Authored By: Lesedi Wada Lentswe
University of Botswana
Facts:
The Appellants had sold their shares in the Mines they operated in Africa to the Respondents; however, as the Respondents were being liquidated, the Appellants feared they would repudiate the agreement and sought to commence arbitral proceedings for damages. This appeal arises from the application of the Appellants to the High Court under section 376 of the Companies Act.[1] for leave to proceed with arbitration proceedings in the London Court of International Arbitration against the Respondents, who are in liquidation pursuant to a winding-up order by the court. This previous application by the appellants was refused with costs because the Court a Quo favoured the argument that the Appellants should have sought the Court’s consent before commencing arbitration proceedings as they did.
Issues:
- Whether the Appellants must have applied for the leave of the Courts of Botswana before instituting Arbitration Proceedings in another jurisdiction – whether section 376 of the Companies Act has any Extraterritorial Effect.
- qwaWhether the Appellants original application had any basis and could be granted on the facts.
Appellants Argument
1st appellant Norilsk Nickel, a company incorporated under the Laws of Mauritius, and 2nd appellant Norilsk Nickel Africa, incorporated in terms of the laws of South Africa.[2] The Appellant companies were Russian-owned.[3]
The Appellants argued that the suspensive conditions under their sale agreement had been fulfilled and that the Respondents were in material breach of their obligations under the sale agreement by failing to pay the purchase price. Consequently, the Appellants claimed a total sum of $271 302 137,35, with accumulated interest, by way of specific performance from the Respondents. The Appellants further contended that this dispute can only be resolved by the LCIA pursuant to the Arbitration Clause in their Share Sale agreement.
The appellants brought their initial application under section 376 of the Companies Act, which provides:
“In a winding up by the court, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose”[4]
The appellants contended that their claims, which they wished to pursue in arbitration, were not capable of proof at the first meeting of creditors because they were for unliquidated damages. The Appellants argued that section 383 (1) of the Companies Act,[5] which provides that all claims against a company being wound up at the first meeting of the creditors must be read together with section 43 of the Insolvency Act, which states that
“Every claim against an estate not being conditional or unliquidated which was due or the cause of which arose before the sequestration of the estate, may be proved by the creditor or by any person authorised thereto at any time before the final distribution of the estate.”[6]
Respondent’s Argument
BCL Investment is a subsidiary of BCL, which the Government of Botswana entirely owns, and both are incorporated under the Laws of Botswana. The Respondents argued that the suspensive conditions of the share sale agreement were never fulfilled and that their obligations under the agreement were therefore unenforceable. The Respondent’s counsel thereby attempted to find support for their argument in court that the leave of the courts was never required in the present case. They employed judgments from foreign jurisdictions, stating as follows:
“It has long been established that the statutory prohibition against a company being wound up by the court is not extra-territorial, i.e. it does not extend to proceedings in a foreign court.”[7]
“the mere fact that there has been since the attachment both a bankruptcy order and a receiving order against the defendant in the Court of its domicile – a foreign court – is no bas to Plaintiff proceeding with his action against Defendant: proceedings in our courts are not therby stayed…[A] Bankruptcy statute is only of force in a State where it is enacted. It is for this reason that the sequestration of a debtor by a foreign court does not preclude a creditor in this country from instituting or proceeding with an action against the debtor in the ordinary way.”[8]
Regarding the issue of why the Appellants should be granted leave to proceed with arbitration before the LCIA, the Respondents argued that the Appellants must first be compelled to prove their claims at the first meeting of the creditors before they should be allowed to begin the more costly procedure of international arbitration in accordance with section 383 (1) of the Companies Act.
Rule Applied:
Issue 1) Whether or not the Appellant’s required consent of the courts to proceed with Arbitration in a foreign jurisdiction.
The Judges rejected the Respondents’ argument that it was not necessary to obtain consent before embarking on arbitration in another jurisdiction; they found that there was a clear distinction between the situations presented in the cases they had cited and the present circumstances.
Firstly, in the situation described in the respondents’ cases, a creditor seeks to obtain a judgment in a foreign jurisdiction to attach assets there and execute them.[9] On the other hand, is a creditor initiating litigation or arbitration outside the court’s jurisdiction where the liquidation is taking place, but to enforce the judgment or award obtained through that litigation or arbitration against the company in liquidation in any country where the liquidation is proceeding? This is the present case.[10]
Furthermore, considering the Recognition and Enforcement of Foreign Arbitral Awards Act [Cap 06:02], which provides that any arbitral award made in a country set out in the schedule to the Act shall be binding and may be enforced under the provisions of the Arbitration Act and Laws of Botswana.[11] The court found no reason why the laws of Botswana, as considered by this provision, should exclude section 376 of the Companies Act, therefore, if a creditor should seek to enforce a foreign arbitral award against a company in liquidation, a court may well refuse to do so on the basis that its consent was required for the proceedings and had not been obtained.[12]
Combined with the broad wording of section 376, which provides that no action or proceeding shall continue against the company in liquidation without the court’s leave, the court could find no reason why this would exclude proceedings to enforce the arbitral award in Botswana; this provision should extend to foreign arbitrations as well. J.A. Brand thus stated as follows;
“to ensure that when the court has made a winding-up order, all the proceedings having any bearing on the winding-up of the company should remain under the supervision of the court. Given that purpose, I have no reason to think that there is any difference between arbitral proceedings inside or outside the jurisdiction of the winding-up court.”[13]
The Court of first instance had also found that section 376 was peremptory, that leave must be sought strictly before the commencement of proceedings, and that the court had no power to grant such leave retrospectively.
The court then applied Bank of Ireland v Colliers International UK Plc, which held that, in such instances, there is no reason to conclude that proceedings brought without the required consent are a nullity from the start. Instead, they supported the position that the purpose of requiring such permission to initiate proceedings is to ensure that, when a court has made a winding-up order, the entire task of supervising the collection and distribution of the company’s assets should be committed to the winding-up court. Consequently, any proceedings that have any bearing on the company’s winding-up should remain under the court’s supervision and control. Therefore, it is reasonable to assume that the court would have the power to grant consent if necessary retrospectively.[14]
Finally, regarding the Appellant’s contention that they cannot prove their claims at the first meeting of the creditors, they require their dispute to be dealt with through the LCIA, J. A Brand stated that for the Appellants to prove their claim against the Respondents, they must establish that
“ (a) the share sale agreement became unconditional and
(b) the quantum of their damages upon termination of the agreement.
It is plain to me that both these issues can only be determined by the LCIA. The inevitable conclusion is therefore that precluding the Applicants from proceeding with the arbitration in the LCIA would prevent them from ever proving their claim. The point is that the claims are clearly not frivolous, and to deny Appellants the opportunity to prove them will amount to a serious injustice which this court can never endorse.”[15]
Analysis:
The companies involved in this dispute were incorporated in three different countries, and because of the differences in their domestic laws, they decided in their share sale agreement to nominate a neutral forum in the event of a dispute arising from the agreement; that forum was the LCIA. The initial findings of the Court a quo was largely criticised for making the country seem like a horrible place for foreign investors, as the court had effectively decided that the applicant/appellant would find no remedy whatsoever, as it refused to grant consent. The appellant would likely have recovered only a fraction of what was due to them, or nothing at all, if they had claimed at the creditors’ first meeting.
This previous decision was not simply a local matter; it painted Botswana as a nightmare for foreign investors. Understandably, the Court of Appeal’s decision came as a relief, as denying contractual partners a neutral forum would be untenable.
Conclusion:
The Appeal was upheld
- Leave was granted to the Appellants in terms of section 376 of the Companies Act of
- Leave was granted to commence and prosecute arbitration proceedings in the LCIA against the 1st and 2nd Respondents pursuant to clause 29.3 of the share sale agreement.
Reference(S):
[1] Companies Act of Botswana [Cap 42:01]
[2] Maurituis Companies Act No. 22 of 2005 and South African Companies Act No. 71 of 2008
[3] [2019] 2 BLR 146 (CA)
[4] Companies Act [Cap 42:01] Section 376
[5] Ibid fn 4
[6] Insolvency Act [Cap 42:02] Section 43
[7] [2019] 2 BLR 146 (CA) At paragraph 10 cited Harms Offshore AHT Taurus GmbH and Another v Bloom and Others [2009] EWCA Civ 632 para 22
[8] [2019] 2 BLR 146 (CA)At paragraph 10 cited Hymore Agencies Durban v Gin Nih Weaving Factory 1959 (1) SA 180 (D) at 182 H – 183 A
[9] [2019] 2 BLR 146 (CA) At paragraph 11
[10] [2019] 2 BLR 146 (CA)Paragraph 11
[11] Recognition and Enforcement of Foreign Arbitral Awards Act [Cap 06:02] cited [2019] 2 BLR 146 (CA)
[12] [2019] 2 BLR 146 (CA)
[13] [2019] 2 BLR 146 (CA) At paragraph 13
[14] Bank of Ireland v Colliers International UK Plc [2012] EWHC 2942 (Ch)
[15] [2019] 2 BLR 146 (CA) at paragraph 26
