IP Briefing – Telnic Limited – When will a court consider the merits of a debt subject to an arbitration agreement in the context of a winding up petition?

The High Court in England recently upheld an order granting a stay (sist) in winding-up proceedings, where the petition debt was disputed by the debtor and was subject to an arbitration agreement. In doing so, the court approved the earlier decision in Salford Estates (No 2) Limited v Altomart Limited (No 2), that absent “wholly exceptional circumstances” the court should not inquire into the merits of the dispute, but defer to the arbitrator’s jurisdiction to determine the position.

The case concerned a petition presented by Knipp Medien un Kommunikation GmbH to wind up Telnic Limited. Knipp alleged that Telnic had failed to pay invoices in the sum of £263,777.28, and that Telnic was balance-sheet insolvent. Telnic did not admit the debt, and there was an arbitration agreement in place. At first-instance, the judge stayed the winding-up proceedings pending conclusion of the arbitration process.

Before the High Court, Knipp argued that certain facts amounted to “wholly exceptional circumstances” in terms of Salford Estates. These were:

  • Prior admission of the debt by Telnic;
  • Alleged balance-sheet insolvency;
  • An alleged unlawful distribution by Telnic to its shareholders; and
  • Telnic’s conduct during the arbitration.
    The High Court agreed that the test in Salford Estates was the appropriate one, but held that these facts did not amount to “wholly exceptional circumstances.”
  • The alleged admissions had been heavily caveated;
  • As the debt was not admitted, Knipp did not have locus standi to raise winding-up proceedings on the basis of balance-sheet insolvency;
  • The alleged distribution was complex, and not suitable for the analysis being performed in this case; and
  • Poor conduct in the arbitration does not itself amount to a “wholly exceptional” circumstance.
    Telnic, meanwhile argued that the petition ought to have been dismissed; the High Court held that, in the existing circumstances, a stay was more appropriate. It would protect Knipp’s position in the event it was successful at arbitration, and would encourage Telnic to properly engage with the arbitration proceedings.

This has confirmed that, in England at least, the court will not go beyond establishing the existence of an arbitration agreement to inspect the merits of a disputed debt, without “wholly exceptional circumstances” requiring that it do so. This will mean that, if accepted in Scotland, that even where there is no bona fide defence to a debt, the existence of an arbitration agreement may be enough to prevent winding-up proceedings.

The court has also provided a useful look at certain factors which will not meet the test of “wholly exceptional circumstances.” These include circumstances where the debtor fails to engage constructively with the arbitration.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk).This briefing note is current as at 5 October 2020 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).