Philpott & Anor v Lycee Francais Charles De Gaulle School

This is an application by the liquidators of a company now called WGL Realisations 2010 Limited (‘the company’), which is in creditor’s voluntary liquidation, for directions. The respondent is Lycee Francais Charles De Gaulle School (‘the school’), with whom the company in liquidation was during its active life contractually involved in a construction project. As a result of insolvency the company went into administration, then voluntary liquidation, and there is now a dispute as to whether monies are due on one side or the other under the contract in question, which is a JCT Intermediate Building Contract (with contractors design) 2005 Revision 1: 2007, which was made on 1^st July 2008. I shall call it ‘the contract’. The name of the company was formerly Welconstruct Limited. I shall continue to refer to it as ‘the company’.

I have before me evidence from Mr. Philpott, who is one of the joint liquidators of the company, setting out the range of the dispute. In Appendix A to his first witness statement he sets out a summary of each party’s position on the final account under the contract. That indicates that, according to the liquidators, somewhere around £615,000 is due to the company, and according to the school a sum of just in excess of £270,000 is due to the school. That is a range of £885,000, in round figures.

The liquidators have considered various ways of resolving the dispute. The school some time ago formally put in a proof of debt for its £270,000-odd, which the liquidators have yet to accept or reject. There is a final certificate which, if valid, is very much in the school’s favour. The liquidators challenge its validity on grounds which I need not consider on this application.

There is an arbitration clause in the contract which plainly applies as a matter of construction to the current dispute. There is also provision for adjudication.

The school’s position is that the arbitration clause is binding and continues to apply after an administration and liquidation. As this is a voluntary liquidation arbitration proceedings could be commenced, though they would be vulnerable to an application for a stay. It is clear that arbitration proceedings are legal proceedings or process for this purpose (see by way of comparison in the context of an administration Re: Frankice (Golders Green) Limited [2010] BLR 1608, paragraph 38, page 1617B).

McPherson’s Law of Company Liquidation, Third Edition, makes the point that a stay is commonly granted when proceedings are brought against a company in voluntary liquidation. In the case of a company in compulsory liquidation the prior permission of the court is required. Mr. Morgan, for the liquidators, took me to the citation set out in McPherson at paragraph 7-072 from Toronto Wood & Shingle Company [1894] 30 Canadian Law Times, 353 and 356 as follows:

“It must be kept in view that the intention of the Winding Up Act and of all legislation respecting insolvency is to get within the control of the court all of the estate of the insolvent company, to settle there all the claims of debt, privilege, mortgage, lien, or right of property upon, in or to any effects or property of such company in the simplest and least expensive way, and to distribute its assets among its creditors in the most expeditious manner possible and not to have the proceedings of the winding up court or the distribution of the assets delayed or impeded by or dependent upon outside or expensive litigation in other courts.”

Likewise, the citation from McPherson J, as he then was, in Ogilvie Grant v. East [1893] 7 ACLR 669 is relied upon, as set out in paragraph 7-071:

“As a matter of history a winding up by the court was, and remains today, an administration conducted by the court.”

[I observe that we are concerned in this case with a voluntary liquidation but similar principles apply subject to the provision that the onus is, when dealing with proceedings brought against a company, upon the liquidator to seek a stay rather than upon the person bringing proceedings to seek permission] :

“Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges
a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a Judge, who determines that appeal de novo primarily on affidavit material: Re: Kenwood Constructions Limited [1960] 1 WLR 646. There can be no doubt that ordinarily such
a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action.”

That quotation remains potentially applicable in the context of the current insolvency legislation in this country, though I confess that my own experience leaves me doubtful whether the procedure for appealing a proof of debt offers significant savings in time and expense.

Proof of debts in a liquidation are dealt with in the Insolvency Rules 1986, Part 4, Chapter 9. Section A sets out the procedure for proving. Rule 4.73(2-CVL) provides:

“In a voluntary winding up … the liquidator may require a person claiming to be a creditor of the company and wishing to recover his debt in whole or in part, to submit the claim in writing to him.”

That obviously is not a procedure which the liquidator could apply to the court to stay, because it is something which the liquidator himself initiates, and the existence of this procedure is the reason for staying other forms of proceedings against a company in liquidation. By contrast, in a winding up by the court, the obligation of the creditor under Rule 4.73(1), is ordinarily to submit his claim in writing, whether or not required to do so by the liquidator.

Under Rule 4.82(2):

“If the liquidator rejects a proof in whole or in part, he shall prepare
a written statement of his reasons for doing so, and send it as soon as reasonably practicable to the creditor.”

In the present case the liquidators have not yet decided whether to accept or reject the proof. Because of the claims on both sides they say they cannot do so until the account referred to in Rule 4.90 has taken place. Put another way, the account referred to in Rule 4.90 cannot take place until the underlying dispute has been resolved. The issue before me is how that dispute should be resolved.

Rule 4.90(1) provides:

“This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.”

It is common ground that Rule 4.90(1) applies here and that the competing contentions of the parties, summarised in Appendix A to the witness statement to which I have referred, reflect such mutual dealings.

Rule 4.90(3) provides:

“An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.”

This means that the only remaining debt following the liquidation is for the net balance one way or the other. The rule is however silent as to what procedure is to be adopted for the purpose of the taking of the account. Obviously the court has ample power to give directions for the taking of an account in an appropriate case, and it may be, as Coulson J observed, in Enterprise Managed Services Ltd v. Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC), that ordinarily what is contemplated is the taking of an account in one hearing and as part of one process, rather than, as he put it in paragraph 79:

“in a piecemeal or slice-by-slice fashion, by reference to potentially different tribunals, including adjudicators who could, at most, make
a decision that is only of temporary effect.”

The issue in that case was whether or not adjudication was an appropriate process in the case of an assigned debt involving several contracts. We are only concerned here with one contract and there is no assignment. However, an adjudication, which is one of the suggested ways forward, would in this case also only be, at most, of temporary effect, and would not determine the account which is contemplated under Rule 4.90(3).

The real issue before me arises under section 9 of the Arbitration Act 1996. That section, which is headed: “Stay of Legal Proceedings”, reads as follows:

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.

I need not read sub-paragraph 5. The most relevant part is sub-paragraph (4), under which the grant of a stay is mandatory, with limited exceptions. Accordingly it is said by Ms. Briggs for the school that whichever form of court proceedings the liquidators choose (outside of arbitration proceedings) to establish the balance of the account between the parties, those proceedings must be stayed.

It was suggested by Mr. Morgan, for the liquidators, that the court has power under Part 9 of the Insolvency Rules, of which Rule 4.90 is part, in connection with the proof of debt process to give directions as to the taking of an account of the balance due between the company and the school. Were the liquidators to seek such directions, however, they would in my judgment be bringing legal proceedings against the school within the arbitration clause, which would have to be stayed unless the arbitration agreement was null and void, inoperative, or incapable of being performed. In my judgment, none of that applies. In particular, the arbitration agreement does not become inoperative following a liquidation, or in consequence of the statutory set-off.

The importance of giving effect to the mandatory provisions of the Arbitration Act has been recognised in a number of cases. Thus, in Fulham Football Club (1987) Limited v (1) Sir David Richards & Ors [2011] EWCA Civ 855, Longmore LJ in paragraph 98 made reference to Section 1(b) of the Arbitration Act 1996, which is in the following terms:

“The parties shall be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest”

and commented:

He went on in paragraph 99:

“This is a demanding test and I cannot see that it is necessary in the public interest that agreements to refer disputes about the internal management of a company” [which is what that case related to] “should in general be prohibited.”

In Bannai v. Erez [2013] EWHC 3689 (Comm), Burton J had to consider whether or not to grant an anti-suit injunction restraining the pursuit of legal proceedings in the Israeli courts or elsewhere in respect of any matters falling within the scope of an arbitration agreement. The defendants were trustees in bankruptcy of a Mr. Eli Reifman. Burton J enforced the arbitration clause, commenting as follows:

“I see no reason why the issues between the Claimant and the Bankrupt should not be adjudicated in arbitration, and the result of arbitration proceedings which could, as with all arbitration proceedings, be concluded relatively speedily, can then inform the outcome of the insolvency proceedings.”

I wish I could share the optimism that arbitration is as speedy as Burton J’s experience suggests. It is certainly not cheap, as figures showing the estimated cost of arbitration proceedings demonstrate in this case. However, if the resolution of the underlying dispute is to be left to the taking of an account under directions given in the context of an appeal from the rejection of a proof of debt, that also could potentially be an expensive process, and I cannot believe it would be any speedier than arbitration.

The real issue I have to decide, as the liquidators wish to adopt alternative and, they say, more economical procedures, is whether or not the Arbitration Act 1996 trumps - an expression that has been used in argument – the taking of an account under the court’s directions, as envisaged by the Insolvency Rules. In my judgment it does.

The nature of statutory set-off in insolvency has been considered by the House of Lords in Stein v. Blake [1996] AC 243. That case concerned section 323 of the Insolvency Act 1986, which is the equivalent in personal bankruptcy of Insolvency Rule 4.90. Lord Hoffmann, observing that the operation of statutory set-off did not depend on the lodging of a proof by the creditor, said at page 253:

“The language of section 323(2) suggests an image of the trustee and the creditor sitting down together, perhaps before a judge, and debating how the balance between them should be calculated. But the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law.”

At page 255 reference was also made to a decision of Neill J in Farley v. Housing and Commercial Developments [1984] BCLC 442, another building dispute where the contractor went into insolvent liquidation and arbitration proceedings were subsequently commenced under 2 agreements. The arbitrator stated a special consultative case asking whether upon the liquidation the mutual debts had been replaced by a balance of account under Section 323. Neill J answered that question in the affirmative and Lord Hoffmann said that he was right, observing:

“This may suggest the respective claims actually do continue to exist until the court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other in accordance with Section 323. But the litigation is merely part of the process of retrospective calculation from which it will appear that from the date of bankruptcy, the only chose in action which continued to exist as an assignable item of property was the claim to a net balance.”

There was, incidentally, no suggestion in that case that the insolvency procedures in some way trumped the Arbitration Act.

In my judgment, despite my scepticism as to whether or not arbitration really is the speedy and relatively economical alternative that it is made out to be, Parliament has clearly chosen to strengthen the impact of arbitration clauses, and this case does not come within any of the limited statutory exceptions. Accordingly, it seems to me that any legal proceedings which the liquidators may hereafter wish to bring to ascertain the net balance would come up against the obstacle of Section 9, which, if invoked by the school, as it has indicated it would, would have to be enforced. The matter can perhaps be tested in this way: the liquidators for the company claim that a substantial sum of over £600,000 is due. Were they to bring proceedings against the school on behalf of the company to recover that sum, those proceedings would plainly be within section 9. Were it not for the accidental feature that there is also a claim on the other side by the school for recovery of monies due to the school, Rule 4.90 would not come into it. The mere fact that there is a claim on both sides should not, in my judgment, be determinative of whether or not the arbitration clause is to be enforced. The dispute ultimately can only be resolved by some form of proceedings and legal proceedings, if brought, would be subject to the mandatory requirement of a stay under Section 9. That conclusion cannot be avoided by presenting the claim as a claim for an account in the context of Rule 4.90, as the taking of the account requires the court to resolve the dispute which is subject to the arbitration clause.

There was some debate before me as to whether or not by proving its debt, which the school was required to do, presumably (as Mr Morgan conceded) by the liquidators, the school had in some way compromised its position. Its position would only be compromised, in my judgment, if section 9(3) of the Arbitration Act 1996 applies. 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 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 school’s position, amount to taking a step in “those proceedings”, there being none, “to answer the substantive claim”. The school’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. I do not see why the school 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, following which the net balance would be a matter of simple calculation.

An issue has also been raised as to whether or not adjudication is available. It seems to me that in the particular circumstances of this case, under the terms of the contract, adjudication is an available process which it is open to the liquidators to pursue. Whether it makes any sense to invoke adjudication must be a matter of commercial judgment, because the adjudication will not, as I have said, without more, result in the ascertainment of the net balance. The adjudication will produce at most a temporary obligation, more in the nature of an interim payment. However the contractual right to an adjudication is there. Whether or not the court would enforce any order against the company seems inconceivable, as this would defeat the requirement of pari passu distribution, and it may therefore be that were the school to make an adjudication application, that might be met by an application for a stay by the liquidators on conventional insolvency grounds. Paradoxically, however, it is the liquidators who appear to favour an adjudication as one possibility, in which case their applying for a stay would not arise. Whilst, therefore, the contractual right to an adjudication remains, whether it is of any practical use is for others to reach a commercial judgment upon.