaintiffs claimed an account. The defendants had simply done nothing. The Court of Appeal expressly followed the decision in [Tradax Internacional S.A. v. Cerrahogullari T.A.S. [1981] 3 All E.R. 344] and held that silence did not mean consent and that, as Kerr J. said, until the defendant admits that a sum is due and payable there is a dispute within the meaning of the arbitration clause. Even in such a case I can see an argument for saying that a claimant would be entitled to an award if the respondent then refused to pay. But, however that might be, the Ellerine Bros. case is authority for the proposition that where a party simply does nothing there is a dispute which the claimant is both entitled and bound to refer to arbitration. It follows that there is binding Court of Appeal authority in favour of the defendant's case on construction of the clause. It is true that the Nova (Jersey) Knit case [1977] 1 W.L.R. 713 was not directly referred to the Court of Appeal in that case, but it is expressly referred to by Kerr J. in [Tradax Internacional S.A. v. Cerrahogullari T.A.S. [1981] 3 All E.R. 344 ] so that it cannot possibly be held that it was overlooked or that the Ellerine Bros case was decided per incuriam. Both Kerr and Saville JJ. regarded the second point in the Nova (Jersey) Knit Ltd. case as depending on the meaning of the final words of section 1(1) of the Act of 1975 and not upon the true construction of the contract. It may well be that the Court of Appeal did the same. In these circumstances the correct approach for a judge of first instance is to follow the reasoning of the Court of Appeal, so far as construction of the contract is concerned”
I agree with that, and that decision is equally binding on this court.’
Swinton-Thomas LJ in Halki Shipping said, at 761:
‘In my view…there is a dispute once money is claimed unless and until the defendants admit that the sum is due and payable….In my judgment if a party has refused to pay a sum which is claimed or has denied that it is owing then in the ordinary use of the English language there is a dispute between the parties.’
[12] As to quite what circumstances might qualify as ‘wholly exceptional circumstances’, Nugee J in Fieldfisher LLP v Pennyfeathers Ltd [2016] BCC 697 ('Fieldfisher') said in an analogous application for an administration order, at paragraph 29:
‘It is apparent, from the way in which the Chancellor expressed himself in [paragraph 39] of Salford Estates, that he did not envisage that there would be any circumstances which were wholly exceptional. It seems to me that the fact that the alleged debtor has made admissions in the past that money is due cannot fall within the description of wholly exceptional circumstances that the Chancellor seems to have had in mind.’
In any event, on the facts in Fieldfisher, ‘wholly exceptional circumstances’ were not shown. i.e. the applicant’s case failed on the facts as well as the law. The applicant sought to argue that a series of particular matters amounted to admissions that the debt was due from the company to the applicant, but these were found to be insufficient. None of them amounted to unequivocal admissions that the sums relied upon in the application for an administration order were, in fact, due. See paragraph 28 of Fieldfisher.
[13] In this paragraph, Vos C in Telnic Limited v Knipp Medien Und Kommunikation [2020] EWHC 2075 (Ch); [2021] 2 All ER (Comm) 328 ('Telnic 2075'), refers to 2 other authorities:
(1) Telnic Ltd v Knipp Medien und Kommunikation GmbH [2020] EWHC 1615 (Ch); [2020] BPIR 1507 ('Telnic 1615'), a permission to appeal hearing, wherein, at paragraph 12, Vos C said:
'I do not, however, think that Salford Estates establishes that the court cannot under any circumstances enquire into whether or not the debt is disputed in good faith or on substantial grounds. It is a matter of discretion, as I made clear in The Commissioners for Her Majesty's Revenue and Customs v Changtel Solutions UK Limited [2015] EWCA Civ 29 at para. 48 where I said:
"… Section 9 did not operate to deprive the Companies court of jurisdiction. But the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding-up before having it determined that the debt was due by the method that it had agreed. Likewise, in this case as I have said, the existence of the tax appeal and the decision of Judge Poole were relevant, but not necessarily conclusive, to the judge's decision on the petition."
(2) The Commissioners for Her Majesty's Revenue and Customs v Changtel Solutions UK Limited [2015] EWCA Civ 29; [2015] 1 WLR 3911 ('Changtel'), wherein, at paragraph 48, Vos LJ (as he then was), said:
'Finally, [counsel for the company] referred in this connection to the very recent decision of the Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] 3 WLR 491 where Sir Terence Etherton C (with whom Longmore and Kitchin LJJ agreed) upheld Judge Bird's decision to stay (or dismiss) a petition where the debt on which it was based arose under a contract subject to an arbitration clause, and section 9(1)(4) of the Arbitration Act 1996 required the court to stay legal proceedings “in respect of a matter which under the agreement is to be referred to arbitration”. At para 26, Sir Terence Etherton C made clear that section 9 did not apply to a winding up petition where what was in issue was whether a debt was outstanding and due. In that case, however, the debt fell within the wide ambit of the arbitration clause, and Sir Terence Etherton C thought it was right as a matter of discretion for the court to stay or dismiss the petition so as to compel the parties to resolve their dispute, as to whether, in effect, summary judgment on the debt was appropriate, by their chosen method of dispute resolution rather than requiring the court to investigate whether the debt was disputed in good faith on substantial grounds: paras 40–41. In my judgment, the decision in the Salford Estates case supports the conclusion I have reached. Section 9 did not operate to deprive the Companies Court of jurisdiction. But the fact that the parties had agreed an alternative method of dispute resolution was, as a matter of discretion, relevant to whether it was appropriate to allow the petitioner to proceed with a winding up before having it determined that the debt was due by the method that it had agreed. Likewise in this case, as I have said, the existence of the tax appeal and the decision of Judge Poole were relevant, but not necessarily conclusive, to the judge's decision on the petition.'
[14] In the Hong Kong Court of Appeal case of Lam v Tor [2022] HKCA 1297, Hon G Lam JA (with whom Hon Barma JA agrees), provides a wide review of commonwealth authorities on how an insolvency court deals with a petitioner relying, to found his petition, upon a debt said to arise from a breach of contract, the contract containing an exclusive jurisdiction clause nominating a foreign court as having jurisdiction to determine whether a debt does in fact exist.
[15] In City Gardens Ltd v DOK82 Ltd [2023] EWHC 1149 (Ch) HHJ Pearce sitting as a Judge of the High Court said, at paragraph 42:
‘Having considered the judgment of the Court of Appeal in [BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997], I am satisfied that the Appellant is correct in its argument that the exclusive jurisdiction clause was of no relevance to the determination of the issue before the lower court. That decision is binding authority for the proposition that the Companies Court, in considering the exercise of its power to wind up under section 122 of the Insolvency Act 1986, is itself charged with determining whether the petitioner is genuinely a creditor. For that purpose, it has to determine whether the alleged debt is disputed in good faith on substantial grounds. Even where the alleged debt is based upon a contract which has an exclusive jurisdiction clause in favour of a foreign jurisdiction, the judgment as to the exercise of the winding up power remains that of the domestic court. It follows that the petition should not have been dismissed on the grounds of the existence of the exclusive jurisdiction clause, whether because, on account of the clause, it had no power to hear the petition or because it should (or indeed could) decline in its discretion to hear the petition.'