Winding up petitions and contractual arbitration clauses - which reigns supreme?

The High Court has recently handed down a judgment which may be of interest to arbitration practitioners and those who present winding up petitions. 

Stephen Murphy and Dominique Dolman consider the judgement in the recent case of Telnic Limited v Knipp Medien und Kommunikation GmbH [2020]EWHC 2075 (Ch).

By way of brief background, Knipp presented a winding up petition in October 2019 against Telnic in respect of invoices totalling almost £264,000 raised under an agreement for data hosting and software development services entered into between the parties in 2009. That agreement contained an arbitration clause which covered “any dispute, controversy or claim arising out of or relating to this agreement … or the breach, termination or validity thereof”.  

Knipp alleged that Telnic had made an admission in respect of the debt, whereas Telnic’s position was that the debt was disputed. On that basis, Telnic sought to rely on the arbitration clause in the agreement and contested the Insolvency and Companies List Judge’s jurisdiction to hear the matter. Telnic were successful in that regard and the petition was stayed at first instance, a decision which was appealed by Knipp. The appeal was heard before Sir Geoffrey Vos, Chancellor of the High Court on 22 July 2020.

The Chancellor followed the principle established in Salford Estates (No.2) Limited v Altomart Limited (No.2) [2015] Ch 589 which provides that, in circumstances where there is a binding arbitration clause, only in exceptional circumstances will the Court conduct a review of whether the debt is disputed in good faith on substantial grounds. Unless those exceptional circumstances are present, and the Judge in this case struggled to envisage what those might be, the Court will simply defer to the parties’ agreement to determine said dispute by arbitration. In those circumstances, any winding up petition that has been presented will in all likelihood be stayed or dismissed with the petitioner ordered to pay the respondent’s costs.

This is a useful reminder that, no matter how weak the grounds for disputing the debt are, the Courts will not enquire in any way as to the merits of that dispute unless exceptional circumstances can be demonstrated. In short – the arbitration clause rules supreme. 

Many commentators have expressed the view that arbitration clauses will become increasingly common in commercial agreements involving at least one UK-based party in the run up to, or following Brexit, as parties seek certainty over jurisdictional and enforcement issues. On that basis, and as has been demonstrated in the Telnic case, parties need to carefully consider the scope of any arbitration clause and whether arbitration is the best way to protect their interests, lest they find themselves in a situation where a debt is due under the agreement, albeit disputed on spurious grounds, but they cannot enforce their rights without incurring the legal costs, disbursements and delay involved in a full-blown arbitration.  

Dominique Dolman, Senior Associate at Irwin Mitchell LLP and experienced commercial litigator says: “This is a very interesting case, where the Court had to conduct a delicate balancing act between the conflicting interests of the parties and their reliance on either the implementation of the arbitration or insolvency regimes. This decision confirms that the Court appear reluctant to look beyond the existence and implementation of an arbitration clause and that in certain circumstances, the collection of a straightforward debt may now become even more arbitrary.”

Should you have any queries regarding arbitration clauses or any of the subject matter above, please contact us at Dominique.dolman@irwinmitchell.com or stephen.murphy@irwinmitchell.com.