Arbitration Agreements and Proof of Debt when Company in Liquidation

Does the arbitration clause still apply to any disputes that might arise under a contract in England and Wales where contracting parties have included one in their agreement and one party later enters liquidation? More specifically, can the disagreement still be resolved by arbitration if a proof of debt based on a claim under the contract is made and denied (at least partially)?

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The Parties Involved

The parties involved must be named and identified for the purposes of the above questions. Those involved are:

• The corporation that is in liquidation (the “Company”), a party to the agreement containing the arbitration clause, and who is asserted to be a debtor of the other party under the agreement; and

• The other party to the contract, i.e., the counterparty or contracting party, who claims to be a creditor of the Company (the “Counterparty”).

When Company is in Liquidation

Most contracts a company has with third parties are unaffected by the fact that it goes into liquidation. The Counterparty will be free to submit a Proof of Debt into the liquidation after the Company enters liquidation.

For voting and/or dividend purposes, the liquidator to the company will decide whether the Proof of Debt is: (1) admitted (completely); (2) rejected (totally); or (3) allowed in part only (Insolvency Rules 2016, r.15.33/r.14.7).

There will be a disagreement between the Company and the Counterparty in the event that the liquidator (1) rejects (completely); (2) admits (partially); or (3) admits (wholly) the Proof of Debt. On its face, this disagreement could be submitted to an arbitrator for resolution in accordance with the arbitration clause in the underlying contract.

One could pause to consider whether the Counterparty’s rights under the 1996 Arbitration Act are affected by the fact that he filed the Proof of Debt into the liquidation.

In the 2015 case of Philpott v. Lycee Français Charles de Gaulle School 2016 EWHC 1065 (Ch) In 1 All ER (Comm) (“Philpott”), High Court Judge HHJ Purle QC considered a request for instructions from a company’s liquidators regarding a proof of debt where there was a disagreement as to whether a sum was owed (under a contract, a contract that contained an applicable arbitration agreement). The Judge also had to take into account the consequences of the counterparty’s submission of a proof of debt. “Whether or not by proving its debt,… [the counterparty] had in some way compromised its position,” the judge summarised the issues before him.

The judge came to the conclusion that the counterparty had not compromised its position by offering a proof of debt. At paragraph 29, the Judge noted the counterparty’s:

Only if Section 9(3) of the Arbitration Act of 1996 were in effect, in my opinion, would the position be compromised.

“Stay of legal proceedings” is the title of Section 9 of the Arbitration Act of 1996[3], and subsections 9(1) and 9(3) state the following:

“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.”

“An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.”

The Judge explained clause 9(3) at paragraph 29:

‘That subsection precludes a stay application once the person wishing to enforce the arbitration clause has taken “any step in those proceedings to answer the substantive claim”.’

The Judge concluded that the following situations do not, in fact, fall under section 9(3):

• The process for providing a debt proof;
• Any appeal the (putative) creditor may make in response to the liquidator’s decision to reject (completely or partially) the proof of debt.

The Judge said, at paragraph 29:

‘The mere making of a proof of debt does not come within those words, nor, were the liquidators now to reject the proof, would an appeal from the rejection of that proof, which would be necessary in order to preserve the [counterparty’s] position, amount to taking a step in “those proceedings”, there being none, “to answer the substantive claim”. The [counterparty’s] proof and appeal would merely be the making of its own claim, not answering the company’s claim, which would on this example not yet have been made in any legal proceedings.’

Importantly, for present purposes, the Judge said ‘I do not see why the [counterparty] could not, in those circumstances, give notice of arbitration at the same time as, or after, appealing, in which case the court would await the outcome of the arbitration before dealing with any appeal. The arbitration itself would operate as the appropriate occasion for determining the underlying dispute…’ (paragraph 29).

Philpott has subsequently been doubted, but on a different point about adjudicators (paragraph 30 of Philpott – on ‘inconceivable’). It has not been doubted in respect to the above proposition on arbitrations agreements.

If there was a countervailing Company claim, and if: (i) disputed; and (ii) within the scope of the arbitration agreement, then this could also be subject to arbitration. In the event, the court on the appeal would undertake the calculation for the statutory set off – ‘…the net balance would be a matter of simple calculation’ (paragraph 29)

Later, Philpott was questioned, but this time concerning adjudicators (Philpott, paragraph 30, on “inconceivable”). Regarding the aforementioned assertion regarding arbitration agreements, it has not been doubted 

A countervailing company claim might likewise be subject to arbitration if it was I challenged and (ii) fell under the terms of the arbitration agreement. In that case, the court hearing the appeal would conduct the statutory set-off calculation; “the net balance would be a matter of simple calculation” (paragraph 29)

Stay of Compulsory Liquidation on Proceedings

Section 130 of the Insolvency Act 1986 will be applicable if the company is in compulsory liquidation (as opposed to creditor’s voluntary liquidation). Section 130 is entitled ’Consequences of winding-up order’ and section 130(2) reads:

‘When a winding-up order has been made …no action or proceeding shall be proceeded with or commenced against the company or its property, except by leave of the court and subject to such terms as the court may impose.’

It is possible that the term “proceeding” in this case includes arbitration because of the comparison to Bristol Airport Plc v. Powdrill [1990] Ch. 744. Does the court intend to provide permission for the arbitration? Referring to the court’s discretion in this case, Cosco Bulk Carrier Co. Ltd. v. Armada Shipping SA 2011 EWHC 216 (Ch) 2 All E.R. (Comm) 481. Instead of s.130(2) of the Insolvency Act of 1986, this case included Model Law, Article 20.1(a), as it is interpreted by the Cross-Border Insolvency Regulations of 2006. Briggs J stated at paragraph 49 that while:

‘Article 20.1(a) is expressed, a little more broadly, in terms of staying proceedings “concerning the debtor’s assets, rights, obligations or liabilities”. Nonetheless it is not to have a wider scope or effect than section 130(2): see article 20.2(a).’

As to section 130(2) of the Insolvency Act 1986, at paragraph 47, Briggs J said:

‘There is a long line of English authority, both at first instance and in the Court of Appeal, that in considering whether to permit proceedings which would otherwise be stayed by what is now section 130(2) nonetheless to continue, the court is given “a free hand to do what is right and fair according to the circumstances of each case’

In Cosco, Briggs J said ‘I shall … approach the matter as one of broad discretion’ (paragraph 53) and framed the question as being ‘…which route for the resolution of the underlying dispute is likely best to serve the interests of justice, being that which is right and fair in all the circumstances.’  (paragraph 53).

The parties’ agreement that any disputes resulting from their contract shall be resolved by arbitration is a factor in assessing whether a stay should be removed. In Briggs J’s examination of Cosco, it was the second component to be taken into account (paragraph 56). The relative cost, speed, and stress any conflict resolution forum will place on the office holder’s meagre resources are further considerations.

According to Briggs J’s analysis of the circumstances in Cosco, paragraph 54 states: “In my opinion the application of that approach obviously leads to the conclusion that the underlying issue should, if feasible, be resolved in… arbitration…”

Conclusion

Overall, what is “right and fair in all the circumstances” will vary, but one might have guessed, that leave or permission would typically be granted for the dispute to be resolved by arbitration given that the parties stipulated arbitration as their forum for resolving disputes for the applicable contract.

Regarding the possibility that the court would have to “satisfy itself that there is a genuine, arguable claim,” see Bourne v. Charit-Email Technology Partnership LLP, it is an intriguing subject. Proudman J., paragraph 2; see also Cosco, paragraph 48) before providing such leave or consent, provided that the legal proceedings under consideration are arbitration, in light of (1) Salford Estates (No. 2) Ltd. v. Altomart Ltd., [2009] EWHC 1901 (Ch), [2010] 1 BCLC 210, Proudman J., paragraph 2. EWCA Civ 1575 from 2014; B.C.C. 306 from 2015; and BCC 877 from Eco Measure Market Exchange Ltd. and Would the companies court violate the argument made in those cases by doing that (summary judgement) type of investigation and coming to that type of conclusion?

How Can We Help you Oppose a Winding Up Petition?

Our specialist winding-up petition lawyers are experts in defending winding-up petitions. We can advise you as to the specific merits and demerits of your case and can assist you in opposing winding up petitions and negotiating with creditors. If your company has been issued a winding-up petition or statutory demand, you may be able to challenge that petition on the following grounds:

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