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NSW Supreme Court allows enforcement of arbitral award against company in administration
Practical Law UK Legal Update 3-518-2588 (Approx. 5 pages)
NSW Supreme Court allows enforcement of arbitral award against company in administration
| Published on 29 Feb 2012 • Australia |
Andrew Robertson (Partner) and Ryan Kuss (Law Clerk), Piper Alderman
The New South Wales Supreme Court has allowed the enforcement and recognition of an arbitral award against a company in administration.
Background
Section 440D(1) of the Corporations Act 2001 (Cth) provides:
"Stay of proceedings
(1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:
(a) with the administrator's written consent; or
(b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes."
Section 36 of the Commercial Arbitration Act 2010 (NSW) provides:
"Grounds for refusing recognition or enforcement
(1) Recognition or enforcement of an arbitral award, irrespective of the State or Territory in which it was made, may be refused only:
(a) at the request of the party against whom it is invoked, if that party furnishes to the Court proof that:
(i) a party to the arbitration agreement was under some incapacity, or the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication in it, under the law of the State or Territory where the award was made, or
(ii) the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present the party’s case, or
(iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognised and enforced, or
(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the State or Territory where the arbitration took place, or
(v) the award has not yet become binding on the parties or has been set aside or suspended by a court of the State or Territory in which, or under the law of which, that award was made, or
(b) if the Court finds that:
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or
(ii) the recognition or enforcement of the award would be contrary to the public policy of this State."
Facts
The respondent/cross-claimant (Larkden) was the holder of a number of patents relating to renewable energy. The claimant/cross-defendant (Lloyd) was engaged in various forms of research and development in the same field. Larkden and Lloyd entered an agreement under which Larkden granted Lloyd a licence to the technologies under the patent. One of the conditions of this agreement was that Larkden would own any improvements or modifications made to the technologies by Lloyd.
A dispute arose when third party companies which Larkden asserted were connected with Lloyd filed patents which Larkden alleged were improvements or modifications to the Larkden patents. A further dispute related to certain licensing fees which Larkden asserted were owed by Lloyd.
Lloyd rejected these allegations and commenced arbitration against Larkden.
On 7 September 2011, the arbitrator published "draft reasons" dealing with the various claims and cross-claims of the parties and suggested that the parties agree on appropriate orders. On 9 September 2011, Larkden wrote to Lloyd seeking consent to a form of orders. On 13 September, the directors of Lloyd resolved that Lloyd was or was likely to become insolvent and appointed voluntary administrators. Larkden was informed of this development the following day.
On 20 September, after an exchange of correspondence in which Larkden urged the arbitrator to make orders, and in which the administrators sought to defer the making of orders, the arbitrator published further reasons and made his orders, which were largely in favour of Larkden.
On 26 September, Larkden sought leave, under section 440D(1) of the Corporations Act 2001 (Cth), to commence proceedings against Lloyd to enforce the arbitrator's award under section 35(1) of the Commercial Arbitration Act 2010 (NSW). The administrators sought to resist the application for leave, submitting that having to resist Larkden's claim would deflect them from other activities and cause them to incur costs. They asserted that leave under section 440D is only granted in rare cases and this was not such a case.
Decision
Hammerschlag J rejected the administrator's submissions and granted leave to commence proceedings against Lloyd.
Corporations Act 2001 (Cth)
Hammerschlag J discussed the insolvency framework in the Corporations Act 2001 (Cth), noting that the relevant provisions (Pt 5.3A) are designed to maximise the chances of a company continuing in existence or, if this is not possible, to ensure a better return for the company's creditors and members than would result from an immediate winding up of the company. To facilitate this end, the Corporations Act provides for an administrator to convene two meetings with the company's creditors. At the second meeting, which must take place within a certain timeframe (but which Hammerschlag J decided to extend in the present case), the creditors may resolve that:
- The company execute a deed of company arrangement in an attempt to preserve the company.
- The administration should end.
- The company be wound up.
Section 440D of the Corporations Act 2001 (Cth) provides for a freeze on proceedings "in a court" against the company unless the administrator agrees or the court gives leave. Hammerschlag J noted that section 440D may facilitate the policies underlying Pt 5.3A by, among other things,:
- Affording the administrator time to assess and report on the company without the distraction of the proceedings.
- Giving the creditors time to consider their position for the purposes of the creditors' meeting.
- Prevent a creditor from obtaining some advantage over other creditors or potential creditors (in appropriate circumstances).
The administrators in this case cited authority for the proposition that, because of the issues of cost and distraction, as well as concern about the possibility of giving the claimant some advantage over other creditors or potential creditors, leave under section 440D will rarely be granted. Hammerschlag J declined to follow this approach. He noted that while these policies must be kept in mind by the court in exercising its discretion under section 440D, the discretion "remains one at large". The process is to treat a stay as the starting point and determine whether there are circumstances which warrant its displacement. There is no presumption, however, that leave will only rarely be granted or that an application must be treated with a special degree of caution.
Cost and distraction of enforcement proceedings
Hammerschlag J noted that principal arbitral proceedings are not a "proceeding in a court" for the purposes of section 440D(1). This means that they are not stayed by the appointment of an administrator, even though arbitral proceedings can be distracting, time consuming and expensive for an administrator. He noted that he considered that Parliament intended to except arbitration proceedings from the stay. In light of this he stated that:
"[i]t is unlikely that Parliament intended to disregard the distraction and cost considerations in relation to principal arbitral proceedings but nevertheless intended that they should be given weight when it comes to recognition and enforcement of an award which is the culmination of those proceedings [emphasis added]."
That is, he seemed to conclude that the distraction and cost considerations underpinning Pt 5.3A are not of great significance in deciding whether to depart from the default section 440D(1) stay in cases where the proceedings in a court are for the recognition and enforcement of arbitral awards.
Commercial Arbitration Act 2010 (NSW)
Hammerschlag J then discussed section 36 of the Commercial Arbitration Act, which provides that recognition or enforcement of an arbitral award may only be refused in defined circumstances.
He noted that while a stay is not a refusal, it is an impediment to seeking recognition or enforcement. He expressed no further view on this point but noted that, in any event, a stay is possible if appropriate circumstances are shown.
Grant of leave in the present case
Hammerschlag J listed the following relevant factors in favour of granting leave:
- The distraction to the administrators would be minimal and the cost would be modest.
- The convening period for the second creditors meeting has been extended which relieves time pressure on the administrators.
- The foreshadowed proceedings are likely to be simple and brief.
- There is no indication that enforcement will allow Larkden to "steal a march over any other creditor or potential creditor".
- Larkden's rights are essentially proprietary in nature and "[t]here is no good reason why the interests of unsecured creditors should be a barrier to Larkden at least seeking vindication of those rights".
He rejected the relevance of the following submissions of the administrators:
- The administrators had submitted that leave should be refused because they had good answers to Larkden's claims for recognition and enforcement (for example, bias of the arbitrator). Hammerschlag J stated that these were propositions of law, were not susceptible to summary assessment and could not be addressed in the present type of application.
- The administrators had proferred an undertaking that they would not deal with the interests the subject of the claim. Hammerschlag J stated that this did not provide a reason why Larkden should not be able to seek recognition and enforcement of its proprietary interests.
Hammerschlag J ultimately held that there were weighty considerations in favour of granting leave and little in favour of refusing it. Therefore, he granted leave.
Comment
This case demonstrates the courts' willingness to hold parties to the outcome of their agreement to refer their dispute to arbitration and to support the process of arbitration. This approach places arbitration into a different and distinct position from litigation. Hammerschlag J granted the plaintiff leave to bring proceedings to enforce an arbitral award in circumstances where the outcome may well not have been the same in respect of proceedings to enforce a judgment of the court.