In Philpott v Lycee Francais Charles De Gaulle School  EWHC 1065 (Ch), the English High Court held that an arbitration clause in a contract to which a company was a party remained enforceable, notwithstanding that the company was being wound up in insolvency. Could the same result ensue in the winding up of a BVI business company by the BVI High Court? The commencement on 1st October 2014 of the Arbitration Act 2013 (the “BVI Arbitration Act”) makes the position arguable.
The decision in Philpott
At issue in Philpott was the effect of a standard form construction contract between WGL Realisations 2010 Ltd (the “Company”) and the Lycee Francais Charles De Gaulle School (the “School”). The Company became insolvent, administrators were appointed and thereafter the Company was placed into a creditors’ voluntary liquidation.
A dispute arose between the Company’s liquidators and the School over whether monies were due under the contract by the School to the Company, or by the Company to the School. Ordinarily, in that situation Rule 4.90 of the Insolvency Rules 1986 (the “UK Insolvency Rules”) would require an account to be taken of the sums owing between each party, with those sums being set off against each other. Following the taking of the account, the School would either be (i) a creditor of the Company and entitled to prove for the balance owing to it in the Company’s liquidation or (ii) a debtor of the Company and required to pay the balance owed by it to the liquidators as part of the Company’s assets.
However, the contract in issue contained a clause that any dispute over monies owing under the contract must be submitted to arbitration. The School argued that the arbitration clause remained binding and survived the Company’s administration and liquidation, such that any non-arbitral proceedings concerning the dispute had to be stayed pursuant to the Arbitration Act 1996 (the “UK Arbitration Act”). Section 9 of that Act provides that:
“(1) 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.
(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.”
The liquidators applied to the court under s.168(3) of the Insolvency Act 1986 (the “UK Insolvency Act”) for directions. They argued that any arbitral proceedings would themselves be vulnerable to an application for a stay. Under the UK Insolvency Act, the automatic prohibition in s.130(2) against commencing or continuing with an action or a proceeding against a company in liquidation applies only to companies being wound up by the court, and not to companies being wound up voluntarily (whether by way of a members’ or a creditors’ voluntary liquidation). Nevertheless, the liquidators relied on observations in McPherson’s Law of Company Liquidation to the effect that a stay is commonly granted when proceedings are brought against a company in voluntary liquidation. (It might be added that an anti-suit injunction could also issue to restrain a purported creditor such as the School, who had already filed a proof of debt in the Company’s liquidation, from commencing or continuing with foreign proceedings against the Company.)
The question for the court was, therefore, “whether or not the Arbitration Act “trumps” … the taking of an account under the court’s directions, as envisaged by the Insolvency Rules” (at ). The court held that it did, reasoning as follows (at ):
“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.”
Consideration of other English authorities
A decision that can be contrasted with Philpott is Salford Estates (No 2) Ltd v Altomart Ltd  EWCA Civ 1575. InSalford Estates, the English Court of Appeal rejected an argument that s.9 of the UK Arbitration Act required the court to stay a winding up petition, where the ground of the petition was the company’s inability to pay its debts and the dispute over the underlying debt was subject to a mandatory arbitration clause. The court reasoned (at ) that the company’s non-payment of the debt upon which the winding up petition was premised was merely evidence of the company’s inability to pay its debts, and that the petition was not itself a claim for payment of the debt. Accordingly, the petition was not a “claim or counterclaim” within the meaning of s.9(1) of the UK Arbitration Act. The court observed (at ):
“Furthermore, it seems highly improbable that Parliament, without any express provision to that effect, intended section 9 of the [UK Arbitration] Act to confer on a debtor the right to a non-discretionary order striking at the heart of the jurisdiction and discretionary power of the court to wind up companies in the public interest where companies are not able to pay their debts.”
Similarly, in distinguishing the decision in Fulham Football Club (1987) Limited v Richards  2 WLR 1008, the court noted (at ) the “public policy objective of protecting the public where a company continues to trade despite being unable to pay its debts”.
However, on the facts of the case, the court in Salford Estates ordered that the winding up petition be stayed (and would have dismissed it had dismissal been sought) because the debt on which the petition was founded was not admitted and there was no admitted debt above the statutory threshold. Further, there was no other creditor who was willing to be substituted as petitioner. The court considered (at -) that it should act consistently with the legislative policy behind the UK Arbitration Act, and that the parties should be held to the agreement to arbitrate their disputes.
Had there been admitted debts exceeding the statutory threshold, however, the court in Salford Estates would have allowed the petition to continue. In that event, the fact that some of the debts mentioned in the petition were disputed and fell within an arbitration clause would not have been a basis for staying the petition. The court considered (at ) that, once in liquidation, the statutory scheme for proofs of debt would supersede any arbitration agreement in respect of claims made by the petitioning creditor against the company. In those circumstances, the only claims involved would be claims by the petitioning creditor against the company.
Where, however, there are cross-claims, and an account needs to be taken to establish the balance due after application of insolvency set off, the question arises as to what mechanism is employed to determine the cross-claims. There is certainly something to be said for having all claims and cross-claims dealt with in the liquidation regime. It might also be said that mandatory referral to arbitration – or any other external regime – has the potential to interfere with the liquidator’s ability to conduct an efficient and orderly winding up under the court’s supervision. Additional expense and delay may be necessitated where liability to pay a debt needs to be determined or quantified through external proceedings, though in Philpott it was doubted whether there would be any material difference in the cost of a determination of liability in an arbitration as opposed to in proceedings challenging a rejection of a proof.
When it comes to the mechanics of determining claims and cross-claims, Rule 4.90 of the UK Insolvency Rules is silent as to the procedure for the taking of the account. As Lord Hoffman observed in Stein v Blake  AC 243 at 253 (in relation to the equivalent provision in English personal bankruptcy law), “the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law”. Upon the making of a bankruptcy (or a winding up) order, the only claim that continues to exist is the claim to the net balance one way or the other. However, to calculate that net balance, it remains necessary to consider the competing cross-claims separately. Lord Hoffman stated (at 255):
“The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continued to exist. So, for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract. This may suggest that 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.”
It is clear, therefore, that the process of determining claims and cross-claims may need to resort to proceedings external to the liquidation, and there is no reason why those separate proceedings cannot take the form of an arbitration instead of a court action.
The BVI regime
How would the facts of Philpott be resolved if they were to arise in relation to a BVI business company being wound up by the BVI High Court? Certainly, there are substantial similarities between the key provisions relied upon inPhilpott and the equivalent provisions in BVI legislation. Section 150 of the Insolvency Act 2003 (the “BVI Insolvency Act”), which concerns the taking of an account where mutual debts are owing, has a substantially similar effect to Rule 4.90 of the UK Insolvency Rules. Section 18 of the BVI Arbitration Act has a substantially similar effect to s.9 of the UK Arbitration Act. Section 18 of the BVI Arbitration Act provides that:
“(1) Article 8 of the UNCITRAL Model Law, the text of which is reproduced below, has effect:
“Article 8. Arbitration agreement and substantive claim before court
(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
(2) Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”.
(4) Where the Court refers the parties in an action to arbitration, it shall make an order staying the legal proceedings in that action.”
However, there are some differences between the BVI and English insolvency regimes. As noted above, the prohibition in s.130(2) of the UK Insolvency Act against commencing or continuing with an action or a proceeding against a company in liquidation applies only to companies being wound up by the court, and not to companies being wound up voluntarily. In BVI, however, the equivalent prohibition in s.175(1) of the BVI Insolvency Act does apply to companies being wound up under the BVI equivalent of an English creditors’ voluntary liquidation.Section 175(1) provides that:
“(1) Subject to subsection (2), with effect from the commencement of the liquidation of a company
(c) unless the Court otherwise orders, no person may
(i) commence or proceed with any action or proceeding against the company or in relation to its assets”.
Observations in Philpott at , relying on Re Frankice (Golders Green) Limited  BLR 1608 at , support the view that arbitral proceedings are amongst those that would be caught by the prohibition in s.175(1), though enforcement of the prohibition in the case of foreign proceedings will depend on whether the person concerned is amenable to the jurisdiction. The question that arises, then, is how to reconcile the mandatory stay of proceedings under s.18 of the BVI Arbitration Act with the prohibition against commencing or continuing with proceedings in s.175(1) of the BVI Insolvency Act.
In the case of a claim by the liquidator against a counterparty who benefits from an arbitration clause, the problem does not arise, because there is no claim against the company to trigger s.175(1), and the liquidator will need to bring an arbitration (Philpott at ). Further, where the counterparty asserts a defence of set off based on a cross-claim, it must also be able to assert such a defence in the proceedings brought by the liquidator. The mere fact that the counterparty has a claim that may exceed the value of the company’s claim should not alter the position, and it is therefore submitted that Philpott would be followed in the BVI.
The two legislative provisions can be reconciled by reference to their respective wording. The arbitration provision is mandatory unless the court determines that the arbitration agreement is null and void, inoperative or incapable of being performed. The insolvency provision, on the other hand, confers a more general power on the court to “order otherwise”.
An argument that the arbitration agreement becomes “inoperative or incapable of being performed” due to the winding up would be flawed, and indeed was rejected in Philpott (at ). The arbitration agreement is clearly capable of operating and being performed if the court gives permission under s.175(1) for it to be commenced or continued. The legislative policy underlying the BVI Arbitration Act (just as in the case of the UK Arbitration Act, as per Salford Estates) indicates that the BVI court should give permission under s.175(1), where required, for an arbitration to be commenced or continued.
Where, therefore, there are claims and cross-claims between a company and a counterparty, and at least some of the claims fall within an arbitration agreement, that agreement is likely to be enforced, and the parties referred to arbitration in respect of the relevant claims. The outcome of the arbitration will then be fed into the insolvency set off equation in order to identify the balance due, whether to the company or to the counterparty.
The BVI Insolvency Act is in its first year of operation and many questions remain unanswered. Similarities and differences between the provisions of the BVI insolvency and arbitration legislation and the equivalent provisions in UK legislation mean that English authorities, though relevant and persuasive, are always potentially distinguishable. However, even when the legislative differences are taken into account, the decision in Philpott indicates that a referral to arbitration will be mandatory where a company that is being wound up in the BVI wishes to assert against a counterparty a claim that falls within an arbitration agreement between the company and the counterparty, and that this is so even where the counterparty has cross-claims against the company and the net balance following insolvency set off will have to be determined.
 A BVI business company can be wound up under the simplified procedure in Part XII of the BVI Business Companies Act 2004 (the “BVI BCA”), but only if it is not insolvent – this is the BVI equivalent of an English members’ voluntary liquidation. If the members of an insolvent company wish to appoint a liquidator, or if a liquidator appointed under the BVI BCA subsequently forms the view that the company is insolvent, then the company can only be wound up in accordance with Parts V and VI of the BVI Insolvency Act – this is the BVI equivalent of an English creditors’ voluntary liquidation. Other than the manner of and the grounds for the liquidator’s appointment, and with only a few procedural differences, the same legislative regime applies to both the BVI equivalent of an English creditors’ voluntary liquidation and the BVI equivalent of an English compulsory (i.e. court-ordered) liquidation.