SPECIAL REPORT 25
Liquidation (compulsory and voluntary) For the court tomake an order placing a company into compulsory liquidation, a creditor needs to make an application to the courts, showing that debts are unpaid. An issue, therefore, arises if a creditor seeks to assert that a debt is owed and unpaidwhen the underlying contract contains an arbitration agreement. The Court of Appeal held in Salford Estates (no 2) Ltd v Altomart Ltd [2014] EWCA 1575 Civ that the Arbitration Act 1996 does not prevent a creditor, whose claim is subject to an arbitration agreement, frompresenting a petition. However, it went on to determine that if that creditor seeks to found the petition on a debt that is subject to an arbitration agreement, it would stay or dismiss awinding-up proceeding unless the debt was admitted. Put simply, thismeans (save for in exceptional circumstances) a spurious defence of a petition debt, where the underlying contract contained an arbitration agreement, would be sufficient to prevent the creditor petitioning. Once the company is in liquidation, the liquidators can bring or defend “legal proceedings” (including arbitration) in the name of or on behalf of the company 2 . Case law (Syska (Elektrim) v Vivendi Universal SA [2009] EWCA Civ 677 andmore recently Philpott v Lycee Francais Charles de Gaulle School [2015] EWHC 1065) has confirmed that the appointment of a liquidator does not terminate an existing arbitration agreement. Arguably, a liquidator could disclaiman arbitration agreement as an onerous contract under s178(3) IA86, but if the counterparty has performed its obligations under the contract, it seems unlikely the courts would permit this. In Philpott, both the Company and the creditor had claims against each other pursuant to a construction contract containing an arbitration agreement. The High Court determined that the liquidators should not use the summary IA86 process for determining the value of the net claim, but should go through the arbitration procedure. However, to the extent there is only a claimbeing made against the Company, it is thought likely that the Court would not require an arbitration, but inmost instances would favour the summarymethods set out in IA86. There is no automatic stay of arbitration or other proceedings when awinding-up petition is presented, but an automatic stay arises on an order beingmade (s126&130 IA86). In the case of a voluntary liquidation, there is no automatic stay, but the court can (and usually does) stay matters on the application of the liquidators. Again, even though the test is slightly different, the court would bemore likely to allowproceedings to continue if the creditor had a proprietary claim or can then claimagainst a third party.
CROSS BORDER ISSUES There are numerous ways foreign insolvency proceedings can be recognised in England&Wales. In recent years, these have been predominantly governed by the EU regulation 1346/2000 (as amended) (EU Regulation) (which relate between EUmember states, save for Denmark), and the UK’s enactment of the UNCITRALmodel law on cross border insolvency recognition, being the Cross Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR). Both recognitionmeasures seek to allow foreign “main proceedings” office-holders to be allowed their local lawpowers and apply their local law to the insolvency in the UK. “Main proceedings” are those undertaken in the place where the company has its “centre of main interests”, which is usuallywhere its registered office or management function is located. Asmost insolvency processes include an automatic stay on arbitration proceedings, this is reflected in the CBIR (Sch.1 Ch.III Art.20(1) and (2)), though the court has discretion to lift this or modify this. Scenarios where the court may lift a stay include: - Where it benefits the interests of creditors, for example in United Drug (UK) Holdings Ltd v Bilcare Singapore PTE [2013] EWHC 4335 (Ch), where a stay of proceedings was lifted against a Singaporean company because the arbitrationwould allow the creditor to determine its rights and obligations and to launch proceedings against a solvent company within the group; - Where the court considered it better to allow a tribunal to determine the issue, for example in American Energy Group Ltd v Hycarbex Asia Pte Ltd (In Liquidation) [2014] EWHC 1091, where the staywas lifted because the arbitration claimwas ready for immediate hearing, and the liquidators had left making their application for recognition very late. A further complication is addedwhere arbitral proceedings are afoot. Both the CBIR and EU Regulation state that the local law of the existing proceedings applies to determine whether or not they should be stayed, not the law of the insolvency. For example, in Syska (Elektrim) v Vivendi Universal SA [2009] EWCA Civ 677 at first instance the court consideredwhether or not to lift a stay under the EU Regulations where there were jurisdictional issues at play. In this case there were ongoing arbitration proceedings in England and a later insolvency in Poland. Under Polish law the arbitration agreement would have been annulled by the insolvency, but the arbitration agreement itself was governed by English law. The key issue was, therefore: which law governed the effect of Polish insolvency proceedings on the arbitration agreement? If proceedings have not yet been commenced at the time of insolvency then this, the court held, is determined according to Polish law. Here, however, theywere pending at the date of insolvency, so “the law of the Member State inwhich the lawsuit is pending” applied, i.e. English law, so the arbitral agreement stood. This in itself can be a good reason to commence arbitral proceedings swiftly, if you discover that the counterpartymay be about to enter an insolvency process.
1 IA86 schedule 1, paragraph 5 and 6 2 (s161(1)(a) and para 4, part II, schedule 4 IA86)
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