Salford Estates (No 2) Limited v Altomart Limited (No 2)

The Court of Appeal considered whether the mandatory stay provisions of section 9 of the Arbitration Act 1996 apply to a winding up petition presented under section 122(1)(f) of the Insolvency Act 1986 where the debt relied on in the petition arises under a contract containing an arbitration agreement. The court held that section 9(1) and (4) do not apply to such a petition: a winding up petition grounded on inability to pay is not a "claim" for payment within the meaning of section 9. The court emphasised the statutory scheme in IA 1986 (in particular ss.122 and 123) which treats non-payment of an undisputed debt as evidence of inability to pay and noted the public interest in the court's discretionary power to wind up companies.

Nevertheless, the court held that the court’s discretionary power under IA 1986 s.122(1) should, save in wholly exceptional circumstances, be exercised consistently with the policy of the Arbitration Act 1996. Thus, where the dispute as to the debt falls within a broad arbitration clause and the debt is not admitted, the court should normally dismiss or stay the petition in order to respect the parties' agreement to arbitrate and the legislative policy embodied in the 1996 Act. The appeal was dismissed on that basis.

Background and parties: Salford Estates (No 2) Ltd (landlord) presented a winding up petition against Altomart Ltd (tenant) on the ground of inability to pay debts, relying on arrears said to arise under an underlease which contained a wide arbitration clause. The parties had previously referred disputes over service charge and insurance rent to arbitration and an arbitrator issued awards in November 2013 and January 2014.

Nature of the application: Altomart applied below to strike out or stay the petition on grounds including abuse of process, dispute as to the debt and that the petition was liable to be stayed under section 9 of the Arbitration Act 1996.

Issues framed:

• whether a winding up petition grounded on inability to pay a debt which arises under an arbitration agreement falls within the mandatory stay regime of section 9 of the Arbitration Act 1996;
• whether, and in what circumstances, the court should exercise its discretionary winding up jurisdiction under Insolvency Act 1986 s.122(1) so as to respect the parties' agreement to arbitrate.

Court’s reasoning: The court analysed IA 1986 ss.122 and 123 and the definition of "legal proceedings" in the Arbitration Act 1996 s.82. It concluded that a winding up petition is not a "claim" for payment within s.9: the petition operates as the statutory procedure for determining inability to pay and may lead to a liquidation process that supersedes contractual dispute resolution. Parliament did not, by section 9, remove the companies court's core discretionary jurisdiction to wind up a company in the public interest. However, the court recognised the strong legislative policy in the Arbitration Act favouring parties' agreement to arbitrate and held that the statutory discretion under IA 1986 s.122(1) should, except in wholly exceptional cases, be exercised consistently with that policy. The court therefore concluded that where the alleged debt falls squarely within a broad arbitration clause and is not admitted, it is generally appropriate to dismiss or stay the petition to allow arbitration to proceed. The judge below had stayed the petition applying section 9; the Court of Appeal considered the mandatory stay analysis erroneous but upheld the result by reference to the court’s discretion under IA 1986 s.122(1).

Procedural posture: Appeal from HHJ Bird’s order of 4 February 2014 staying the petition; the Court of Appeal dismissed the appeal, concluding the petition should not proceed in the face of the agreement to arbitrate.

Appeal dismissed. The court held that the mandatory stay provisions of section 9 of the Arbitration Act 1996 do not apply to a winding up petition presented on the ground of inability to pay debts where the debt in issue arises under an arbitration agreement, because a winding up petition is not a "claim" for payment within section 9 and the insolvency statutory scheme operates differently. However, the court held that the court’s discretionary power under Insolvency Act 1986 s.122(1) should, save in wholly exceptional circumstances, be exercised consistently with the policy of the Arbitration Act; accordingly, where the debt falls within a broad arbitration clause and is not admitted, it is normally appropriate to dismiss or stay the petition to respect the parties' agreement to arbitrate. The judge below was wrong to rely on section 9 as mandatory but the result (staying/dismissing the petition) was justified by the exercise of the court’s discretion.

Appeal from the Chancery Division (His Honour Judge Nigel Bird, sitting as a High Court judge, Manchester District Registry), order dated 4 February 2014 staying the winding up petition. Neutral citation of this Court of Appeal judgment: [2014] EWCA Civ 1575.