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There's no escaping an arbitration agreement: winding up petition likely to be trumped by an arbitration clause

11 February 2014
Cases show that Companies Court judges sometimes allow a winding up petition to be presented even if it based on a disputed debt.

However, the recent Companies Court case of Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Ch) found that if a petition is based on a disputed debt identified in a statutory demand and that dispute is the subject of an arbitration agreement, it must be referred to arbitration first.

Traxys financed Rusant and the parties entered into a loan agreement containing an arbitration agreement which required any dispute connected with the agreement to be referred to and finally resolved by arbitration.

Traxys served a statutory demand for immediate repayment of the loan. Rusant denied any sum was due, claiming the parties had orally agreed to postpone repayment, and successfully sought an injunction preventing Traxys from presenting a winding up petition based on the statutory demand.

The key factor in the judge's decision was that the parties had entered into an arbitration agreement.

In relation to debts, the Companies Court will not generally allow a petition where there is a bona fide dispute about the debt on which the petition is based. This is the case even if there is only a "shadowy defence" to the debt. Here, there was a clear dispute that had to be referred to an arbitrator, namely whether the parties had agreed to postpone the repayment date.

The judge concluded that the disputed debt was also a "claim". This satisfied s9(1) of the Arbitration Act 1996, which permits a stay in proceedings where a party to an arbitration agreement faces a claim or counterclaim regarding a matter which is subject to arbitration under that agreement.

Even if wrong on this conclusion, the judge said he would have exercised his discretion to reject any petition based on the debt, leaving it to be established by an arbitrator, as agreed by the parties. The Companies Court should proceed with a petition only where there is no bona fide defence to a dispute, even if the claim itself is nonetheless appropriate for summary judgment.

Although the judge went on to indicate that, had there been no arbitration agreement, he would have allowed Traxys to proceed with winding up proceedings and summarily assessed and dismissed Rusant's argument regarding the postponed repayment date, the policy of the 1996 Act to hold parties to arbitration agreements meant that the arbitration agreement here overrode the decision he would otherwise have made.

This case is therefore a helpful warning to those who think they can get around an arbitration agreement by presenting a statutory demand.

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