It is trite to observe that issues related to the insolvency of a company are not arbitrable. However, the generality of this broad proposition can be misleading. In this the first of two articles on the arbitrability of claims, we look at how a court may approach a winding up petition in the face of a claim that the purported debt on which the petition is based relates to a dispute that is to be arbitrated. In the recent English case of Salford Estates (No.2) Limited v Altomart Limited [2014] EWCA 1575 Civ, it was held that such a petition will not be mandatorily stayed pursuant to arbitration legislation, but will be stayed in the exercise of the court’s discretion when considering a winding up petition.

A commercial landlord and tenant had entered into a 125-year lease agreement for premises which formed part of a shopping centre. The agreement contained an arbitration clause. Disputes arose as to the payment of certain service charges and so-called insurance rent by the tenant to the landlord under the lease agreement. A sole arbitrator found that, on a proper construction of the agreement, the tenant was liable to pay approximately £64,000 to the landlord.

The tenant did not pay immediately. The landlord threatened winding up proceedings unless the debt of £64,000 plus further sums were paid, altogether totalling £92,000. The landlord contended that those further sums necessarily followed from the reasoning in the arbitral award. The tenant provided the landlord with a cheque for £64,000 but disputed the further sums.

The landlord presented a winding up petition on the ground that the tenant was unable to pay its debts. The tenant argued that the court must stay the winding up petition because the debt was disputed in good faith and the dispute must be resolved by arbitration, as required by section 9 of the English Arbitration Act 1996 (Arbitration Act): 

“(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may [...] apply [...] to stay the proceedings so far as they concern that matter.

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(4) On an application under this section the court shall grant a stay unless it is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.”

The High Court found that the winding up petition was a claim within section 9(1) of the Arbitration Act and was therefore obliged to stay it under subsection (4).

The Court of Appeal disagreed. It found that the mandatory stay provisions of section 9 of the Arbitration Act do not apply to a winding up petition where the ground of the petition is that the company is unable to pay its debts and what is in dispute is that issue generally or, more specifically, whether there is outstanding and due a particular debt mentioned in the petition. This is because a winding up petition is in the nature of a class action in the public interest, and it is for the benefit for a class of creditors; it is not a “claim” within the meaning of section 9(1).

However, the Court of Appeal went on to consider section 122(1) of the Insolvency Act 1986, which is the source of the courts’ jurisdiction to make a winding up order. That section confers a discretionary power to wind up a company. The Court of Appeal found that this discretion should be exercised in a manner consistent with the legislative policy embodied in the Arbitration Act, namely to respect party autonomy and adopt minimal curial intervention. In other words, if parties choose to arbitrate their disputes, the courts should only interfere with that choice in limited circumstances. To do otherwise would afford a party the opportunity to bypass an arbitration agreement and extract payment from a counterparty under threat of winding up proceedings. The courts will therefore stay a winding up petition brought against a party who genuinely disputes a debt, whether that dispute is to be resolved through litigation or in arbitration. 

The Court of Appeal’s judgment affirms two separate strands of policy relating to arbitration. First, it confirms that a winding up petition is not a “claim” that must be stayed pursuant to the Arbitration Act where the petition is founded on a disputed debt to be resolved in arbitration. The power to wind up a company has been statutorily conferred on the courts by the legislature and is not available to an arbitrator. The decision thus reaffirms the familiar principle that issues of insolvency are non-arbitrable. 

Secondly, the court has a discretion to stay or dismiss winding up proceedings when the debt forming the basis of the petition is disputed on bona fide grounds. This discretion will be exercised in cases where the underlying dispute is to be arbitrated because this respects the parties’ choice to arbitrate, which policy underpins the Arbitration Act. In other words, the dispute is treated by the court as a private matter and not one that engages the public interest.

It is likely that the Singapore courts would reach a similar conclusion if they were to consider an analogous case. The Singapore courts are likely to exercise their discretion on a winding up application pursuant to section 257(1) of the Companies Act (which tracks the wording of section 122(1) of the English Insolvency Act) with the policy of minimal curial intervention in arbitration in mind. Thus, they would presumably dismiss or stay a winding up application where the underlying debt is disputed, to allow that dispute to be resolved by arbitration. If the debtor were to seek a mandatory stay of the winding up application under section 6 of the International Arbitration Act (IAA), which we have seen from the Salford Estates case above is the incorrect route to obtain a stay, it is likely that the court would dismiss that application. The reasoning, however, may well differ: the wording of section 6 of the IAA differs from the English act and may require a different interpretation. The application would also likely require consideration of subject matter arbitrability under section 11 of the IAA by reference to the factual allegations made, the relief sought and whether rights of third parties may be affected.