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.
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.
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:
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.
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.
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.