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It’s okay to stay: Recent BVI and English Cases in lockstep on exercise of discretion to stay winding up application in favour of arbitration

In the Matter of Telnic Limited, the English High Court upheld a decision to stay a winding up petition in favour of arbitration.

Knipp, the Respondent, had provided data hosting and software development services to Telnic for the purposes of its operation of the "tel" domain. According to Knipp, Telnic failed to pay invoices for the services it provided. This is was in a context where the parties had consequently executed a joint venture agreement which was intended to include forgiveness of the debt owed by Telnic. However, according to Knipp, certain conditions precedent to that agreement were never met and so the agreement did not come into force. Disputes under the agreement were to be subject to arbitration. Telnic then sold its business to a wholly owned subsidiary and consequently distributed all its shares and stopped trading. The Respondent then presented a petition to wind up Telnic due to outstanding invoices on the grounds that Telnic was unable to pay its debts.

The Judge held that the wind up proceedings should not proceed on the basis that the petition debt was disputed and any such dispute should be referred to arbitration. Instead of dismissing the petition, the judge stayed the petition on the basis that Telnic’s conduct warranted the protection of Knipp’s interest. The Court therefore ordered Knipp to pay Telnic’s costs on the standard basis and that such costs were to be paid to an escrow account rather than directly to Telnic. The judge also gave Knipp liberty to apply to lift the stay and proceed with the petition if Telnic were to deliberately not engage in the arbitration process.

The English Court held that the Judge was rightly bound by the decision in Salford Estates that in a case where a debt is covered by an arbitration agreement that the insolvency court should not conduct a summary judgment type analysis of the liability. Only in exceptional cases could the Court go on to consider the merits of the disputed debt. The Court held that not even past admissions of the debt could amount to exceptional circumstances as the discretion of the judge must be exercised to uphold the Arbitration Act. The Court also held the judge properly exercised his discretion to stay the proceedings in light of Telnic’s conduct.

Within two weeks of the decision in Telnic, the BVI Commercial Court upheld the same principle in IS Investment Fund Segregated Portfolio Company v Fair Cheerful Ltd.  The applicant applied to appoint a liquidator in respect of debts arising out of a share sale and purchase agreement which included a term providing for disputes to be resolved by arbitration before the Hong Kong International Arbitration Centre (HKIAC).  The BVI Commercial Court dismissed the liquidation application, stating that there was “every reason to hold the applicant to the bargain it struck with the respondent, namely that disputes would be referred to the HKIAC”.

Separately, the BVI Commercial Court noted that while the BVI Insolvency Act permits an applicant to present an application for the appointment of a liquidator without first serving a statutory demand, it is not generally desirable.

These decisions demonstrate the strong legal policy in favour of arbitration, although the courts maintain a discretion to safeguard the interests of creditors pending arbitral proceedings in exceptional circumstances.

It’s okay to stay: Recent BVI and English Cases in lockstep on exercise of discretion to stay winding up application in favour of arbitration