On 5 October 2011, the NSW Supreme Court upheld an application pursuant to s 440D(1) of the Corporations Act 2001 (Cth) (the Corporations Act) for leave to bring and continue proceedings against a defendant under voluntary administration. In Larkden Pty Limited v Lloyd Energy Systems Pty Limited  NSWSC 1305, Hammerschlag J found that the discretion granted under the Corporations Act was not limited by the assumption that it would be rarely exercised and, further, that the exceptions to recognition and enforcement of awards under s 36 of the Commercial Arbitration Act 2010 (NSW) (the Arbitration Act) were narrow and specific so as not to include the voluntary administration of an arbitrating party.
Larkden Pty Limited (Larkden) and Lloyd Energy Systems Pty Limited (Lloyd) were parties to arbitration proceedings in July and August 2010 that had arisen out of a dispute about the ownership of patent applications the subject of an earlier licence agreement. In what were described by the arbitrator as “draft reasons”, the arbitrator found in favour of the plaintiff, Larkden. Whilst the parties were preparing consent orders, the directors of Lloyd resolved that the company enter into voluntary administration. Shortly thereafter the arbitrator published further reasons and orders in favour of Larkden (the Award).
The enforcement proceedings
The issue for determination before Hammerschlag J was whether or not to provide Larkden leave under s440D(1) of the Corporations Act to pursue orders for the recognition and enforcement of the Award pursuant to s35(1) of the Arbitration Act.
His Honour found in favour of Larkden for the following reasons:
- Arbitral proceedings are not a “proceeding in a court” as contemplated by, and within the meaning s 440D(1) and accordingly no stay of orders is brought about by the appointment of an administrator: Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766.
- An arbitral award may only be refused in the circumstances defined within s 36 of the Arbitration Act. Neither the administration of an arbitrating party, nor a stay of proceedings against an arbitrating party, are considered within the prescribed circumstances allowing for refusal of an award under the Arbitration Act.
- The distraction value and cost to the administrators is minimal.
- Larkden was seeking to vindicate rights of an essentially proprietary nature and the interests of unsecured creditors should not be a barrier to Larkden seeking to vindicate those rights. Further, it was held that Larkden “would not steal a march over any other creditor or potential creditor” by the court recognising and enforcing the Award.
The decision creates greater prospects for enforcement and recovery to arbitrating parties in the face of an existing risk of other parties to the arbitration entering into administration. The traditional position to rarely exercise the discretion to lift a stay on proceedings has been replaced with the view that the discretion is one at large, and should be exercised on a case by case basis. Section 36 of the Arbitration Act which sets out the circumstances where recognition and enforcement of an award may be refused reflects article 36 of the UNCITRAL model law on International Commercial Arbitration. This decision demonstrates a trend across Australia to ensure consistency in relation to international arbitration rules and arbitration awards and secure their enforceability. This is, however, in contrast to the current position in the UK, where the effect of moratoria under the UK Insolvency Act 1986 appears to be broader than the s440D Corporations Act stay on proceeding. It appears that if a similar application were adjudicated upon by the UK courts, the enforcement of the award would not have been sustained.