In England and Wales, where contracting parties have included an arbitration agreement in their contract, and one party subsequently enters liquidation, does the arbitration agreement[1] continue to govern any dispute that might arise under the contract? More particularly, if a proof of debt is submitted, based upon a claim under the contract, and rejected (at least in part), can the dispute still go off for arbitration?
The Parties
For the purposes of these questions, it is helpful to identify and label the parties involved. The parties are:
(1) the company in liquidation (the 'Company'), who is a party to the contract containing an arbitration agreement, and who is alleged to be a debtor of the other party, under the contract; and
(2) the other party to the contract, that is, the contractual counterparty/co-contractant, who alleges that they are the Company's creditor (the 'Counterparty')
Liquidation
The fact a company enters liquidation does not affect most[2] of the company's contracts with 3rd parties.
Once the Company enters liquidation, the Counterparty will be at liberty to submit a Proof of Debt into the liquidation.
The liquidator to the Company will, for voting and/or dividend purposes (Insolvency Rules 2016, r.15.33/r.14.7), determine whether the Proof of Debt is: (1) admitted (entirely); (2) rejected (entirely); or (3) admitted in part only.
Where the liquidator (2) rejects (entirely); or (3) admitted in part only, the Proof of Debt, there will be a dispute as between the Company and Counterparty, which on its face, could go off for determination by an arbitrator, pursuant to the arbitration agreement in the underlying contract.
One might pause to ask, whether the fact that the Counterparty has submitted the Proof of Debt into the liquidation, affects his rights under the Arbitration Act 1996?
In Philpott v Lycee Francais Charles de Gaulle School (Also known as: Joint Liquidators of WGL Realisations 2010 Ltd v Lycee Francais Charles de Gaulle School, Orton v Lycee Francais Charles de Gaulle School) [2015] EWHC 1065 (Ch) [2016] 1 All ER (Comm) 1 ('Philpott'), HHJ Purle QC sitting as a Judge of the High Court, heard an application for directions from liquidators of a company, in respect to a proof of debt where there was a dispute as to whether a sum was due (under a contract, a contract that contained an applicable arbitration agreement). As part of this, the Judge had to consider what impact the counterparty's act of submitting a proof of debt had had. The Judge summarised the issued before him as: '...whether or not by proving its debt, ... [the counterparty] had in some way compromised its position.'
The Judge concluded that the counterparty had not, by submitting a proof of debt, compromised the counterparty's position. The Judge stated, at paragraph 29, that the counterparty's:
'...position would only be compromised, in my judgment, if section 9(3) of the Arbitration Act 1996 applies.'
Pausing there. Section 9 of the Arbitration Act 1996[3] is entitled 'stay of legal proceedings' and subsections 9(1) and 9(3) read:
'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.'
Explaning section 9(3), the Judge said, 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 went on to find that section 9(3), in effect, does not apply to:
(1) the procedure of submitting a proof of debt; nor
(2) any appeal, the (putative) creditor might bring, against a decision of the liquidator, to reject (entirely, or in part), 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)
Compulsory Liquidation's Stay on Proceedings
Where the company is in compulsory liquidation (not creditors voluntary liquidation[4]), section 130 of the Insolvency Act 1986 will apply. Section 130 is entitled 'Consequences of winding-up order' and section 130(2) reads (so far as material[5]):
'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.'
By analogy with Bristol Airport Plc v Powdrill [1990] Ch. 744[6], it is likely that 'proceeding' here includes arbitration. Will the court grant leave (permission) for the arbritration? On the court's discretion here, reference can be made to Cosco Bulk Carrier Co Ltd v Armada Shipping SA (The Spar Sirius) [2011] EWHC 216 (Ch) [2011] 2 All E.R. (Comm) 481 ('Cosco'). This case involved: Model Law (in the form applied by the Cross-Border Insolvency Regulations 2006), Article 20.1(a), rather than: s.130(2) of the Insolvency Act 1986, but Briggs J said, 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”: see Re Grosvenor Metal Co Ltd [1950] Ch 63, at 65 per Vaisey J, Re Suidair International Airways Ltd [1951] Ch 165, Re Redman (Builders) Ltd [1964] 1 WLR 541, Re Aro Co Ltd [1980] Ch 196 at 209 (CA) and, most recently, Bourne v. Charit-Email Technology Partnership LLP [2010] 1 BCLC 210 at 212–213.'[7]
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).
A factor in determining whether a stay should be lifted, is how the parties had agreed any disputes arising from their contract, should be dealt with - i.e. by arbitration. In Cosco, it was the second factor to be considered, in Briggs J's analysis (paragraph 56). Another factor is the relative cost, speed and the burden upon the limited resources of the office holder, each dispute resolution forum will involve.
On the facts in Cosco, Briggs J said, at paragraph 54, that 'In my judgment the application of that approach clearly leads to the conclusion that the underlying dispute should, if possible, be determined in... arbitration...'
Two quick points:
(1) to see this in its wider context, see ICC Judge Jones' analysis in The Financial Conduct Authority v Carillion Plc (In Liquidation) [2020] EWHC 2146 (Ch)[8] ];
(2) a stay was lifted in Re Pan Ocean Co Ltd [2015] EWHC 1500 (Ch); [2016] BPIR 1541, another Model Law case, by ICC Judge Jones (then Registrar Jones), at paragraph 74.
Overall, what is 'right and fair in all the circumstances' will vary, but one would have thought, tentatively, that leave/permission would generally be granted for the dispute to be resolved by arbitration, given the parties stipulated, as its dispute resolution forum, for the relevant contract, arbitration.
As an aside, it is an interesting question whether the court would need to 'satisfy itself that there is a genuine, arguable claim' (see Bourne v Charit-Email Technology Partnership LLP [2009] EWHC 1901 (Ch), [2010] 1 BCLC 210, Proudman J, paragraph 2; see also Cosco, paragraph 48) before granting such leave/permission, given the legal proceedings in contemplation is arbitration, in light of (1) Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306; and (2) Eco Measure Market Exchange Ltd [2015] BCC 877. Would the companies court, in undertaking that (summary judgment) type investigation and making that type of determination, fall foul of the point made in those cases?
SIMON HILL © 2022
BARRISTER
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
[1] Four points to make about 'arbitration agreements':
Point 1: The statute, Arbitration Act 1996, gives a definition of 'arbitration agreements'
Section 7 of the Arbitration Act 1996 is entitled 'Definition of arbitration agreement' and reads:
'(1) In this Part an “arbitration agreement” means an agreement to submit to arbitration present or future disputes (whether they are contractual or not).
(2) The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.'
'Part' is a reference to Part I of the Arbitration Act 1996, which includes sections 1 to 84 inclusive.
Point 2: The arbitration provisions in the main contract are known, properly, as the ‘arbitration agreement’, rather than, say, the arbitration clauses or clause. This is because, under the doctrine of separability, the arbitration provisions are actually separate from the main/underlying contract. The ‘arbitration agreement’ forms an agreement within the main/underlying agreement. In Union of India v McDonnell Douglas Corp [1993] 2 Lloyd’s Rep 48, Saville J said, 49-50:
‘An arbitration clause in a commercial contract…is an agreement inside an agreement. The parties make their commercial bargain…but in addition agree on a private tribunal to resolve any issues that may arise between them.’
An effect of this separability, is the arbitration agreement's ability to exist independently of the rest of the contract within it resides:
(1) Section 7 of the Arbitration Act 1996 is entitled 'Separability of arbitration agreements' and reads:
'Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.'
(2) The arbitration agreement can survive the termination of the main/underlying agreement. This attribute was briefly touched on in Eco Measure Market Exchange Ltd [2015] BCC 877, at paragraph 9, where Alan Steinfield QC sitting as a Deputy High Court Judge said:
‘At one stage it seems that there was being put forward on behalf of [petitioning putative creditor] an argument that the arbitration clause somehow did not survive what was contended was a termination of the agreement by what was contended was the wrongful repudiation of the agreement accepted by [petitioning putative creditor] by reason of the non-payment of amounts which it claims were due to it. But [counsel for the petitioning putative creditor] very correctly, in his submissions to me, did not advance that submission as it is clearly established on the authorities that an arbitration clause in an agreement will ordinarily encompass arguments as to whether or not an agreement has been properly terminated and disputes as to what the consequences of that wrongful termination, if there was any, might be.’
An additional effect, similar to its separability, is the arbitration agreement's ability to outlive a party to the contract. Section 8 is entitled 'Whether agreement discharged by death of a party' and reads:
'(1) Unless otherwise agreed by the parties, an arbitration agreement is not discharged by the death of a party and may be enforced by or against the personal representatives of that party.
(2) Subsection (1) does not affect the operation of any enactment or rule of law by virtue of which a substantive right or obligation is extinguished by death.'
Point 3: On Jurisdiction of the Arbitration Act 1996.
Section 2 of the Arbitration Act 1996 is entitled 'Scope of application of provisions' and:
(1) Section 2(1) reads:
'The provisions of this Part apply where the seat of the arbitration is in England and Wales or Northern Ireland.'
As noted earlier, 'Part' here is a reference to Part I of the Arbitration Act 1996, which includes sections 1 to 84 inclusive.
(2) even if the seat of the arbitration (defined by section 3) is outside England and Wales or Northern Ireland or no seat has been designated or determined:
(a) section 2(2) makes the following sections applicable:
(i) sections 9 to 11 (stay of legal proceedings, &c), and
(ii) section 66 (enforcement of arbitral awards).
(b) section 2(3) confers the following powers on the court (though the provision expressly empowers the court to refuse to exercise the powers, if the court considers it inappropriate):
(i) section 43 (securing the attendance of witnesses), and
(ii) section 44 (court powers exercisable in support of arbitral proceedings)
(c) section 2(5) provides, so long as the law applicable to the arbitration agreement is the law of England and Wales or Northern Ireland, that section 7 and section 8 are applicable. Section 2(5) reads:
'Section 7 (separability of arbitration agreement) and section 8 (death of a party) apply where the law applicable to the arbitration agreement is the law of England and Wales or Northern Ireland even if the seat of the arbitration is outside England and Wales or Northern Ireland or has not been designated or determined.'
Point 4: Arbitration Agreements subject to Arbitration Act 1996 - Mandatory Provisions and Non-Mandatory Provisions
Section 4 of the Arbitration Act 1996 is entitled 'Mandatory and non-mandatory provisions' and subsections (1) and (2) read:
'(1) The mandatory provisions of this Part are listed in Schedule 1 and have effect notwithstanding any agreement to the contrary.
(2) The other provisions of this Part (the “non-mandatory provisions”) allow the parties to make their own arrangements by agreement but provide rules which apply in the absence of such agreement.'
Schedule 1 contains:
'sections 9 to 11 (stay of legal proceedings);
section 12 (power of court to extend agreed time limits);
section 13 (application of Limitation Acts);
section 24 (power of court to remove arbitrator);
section 26(1) (effect of death of arbitrator);
section 28 (liability of parties for fees and expenses of arbitrators);
section 29 (immunity of arbitrator);
section 31 (objection to substantive jurisdiction of tribunal);
section 32 (determination of preliminary point of jurisdiction);
section 33 (general duty of tribunal);
section 37(2) (items to be treated as expenses of arbitrators);
section 40 (general duty of parties);
section 43 (securing the attendance of witnesses);
section 56 (power to withhold award in case of non-payment);
section 60 (effectiveness of agreement for payment of costs in any event);
section 66 (enforcement of award);
sections 67 and 68 (challenging the award: substantive jurisdiction and serious irregularity), and
sections 70 and 71 (supplementary provisions; effect of order of court) so far as relating to those sections;
section 72 (saving for rights of person who takes no part in proceedings);
section 73 (loss of right to object);
section 74 (immunity of arbitral institutions, &c.);
section 75 (charge to secure payment of solicitors' costs).'
[2] The impact of the company entering into liquidation depends on various factors:
(1) whether the company enters: (i) compulsory liquidation; or (ii) voluntary liquidation.
(2) whether the third party is an employee, with the company the employer. In other words, is the contract under consideration a contract of employment.
Looking at three situations:
(a) Compulsory liquidation - contracts of employment
A winding up order against a company, acts, in respect to employees of that company, as a notice of termination of the employee's contract of employment with the company/employer. See Re General Rolling Stock Co Chapman's Case (1866) LR 1 Eq 346 and Re Oriental Bank Corpn, MacDowall's Case (1886) 32 Ch D 366 'MacDowall's Case'). A liquidator is free though, on behalf of the company, to offer, and the (former) employee free to accept, an offer to continue the employment (see MacDowall's Case)
(b) Voluntary liquidation - contracts of employment
Voluntary liquidation does not involve a court order like compulsory liquidation. For a company to enter voluntary liquidation (whether MVL or CVL), there must be a resolution passed by the shareholders in general meeting of the company. The passing of such a resolution (that the company do enter voluntary liquidation) will not (unless the terms of the contract of employment say otherwise) terminate the company's contracts of employment with its employees; See Midland Counties District Bank Ltd v Attwood [1905] 1 Ch 357, and Fox Bros (Clothes) Ltd v Bryant [1979] ICR 64
(c) Non-Contracts of Employment
The impact of the company entering liquidation, will depends on the terms of the (non-employment) contract. Speaking generally, in a detailed and well-drafted contract, the event a company entering liquidation (compulsory or voluntary), will give the counterparty the option to elect to bring the contract to an early end (rather than automatically end the contract - without any decision/elect of the counterparty subsequent to the company entering liquidation).
Jurisprudential debate
It is firmly established in the common law that a contract of employment is personal between the employer and the employee. Such that, any change in the personality of the employer, acts to terminate the contract of employment. The corollary question is, when a company enters: (1) compulsory liquidation; or (2) voluntary liquidation, does the personality of the employer change?
For voluntary liquidation, the liquidator is not appointed by court or but following shareholder resolution. the liquidator becomes an agent of the company.
For compulsory liquidation, there are alternative views, and the jurisprudential debate.
In the author's view, the better view (though not the orthodox view) is that the personality of the employer does not change upon a company entering compulsory liquidation. The author's logic is as follows:
(1) company remains the same, it is not the company (specifically, the company estate) that changes. The change occurs on the 'helm' to the company (as visualised as an addendum to the company estate). More specifically, at the 'helm':
(a) the board of directors' powers are reduced to residual powers (for instance, having power to cause the company to appeal against the winding up order made against it - see Sands v Layne [2017] 1 WLR 1782, Arden LJ at paragraph 47; also In re Diamond Fuel Co (1879) 13 Ch D 400), but they are not extinguished completely. The board of directors, as an adjunct to the company estate, remains in place.
(b) what occurs on the company entering liquidation (or administration), to visualise things, is that there is added, to this 'helm', the liquidator (or administrator, as the case maybe). It is from this 'helm' that the office-holder exercises his/her powers;
(2) unless the business (i.e. the collection of assets), pursuant to an order under s.145 of the Insolvency Act 1986, vests (i.e. is transferred) in liquidator's estate (known/labelled by the liquidator's official name - s.145(1), the business remains in the company estate notwithstanding that the company enters liquidation (though a statutory trust arises). As readers will be aware, this is the opposite of the automatic vesting that occurs in the trustee in bankruptcy, in personal insolvency law, under s.306 of the Insolvency Act 1986.
In Reigate v Union Manufactoring Co (Ramsbottom) Ltd [1918] 1 KB 592, Scrutton LJ said, at 606
'It appears to me that both in a compulsory and voluntary winding up the personality of the company continues until it is dissolved. A different person is managing the affairs of the company; in the case of a compulsory winding up he is appointed by the Court; in the case of a voluntary winding up he is appointed by the company. The company, however, remains in existence until it is dissolved.'
[3] For completeness, section 9 of the Arbitration Act 1996 will be set out in full. Entitled 'Stay of legal proceedings', it reads:
'(1) 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.
(2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.
(3) 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.
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.
(5) If the court refuses to stay the legal proceedings, any provision that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to those proceedings.'
[4] The law in relation to creditors voluntary liquidation contains no corresponding automatically imposed, equivolent statutory stay (moratorium). Note though, there is an ability to apply, in respect to a company in creditors voluntary liquidation, for a stay of any proceedings, under under IA 1986 sections 112 and 126. See the case of Gaardsoe v Optimal Wealth Management Ltd [2012] EWHC 3266 (Ch); [2013] Ch. 298; [2013] BCC 53.
In The Financial Conduct Authority v Carillion Plc (In Liquidation) [2020] EWHC 2146 (Ch), ICC Judge Jones stated, at paragraph 57:
'...there is no express provision for a mandatory stay of an action or proceedings for a voluntary liquidation. However, nothing turns on that because the courts have always accepted that they have an equivalent discretionary power to grant a stay upon an application for directions under section 112 of the [Insolvency Act 1986]. It appears most likely that the distinction arises because voluntary liquidations commence from the passing of the members' resolution and there could be significant delays and can still be delay before the appointment of a liquidator giving rise to opportunities for abuse to avoid an imminent hearing. Although it also follows the approach adopted for bankruptcies (see section 285 of the Act).'
[5] For completeness, section 130(2) of the Insolvency Act 1986 reads:
'When a winding-up order has been made or a provisional liquidator has been appointed, 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.'
For companies registered but not formed under the Companies Act 2006, there is a different provision, contained in section 130(3), which reads:
'When an order has been made for winding up a company registered but not formed under the Companies Act 2006, no action or proceeding shall be commenced or proceeded with against the company or its property or any contributory of the company, in respect of any debt of the company, except by leave of the court, and subject to such terms as the court may impose.'
[6] In Bristol Airport Plc v Powdrill [1990] Ch. 744, an administration case, the Court of Appeal, Staughton LJ and and Woolf LJ essentially agreed with the Vice-Chancellor Sir Nicolas Browne-Wilkinson's judgment, wherein he considered (amongst other things), the meaning of section 11 (now obsolete), contained in Part II to Insolvency Act 1986. On the contents of Part II, she said, at 757:
'Part II of the Act contains two sections designed to protect the property of the company against adverse claims. Section 10 covers the period between the presentation of the petition and the making of the administration order. Section 11 covers the period after the making of the order and is the section directly in point in this case.'
He then quoted section 11 (so far as was relevant), as follows:
'(3) During the period for which an administration order is in force - (a) no resolution may be passed or order made for the winding up of the company; (b) no administrative receiver of the company may be appointed; (c) no other steps may be taken to enforce any security over the company's property, or to repossess goods in the company's possession under any hire-purchase agreement, except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as the court may impose; and (d) no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as aforesaid.' [bold added]
Under the subheading '(2) "Other proceedings."', the Vice-Chancellor said, at 765:
'In my judgment the natural meaning of the words "no other proceedings . . . may be commenced or continued" is that the proceedings in question are either legal proceedings or quasi-legal proceedings such as arbitration.'
It is this, that by analogy, is used to reach the conclusion that 'proceeding' in section 130(2) of the Insolvency Act 1986, is likely to include arbitration.
[7] Taking those authorities in turn:
(1) In Re Grosvenor Metal Co Ltd [1950] Ch 63, Vaisey J considered when a court should exercise its discretion to set aside liquidator's rights under section 325(1)(c). Section 325 (now obsolete) was entitled 'Restriction of rights of creditor as to execution or attachment in case of company being wound up in England.' and section 325(1) with (c) read:
'Where a creditor has issued execution against the goods or lands of a company or has attached any debt due to the company, and the company is subsequently wound up, he shall not be entitled to retain the benefit of the execution or attachment against the liquidator in the winding up of the company unless he has completed the execution or attachment before the commencement of the winding up:
Provided that-
(a) ...
(c) the rights conferred by this subsection on the liquidator may be set aside by the court in favour of the creditor to such extent and subject to such terms as the court may think fit.'
On the discretion granted to the court by section 325(1)(a), Vaisey J said, at 65:
'The section seems to give the court a free hand to do what is right and fair according to the circumstances of each case. It is just because the discretion is so wide and so uncontrolled, and because th words are so lacking in any sort of guidance, that the exercise of it is made so difficult.'
(2) In Re Suidair International Airways Ltd [1951] Ch 165, Wynn-Parry J said, at 171:
'...I am proposing to accept the construction which Vaisey, J., has placed on the subsection, not merely because I feel bound in the circumstances which I have adumbrated to do so, but because I find myself, with all respect, in agreement with him. I propose, therefore, to treat myself as having, to use the judge's words, "a free hand to do what is right and fair according to the circumstances of each case".'
(3) In Re Redman (Builders) Ltd [1964] 1 WLR 541, Pennycuick J referred to the two cases above, stating
'The principle laid down alike in the Grosvenor Metal case and the Suidair case is that the section gives the court a free hand to do what is right and fair according to the circumstances of each case. It is, no doubt, desirable that there should be some measure of uniformity in the manner in which the discretion is exercised where the circumstances are broadly the same;'
(4) In Re Aro Co Ltd [1980] Ch 196, the Court of Appeal considered whether or not a creditor of a company in liquidation was a secured creditor of the company, by reason of having invoked, prior to the making of the winding up order, the jurisdiction of the Admiralty Court in respect to its only asset, a vessel. The Court of Appeal held that the creditor was indeed a secured creditor of the company at the time the company went into liquidation, because of this invocation. However, it went on to consider, if it was wrong on that, whether discretion should be exercised under Companies Act 1948, section 231. That section (now obsolete), read (so far as material):
'When a winding up order has been made ..., no action or proceeding shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose.'
Section 130 of the Companies Act 2006 is entitled 'Consequences of winding-up order' and section 130(2) reads (so far as material):
'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.'
Save for the additional words 'or its property' in section 130, the sections are the same.
The Court of Appeal said, at 209F:
'The dispensing power in section 231 is not in terms dependent on the plaintiffs' establishing the status of secured creditors, but on the exercise of the court's discretion. The discretion is conferred by the words "except by leave of the court and subject to such terms as the court may impose." In section 325 (1)(c) the discretion exercisable by the court in favour of the execution creditor is conferred by the words "the rights conferred by this subsection on the liquidator may be set aside by the court in favour of the creditor to such extent and subject to such terms as the court may think fit." The nature of this latter discretion has been considered in three recent cases. In In re Grosvenor Metal Co. Ltd. [1950] Ch. 63, 65, Vaisey J. said: "The section seems to give the court a free hand to do what is right and fair according to the circumstances of each case." In In re Suidair International Airways Ltd. [1951] Ch. 165, Wynn-Parry J. adopted the same construction of the subsection, as also did Pennycuick J. in In re Redman (Builders) Ltd. [1964] 1 W.L.R. 541. We consider that those cases were correctly decided. The only appreciable difference between the wording of the two sections is that section 325 includes the words "to such extent" as well as the words "subject to such terms." This appears to us a trivial distinction on which to found a decision that the discretion under section 231 is somehow narrower than the discretion under section 325. We adopt the definition of the discretion under section 325 as applied in the three cases mentioned and we consider that the discretion of the court under section 231 gives the court an equal freedom to do what is right and fair in the circumstances.' [bold added]
(5) In Bourne v Charit-Email Technology Partnership LLP [2009] EWHC 1901 (Ch), [2010] 1 BCLC 210, Proudman J heard an application under section 130(2) of the Insolvency Act 1986, by a creditor of a company in liquidation, for permission to bring a claim against the company in liquidaiton.
Under the heading 'S 130(2) Insolvency Act 1986', Proudman J said, at paragraphs 2 - 4 (pages 212–213):
'The Court's discretion to grant permission to commence proceedings is broad and unfettered. It has “freedom to do what is right and fair in all the circumstances”: see Re Aro Limited [1980] Ch 186. The Court is not required to, and indeed should not, investigate the merits of the proposed proceedings, other than to satisfy itself that there is a genuine, arguable claim: see the observations of Jonathan Parker J in Re Bank of Credit and Commerce International SA (no 4) [1994] 1 BCLC 419 at 426.
There are two statements of principle in decided cases which are of particular assistance as to the exercise of the discretion. The first is in Re Exchange Securities & Commodities Limited [1983] BCLC 186 , where it was said that permission should be refused if the issues can conveniently be decided in the liquidation because it will ordinarily be quicker and less expensive for matters to be determined in the course of the liquidation. Secondly, there is the unreported decision of Etherton J in New Cap Reinsurance Corp Limited v. HIH Casualty & General Insurance Limited (approved on appeal at [2002] 2 BCLC 228) in which (while giving permission under s. 130(2) ) he said that, particularly taking into account the resources available to the liquidator,
“… the court must be very cautious before exposing the … liquidators to the burden of coping with difficult and time-consuming litigation”.
... in construing the section the Court will start from the premise that proceedings may not be brought against a company in liquidation. It is therefore a question of lifting a stay. It follows that the Court should (subject always to the overriding objective) adopt the primary objective of achieving an orderly resolution of all matters arising in the winding up for the benefit of the creditors as a whole.'
[8] In The Financial Conduct Authority v Carillion Plc (In Liquidation) [2020] EWHC 2146 (Ch) ('Carillion'), ICC Judge Jones gave a wider overview of the situation, under the heading 'The Statutory Regime - Liquidations', from paragraph 50 onwards (though the particularly salient bit starts at paragraph 53):
'A winding-up petition is a collective remedy for the benefit of creditors to enable an insolvent company to be placed under the control of an office holder to achieve the necessary investigations, collection and realisation of assets and the distribution of the net realisations in accordance with the statutory waterfall before the company ceases to exist as a result of dissolution. The introduction of an independent office holder combined with the machinery of a liquidation concerning proof of debts should usually (but not necessarily) lead to a quicker and less expensive route for determining matters in issue. It is not in the interests of creditors to have the company's assets used for the costs and expenses of the liquidation when they could otherwise be distributed.
Those general principles can be identified within the context of (amongst others) the section 130(2) cases of Re Exchange Securities & Commodities Ltd [1983] BCLC 186 and New Cap Reinsurance Corp Ltd v HIH Casualty & General Insurance Ltd, orally per Etherton J., as he then was, approved by the Court of Appeal [2002] EWCA Civ 300, [2002] 2 BCLC 228. As explained by the Court of Appeal in Mortgage Debenture Ltd (in Administration) v Chapman (above at [12]-[13]), Lord Justice David Richards giving the sole reasoned judgment of the unanimous court:
"In the case of liquidation and bankruptcy, the purpose of these provisions is essentially twofold. First, given that the property of the company or individual stands under the statute to be realised and distributed, subject to any existing interests, among the creditors on a pari passu basis, the moratorium prevents any creditor from obtaining priority and thereby undermining the pari passu basis of distribution. Secondly, given that both a liquidation and bankruptcy contain provisions for the adjudication of claims by persons claiming to be creditors, the moratorium protects those procedures and prevents unnecessary and potentially expensive litigation. In circumstances where the potential liability of the company or bankrupt is best determined in ordinary legal proceedings, as for example is often the case with a personal injuries claim, the court will give permission for proceedings to be commenced or continued, but usually on terms that no judgment against the company or individual can be enforced against the assets of the estate."
It is in that overall context and bearing in mind that liquidators need time to assess the position of a company following their appointment (sometimes a considerable period in the absence of required books and records) that legislation has provided for stays in compulsory liquidations since section 87 of the Companies Act 1862...That language has since remained unchanged for over a century. In contrast, the use of tribunals, arbitrations and a variety of statutory bodies to stand in place of the courts in a wide variety of circumstances has proliferated over the years.
Consistently with its predecessors, section 130(2) recognises that there may be circumstances in which the prohibition against any "action or proceeding" may need to be lifted. The statutory regime conducted by the office holder may not be appropriate or best. Those circumstances cannot be defined or listed and, therefore, the court has been conferred with an unfettered discretionary power to grant permission. The court applies a test of what is right and fair according to the circumstances of the case. As Mr Justice Briggs observed when addressing section 130(2) within the context of the automatic stay under Article 20 of the Model Law in the form applied by the Cross-Border Insolvency Regulations 2006 in Cosco Bulk Carrier Co Ltd v (1) Armada Shipping SA (2) TX Pan Ocean Ltd [2011] EWHC 216 (Ch) , [2011] 2 All E.R. (Comm) 48, [2011] BPIR at [47-48]:
"[47] 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 s130(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': see Re Grosvenor Metal Co Ltd [1950] Ch 63, at 65 per Vaisey J, Re Suidair International Airways Ltd [1951] Ch 165 , Re Redman (Builders) Ltd [1964] 1 WLR 541 , Re Aro Co Ltd [1980] Ch 196, at 209 and, most recently, Bourne v Charit-Email Technology Partnership LLP [2009] EWHC 1901 (Ch), [2010] 1 BCLC 210, at 212–213.
[48] In the latter case, Proudman J also noted that, in a case where s 130(2) clearly imposed a stay, the starting point was that proceedings were not generally to be permitted against a company in liquidation, so that the court should, subject to the overriding objective, adopt the primary objective of achieving an orderly resolution of all matters arising in the winding-up for the benefit of the creditors as a whole. She also noted that previous authorities recognised that, in general, the resolution of disputed matters within the machinery of a liquidation was likely to be cheaper and quicker than if left to ordinary proceedings, and that the often limited resources of the office-holder meant that the court should be cautious before exposing liquidators to the burden of coping with difficult and time-consuming litigation. That was, of course, a purely domestic case. Proudman J also noted that, on the authority of Re Bank of Credit and Commerce International (No 4) [1994] 1 BCLC 419, at 426, the Companies Court is not required to investigate the merits of the underlying dispute, beyond satisfying itself that there is a genuine arguable claim, before giving permission for the commencement or continuation of proceedings which would otherwise be stayed by s 130(2)."
...the Act provides a comprehensive scheme of moratoria on actions and proceedings against companies and individuals subject to formal insolvency processes:
Section 130(2) applies to companies in compulsory liquidation and governs any "action or proceeding"; section 228 of the Act applies to unregistered companies (and is otherwise in the same terms as section 130); section 113 of the Act provides, on the application of the liquidator, for a stay of any "action or proceeding" against a company being wound up in Scotland; paragraph 43(6) of Schedule B1 to the Act provides for a moratorium on, amongst other things, any "legal process" without the permission of the Court of consent of the administrator; and section 285 of the Act permits the Court to stay any "action, execution or other legal process" against a bankrupt. Furthermore, section 126 of the Act allows an application to be made for a stay after the presentation of a petition but before the winding up order of any court proceedings or "any other action or proceedings" and similar provision is made for unregistered companies in section 227."'
And at paragraph 56, ICC Judge Jones in Carillion said:
'In liquidations the right and fair test addresses the matters identified by Mr Justice Briggs in Cosco Bulk Carrier Co Ltd (above).'
As an aside, it might be said that, when considering permission for the counterparty to bring arbitration proceedings against the company, the Companies Court ought not to engage in any kind of merits based assessment of the counterparty's claim, following the approach to a different but linked situation, in Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306; and (2) Eco Measure Market Exchange Ltd [2015] BCC 877 . If this is correct, this calls into doubt, the passage in the above, that reads '...the Companies Court is not required to investigate the merits of the underlying dispute, beyond satisfying itself that there is a genuine arguable claim, before giving permission for the commencement or continuation of proceedings which would otherwise be stayed by s 130(2).'