On 29 July 2020, the High Court handed down its much anticipated judgment in the case of Telnic Ltd v Knipp Medien Und Kommunikation GmbH [2020] EWHC 2075 (Ch) and confirmed that the court has discretion to restrain a winding-up petition against debtor’s when the debt is governed by an arbitration agreement.

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Background

On 1 December 2009, Knipp Medien Und Kommunikation GmbH (“the Petitioner”) entered into a Services Agreement (the “Agreement”) for the provision of those services. Clauses 12.1 and 12.2 provided for a service fee to be paid by Telnic Ltd (“the Debtor”) to the Petitioner within 30 days of receiving monthly invoices. Clause 23.1 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.

On 19 March 2019, the Petitioner demanded £263,777.28 from the Debtor in respect of various invoices rendered (the “petition debt”). On 25 October 2019, the Petitioner presented a petition to wind up the Debtor in respect of the petition debt on the grounds that the Debtor was unable to pay its debts.

Deputy ICC Judge Schaffer made an order on 19 December 2019, whereby he restrained the Petitioner from proceeding with its winding-up petition against the Debtor and stayed the petition on the basis that the debt was not admitted and subject to an arbitration clause. It is interesting to note that the Judge ordered the Petitioner to pay the Debtor’s costs assessed at £25,000 into an escrow account held by the solicitors. The Debtor was subsequently granted permission to appeal.

As noted in paragraph 4 of the Judgment, the appeal and cross-appeal raised 5 main issues to be considered:

1. Was the judge right to decide that he was bound by Salford Estates (No. 2) Limited v. Altomart Limited (No. 2) [2015] Ch 589 to consider whether there were wholly exceptional circumstances before moving to ask whether the debt was disputed in good faith on substantial grounds?

2. Was the judge right, in effect, to decide that there were, in this case, no such wholly exceptional circumstances?

3. Should the judge have dismissed the petition, stayed the petition, or allowed the petition to proceed?

4. Was the judge wrong to have ordered the Petitioner to pay the Debtor’s costs on the standard basis?

5. Was the judge wrong to order the Petitioner to pay the costs into an escrow account, rather than directly to the Debtor?

Paragraph 4 of the Judgment

Issue 1: Was the judge right to decide that he was bound by Salford Estates to consider whether there were wholly exceptional circumstances before moving to ask whether the debt was disputed in good faith on substantial grounds?

The Judge addressed this issue in paragraph 27 of his Judgment and noted that Sir Terence Etherton C made clear in Salford Estates, in a case where the debt is covered by an arbitration agreement, the judge sitting in the Insolvency and Companies List of the Business and Property Courts should not “conduct a summary judgment type analysis of liability“. It is not, therefore, appropriate, save in wholly exceptional circumstances, for that judge to inquire whether the debt is disputed in good faith on substantial grounds.

Issue 2: Was the judge right, in effect, to decide that there were, in this case, no such wholly exceptional circumstances?

The Judge examined the circumstances raised by the Petitioner in paragraph and reached the clear conclusion that the very rare and wholly exceptional circumstances did not exist in this instant case and that would justify the court in departing from its usual practice which is to dismiss or stay the petition.

Issue 3: Should the judge have dismissed the petition, stayed the petition, or allowed the petition to proceed?

The Court noted that Deputy ICC Judge’s stayed the petition rather than dismissing it for various reasons, namely because he wanted to make it clear that the Debtor should cooperate in the arbitration process, and to protect the Petitioner by allowing it to lift the stay if it succeeded in the arbitration.

The Judge also noted that he wanted to protect creditors by preventing Debtor disposing of its assets and preserving a Liquidator’s rights of action in respect of the period up to presentation. Naturally, he considered prejudice to Debtor, but ultimately decided that a stay was appropriate because Debtor was not an active trading company and as such, it was not prejudicial to the Debtor.

Issue 4: Was the judge wrong to have ordered the Petitioner to pay the Debtor’s costs on the standard basis?

The Judge noted in paragraph 47 of his Judgment that the award of standard costs was entirely appropriate.

Issue 5: Was the judge wrong to order the Petitioner to pay the costs into an escrow account, rather than directly to the Debtor?

The Judge was skeptical about the Debtor’s willingness to engage in the arbitration and as such, required the costs to be deposited in escrow in the event that it was later shown that the Debtor had indeed been contesting the petition debt in bad faith or on insubstantial grounds.

What did the Judge conclude?

The Judge concluded that the appeal and the cross appeal should be dismissed and in essence, confirmed that the court has discretion to restrain a winding-up petition against debtor’s when the debt is governed by an arbitration agreement.

What are the implications of this Judgment?

This is another decision from the Chancellor of the High Court, which demonstrates that Court’s are likely to prioritise arbitration when it comes to disputed debts. The instant case makes it clear that order to uphold the policy of the Arbitration Act 1961, judges should only take into account whether the debt is disputed in good faith on substantial grounds in wholly exceptional circumstances. As it can be seen from the judgment, even past admissions of the debt would not constitute such circumstances. 

It is very important for the contracting parties to be aware of the scope of any arbitration clauses within the agreements and the implication of these arbitration clauses when a debt arises. The winding-up process may not be a suitable one if an extant binding arbitration agreement is in place and the parties may need to go through the arbitration process in order to determine the disputed debt.

Read the full Judgment here:

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