Can a creditor seek to wind up if there is an arbitration clause? (Part 4) – The English Rejoinder

21 August 2020

In our previous commentaries, we explored the three prevailing responses to the question of when a creditor can wind up a company based on a debt which is subject to an arbitration clause.

The first approach requires the debtor-company to demonstrate a bona fide dispute on substantial grounds and largely ignores the existence of the arbitration clause. The second approach requires the Court to dismiss or stay a winding-up petition if the debtor-company disputes a debt which is subject to an arbitration agreement, save in “wholly exceptional circumstances” (“Salford Approach”). The third approach largely follows the Salford Approach but is subject to the caveat that the dispute is not raised by the debtor-company in abuse of process (“AnAn Approach”).

The English High Court has handed down its decision in Re Telnic Ltd [2020] EWHC 2075 (Ch) which provides the English rejoinder to the question of whether a creditor can wind up a company based on a debt which is subject to an arbitration clause. In short, the English High Court followed the Salford Approach and sheds some light on what constitutes “wholly exceptional circumstances”.

The Facts

Knipp Medien (“Knipp”) and Telnic Limited (“Telnic”) entered into a service agreement which contains an arbitration clause stating that “any dispute, controversy or claim arising out of or relating to this [Agreement] … or the breach, termination or validity thereof” shall be referred to arbitration.

Knipp later petitioned to wind up Telnic based on certain unpaid service fees under the service agreement. Telnic does not admit liability and argues that the matter should go to arbitration. Deputy ICC Judge Schaffer, the first instance judge, adopted the Salford Approach and stayed the petition without considering whether a bona fide dispute on substantial grounds exists. Telnic commenced arbitration shortly after the first instance decision was given.

Knipp appealed on grounds that there were “wholly exceptional circumstances”, viz. (1) the debt was admitted by Telnic in correspondence without prejudice, (2) Telnic was balance sheet insolvent, (3) Telnic made an unlawful distribution to its shareholders and had tried to stay the arbitration. Telnic cross-appealed on grounds that the Judge should have dismissed, rather than stayed, the petition.

The Decision

The High Court confirmed that the Salford Approach remained the law in England and on the facts the Court held that that none of the circumstances raised by Knipp was “wholly exceptional” which would justify the Court in departing from its usual practice which is to dismiss or stay the petition.

As regards Telnic’s admission in without prejudice correspondence, the Court held that even past admissions (at least if they were retracted at the point of the petition) are not “wholly exceptional” and the position is a fortiori here as Telnic’s admissions were “hedged around with caveats”. In relation to the balance sheet insolvent point, the Court opined that this was unclear. In any case, this would not give Knipp locus standi unless it can show it was a creditor. The unlawful distribution point could not be resolved in winding-up proceedings. Finally, as for Telnic’s conduct in attempting to stay the arbitration, this was “unfortunate” but could not be described as “wholly exceptional”.

As for Telnic’s cross-appeal, the Court held that the judge below was entitled, in exercising his discretion, to stay the petition given the need to (a) protect Knipp by allowing it to lift the stay if it succeeded in the arbitration and (b) protect creditors by preventing Telnic from disposing of assets and preserving a liquidator’s rights for the period up to presentation of the petition. Further, there was little prejudice to Telnic since it was no longer actively trading.

The Commentary

Re Telnic Ltd is significant in that it not only confirms that that the Salford Approach remains the law in England, but also elaborates on the meaning of “wholly exceptional circumstances”. In so doing, the Court confirmed that there are subtle variations between the Salford Approach and the AnAn Approach.

Under the Salford Approach, past admissions (at least if retracted by the time of petition) would not constitute wholly exceptional circumstances whereas, under the AnAn Approach, the fact that a debt was previously admitted may constitute “abusive conduct” and justify disapplying the disapplication of the prima facie standard of review. There is also a difference in determining when a petition would be stayed. The Salford Approach requires the court to exercise its discretion independently with regard to the interests of creditors and the need to preserve a liquidator's rights of action; there is no need to engage in the merits of the dispute. By contrast, the AnAn Approach requires the creditor to show “legitimate concerns about the solvency of the company as a going concern, and that no triable issues are raised”.

The varying judicial treatment of arbitration agreements in the winding-up context seems to confirm the concern expressed in Re Asia Master Logistics Limited [2020] 2 HKLRD 423 that “an invitation to give greater emphasis to arbitration agreements invariably begs further questions as to how suchgreateremphasis should be given”. It would be interesting to see whether the appellate courts in Hong Kong would follow the Salford Approach and, if so, how they would give “greater emphasis” to arbitration agreements.

José-Antonio Maurellet SC, Terrence Tai and Cyrus Chua authored this article.

 

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