Arbitration agreement = no winding up petition?

England and Wales

In Telnic Ltd v Knipp Medien und Kommunikation GmbH [2020] EWHC 2075 (Ch), Sir Geoffrey Vos sitting in the English High Court ruled that where a debt is governed by an arbitration agreement, it is appropriate for the Court to stay or dismiss a winding up petition without investigating whether the debt is disputed in good faith and on substantial grounds.

This case provides guidance on the high threshold a creditor will have to cross in order to be able to present a winding up petition for sums due under an agreement with an arbitration clause. 

Factual Background

On 1 December 2009, Knipp and Telnic entered into a Services Agreement (the Agreement), which provided for a service fee to be paid by Telnic to Knipp within 30 days of receiving monthly invoices from Knipp. The Agreement also provided 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 upon the written request of either party.

In March 2019, Knipp demanded £263,777.28 from Telnic for charges under the Agreement (the Petition Debt). In October 2019 Knipp presented a petition to wind up Telnic on the grounds that Telnic was unable to pay the Petition Debt.  In December 2019 the Court stayed the petition on the basis that the Petition Debt was not admitted and subject to an arbitration clause.

Telnic was granted permission to appeal the December 2019 order seeking the winding up petition to be dismissed, as opposed to stayed. Knipp was also granted permission to appeal.

Salford Estates

The ability to present a winding up petition in relation to sums arising from an agreement which is subject to arbitration was analysed by the English High Court in Salford Estates (No. 2) Limited v. Altomart Limited (No. 2) [2015] Ch 589.  Below is a summary of the position of the Court in that case:

  1. Although the mandatory stay provisions in section 9 of the Arbitration Act 1996 do not apply to the winding up petition that is not the end of the matter.
  2. Section 122(1) of the Insolvency Act 1986 confers on the Court a discretionary power to wind up a company.
  3. Save in wholly exceptional circumstances, it would not be appropriate for the Judge to inquire whether the debt is disputed in good faith on substantial grounds. The discretion must be exercised so as to (a) uphold the policy of the Arbitration Act, (b) discourage parties to an arbitration agreement from bypassing it as a tactic by presenting a winding up petition, (c) prevent one party applying pressure on an alleged debtor to pay up immediately or face the burden of satisfying the Court that the debt was bona fide disputed on substantial grounds, and (d) require the parties to adhere to their agreement as to the proper forum for the resolution of such an issue.
  4. Where a debt mentioned in the winding up petition falls within the terms of the arbitration clause and the debt is not admitted, that is sufficient to constitute a dispute for the purposes of the Arbitration Act. This is irrespective of the substantive merits of any defence, and, whether or not proceedings were on foot to recover the debt that would trigger the automatic stay provision in section 9(1) of the Arbitration Act.
  5. In those circumstances it was right for the Court either to dismiss or stay the winding up petition rather than investigate whether or not the debt is bona fide disputed on substantial grounds. This then prevents a creditor from bypassing the arbitration agreement and the Arbitration Act by presenting a winding up petition.

Wholly Exceptional Circumstances

Knipp argued that there were “wholly exceptional circumstances” requiring the Court to consider whether the debt was disputed in good faith on substantial grounds.

The factors relied on were (a) the debt was admitted in correspondence said by Telnic to have been without prejudice, (b) Telnic was anyway balance sheet insolvent and the Judge was wrong to have held otherwise, (c) Telnic had made an unlawful distribution to its shareholders, and (d) Telnic had tried to slow down the arbitration, or failed to participate in it in good faith.

However, the Court decided that “wholly exceptional circumstances” is a high bar and there was nothing in the circumstances relied upon by Knipp that took the case out of the ordinary and into the realm of wholly exceptional circumstances. 

All of the matters relied upon by Knipp were contested. It was not appropriate for the Court to consider the merits of these arguments and the dispute between the parties should be decided by way of arbitration.

Dismissal v Stay

A dismissal of a winding up petition is the usual course where it is established that the winding up petition is based on debt that is genuinely disputed.  However, the Court recognised that there is not much authority on whether a winding up petition should be stayed or dismissed to allow an arbitration to proceed.

In the present case the Court was not convinced that the first instance Judge had not exercised his discretion appropriately in ordering a stay rather than dismissal of Knipp’s winding up petition.

Conclusion

This decision is in line with recent decisions from other common law jurisdictions involving the interaction between arbitration agreements and insolvency proceedings. Where parties enter into arbitration agreements, they will need to have their disputes determined via that forum, save in very limited circumstances.

For defendants, where a dispute is subject to an arbitration agreement, it should be possible to head off an application for a winding up petition by making clear that the debt is contested and the defendant requires the dispute to be resolved by way of arbitration.

For claimants, where you are seeking to recover a debt that is subject to an arbitration agreement careful consideration should be given to the way in which you can seek to expedite your recovery. Various arbitral institutions have mechanisms in their rules for expedited proceedings and for emergency relief. These can be leveraged effectively and prevent unnecessary costs being incurred on avenues that are less effective. 

A copy of the judgment is available here.