Anyone using arbitration clauses should note the Court of Appeal decision made on Monday 8 December, to the effect that a winding up petition is not automatically stayed because the petition debt arises from a contract containing a mandatory arbitration clause.

This important  development could  assist creditors  enforcing strong  claims against  debtors incorporated in many offshore financial centres as well as in England.

A debtor can have ordinary court proceedings stayed in favour of contractual arbitration even if there is no defence to the claim and, probably, even if the debt has been admitted as due (Halki Shipping Corporation v Sopex Oils Ltd [1998] 1LLR 465).

A winding up petition is different. In Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA 1575 Civ the Court of Appeal has decided that a winding up petition is not “legal proceedings” for the purposes of Section 9 of the Arbitration Act 1996, so the requirement to stay imposed by that section does not apply to a winding up petition (and, by analogy, any other insolvency proceedings).

The foundation of the decision is that the insolvency jurisdiction is not concerned with disputes between individuals but rather with matters of public policy and protection of a debtor’s creditors as a class. This does not fit within the language of “claim or counterclaim” used to qualify the term “legal proceedings” in Section 9 of the Arbitration Act 1996.

Debtors will therefore need to be aware that they cannot necessarily rely upon the protection of an arbitration clause to delay resolution of a strong claim

Creditors with very strong claims can now consider presentation of a valid winding up petition, which might provide faster relief.

It is at least possible that this decision will be followed in other Common Law jurisdictions, including many offshore financial centres in which reluctant debtors are often incorporated.

Nonetheless, creditors will need to consider carefully whether they will actually benefit from putting their debtor into a formal insolvency process (and as a result sharing the proceeds with all other creditors), rather than obtaining an arbitral award and enforcing it in the usual way.