TANZANIA: ARBITRATION CANNOT BE BYPASSED THROUGH LIQUIDATION (WINDING UP)
A recent decision of the Commercial Court in Tanzania is a welcome one, clarifying the limits and setting clear demarcations in a murky area of the law on the authority of the High Court when winding up proceedings are initiated as a means to by-pass an arbitration clause.
The decision was in the case of Queensway Tanzania (EPZ) Ltd (Petitioner) v Tanzania Tooku Garments Co. Ltd (Respondent), Miscellaneous Commercial Cause No. 43 of 2020, the High Court of Tanzania Commercial Division.
The Respondent had entered into a sub-lease agreement with the Petitioner whereby it was agreed that any dispute between the parties would be referred to arbitration.
Following a dispute between the parties, the Petitioner sought to wind up the Respondent by way of a petition, invoking the provisions of Sections 275; 279(1)(d); 281(1) and 294 of the Companies Act, 200.
The Respondent, however, filed a Notice of Preliminary Objection to the petition, contending that ( i) the matter was prematurely referred to the Court and( ii) the Court lacked jurisdiction to entertain the matter.
In response to the Preliminary Objection (PO), the Petitioner argued that the POs were misconceived and improperly raised, in that If the Respondent intended to rely on the Arbitration Clause, the appropriate action was to lodge an application for Stay of Proceedings pending reference to Arbitration.
The Petitioner, relying on the case of Rufiji Basin Development Authority, further argued that the nature of the proceedings did not rest on the arbitration agreement in place. Once winding up proceedings are commenced against a company registered in Tanzania, it is the High Court alone which has the jurisdiction to wind up the company and not the arbitrator.
In essence, the point in issue was framed as: Is a Court precluded from proceeding with determination of a Winding-Up Petition when it is alleged that its underlying dispute is governed by an arbitration agreement?
However, before proceeding with addressing the issue, Nangela J., relying on the renowned case of Mukisa Biscuits, ruled that the PO raised was appropriate and that the petition did not warrant an application for Stay of Proceedings pending reference to Arbitration.
Moving on to the crux of the legal matter, the Judge started by conceding that there has never been a ‘one size fits all’ response, with different Commonwealth jurisdictions arriving at different conclusions.
Whilst in agreement with the decision in the case of Rufiji basin Development Authority which was relied upon by the Petitioner, Nangela J. departed from it stating that it is correct in some, but not all, cases.
The present case arose from a breach of a sub-lease agreement. The breach constituted an arbitrable dispute for the purpose of the contract but the Petitioner opted for insolvency proceedings before dealing with the breach in accordance with the agreement.
Citing the British case of Salford Estates, Nangela J. was in agreement with the statement that ‘Courts should not encourage parties to use "the draconian threat of liquidation" as a method for bypassing an arbitration agreement’. To allow that to happen, it was said, ‘would be entirely contrary to the parties' agreement as to the proper forum for the resolution of such an issue…’.
Furthermore, citing the British case of Parmalat Capital Finance, the Judge emphasised that ‘A party to a dispute should not be allowed to use the threat of a winding up petition as a means of forcing the company to pay a bona fide disputed debt’.
After contrasting the position with other decisions in other jurisdictions, Nangela J. highlighted the simple fact that if an award was to be properly issued through arbitration, any failure to satisfy the award ‘would entitle the successful party to seek recourse to the Court for redress, which may as well include filing for winding up proceedings. In so doing, the arbitration policy of upholding parties' autonomy would be upheld while, at the same time, maintaining the right of a creditor to file for winding up proceedings.’
In light of the above and in line with the Court’s approach of encouraging arbitration, the parties were directed to arbitrate their dispute, the PO raised were upheld and the Petition was struck out as the underlying dispute between the parties from which the petition arose was an ‘arbitrable dispute’.
The decision of the Commercial Court is a welcome one, clarifying the limits and setting clear demarcations in a murky area of the law on the authority of the High Court when winding up proceedings are initiated as a means to by-pass the arbitration clause.