Earlier this year, a sub-group of the IBA’s Committee on Arbitration, published its Toolkit on Insolvency and Arbitration (the ‘Toolkit’).¹ Although the project was commenced prior to the coronavirus outbreak, its release is particularly timely and of great significance given the severe economic disruptions caused by the current pandemic and the substantial increase in corporate insolvencies expected across most sectors.

Conceived to address the intersection of insolvency and arbitration, the Toolkit considers the tension arising from competing public policy interests of international arbitration and national insolvency legislation. More specifically, it purports to offer parties, arbitrators and counsel guidance in navigating questions, inter alia, on 1) whether the tribunal has the necessary jurisdiction that would enable it to continue the arbitration; 2) whether the debtor in question continues to hold legal capacity to engage in arbitration and 3) whether the issued award will be enforceable.

The following seeks to address the tension between competing public policy interests of insolvency and international arbitration as well as the detrimental impact that diverging national approaches have when dealing with these conflicting intersections. To this end, the article draws upon the background and structure of the Toolkit as well as the goals that informed the project.

Arbitration versus Insolvency

The diverging nature and aims of international arbitration and insolvency law are not easily reconcilable and their relationship can give rise to significant conflicts of policy interests. The inherent tension has often been described as one between near polar extremes whereby ‘bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralised approach.’²

In general terms, commercial arbitration constitutes a ‘consent-based mechanism for the resolution of claims in a private forum outside of court, resulting frequently in an internationally enforceable award.’³ The very essence of the process flows from party autonomy, confidentiality and the aim of upholding and giving recognition to the parties’ mutual agreement to arbitration.

An insolvency proceeding, by contrast, describes a ‘collective, court-based process to resolve the interests of a plurality of parties, and generally prohibit[s] the conduct of individual enforcement actions against the insolvent party in order to protect the collective interest.’⁴ Unlike arbitration, it aims to ‘maximise the value of the insolvent party’s assets and appropriately distribute those between third party creditors, by way of a structured, centralised and transparent process.’⁵

Mindful of these distinctive policy objectives, national legal systems to taken diverging approaches in regulating the effects that insolvency proceedings can have on contemplated or pending arbitration proceedings. Since the impact of conducting such parallel proceedings, will largely depend on the law of the seat and the contract as well as the laws applicable to the insolvency, co-existing responses at domestic level and the lack of harmonization among them present a number of conflict of law issues, not least in relation to:

• The enforcement of anti-arbitration injunction;
• The legal capacity to arbitration;
• The authority of States to regulate domestic versus non-domestic arbitrations.

Goals of the IBA Toolkit

In the present climate of global economic uncertainty and disruption, the rise in corporate insolvencies is likely to be rivalling the numbers as seen during the Financial Crisis 2009. Accordingly, as many parties will find themselves in dispute with or contemplating claims against insolvent or soon to be insolvent entities, many companies are sensibly opting to settle dispute via alternative dispute resolution mechanisms.

International arbitration has been increasingly embraced as the principle instrument for resolving complex, commercial cross-border disputes. Yet, the absence of a comprehensive, cohesive and well-defined framework as to the arbitrability of insolvency proceedings in international arbitration, creates uncertainty and a lack of predictability. With cases being dealt with on a case-by-case basis, rendering inconsistent and even contradictory outcomes, the need for possible solutions in this area has become ever more pressing. The Toolkit therefore offers a valuable reference point for identifying legal issues arising from parallel insolvency proceedings pursued against parties to domestic or international arbitrations. In light of the socio-economic repercussions of the global COVID-19 pandemic, the range of possible responses it offers, could contribute to mitigating future risks ensuing from a counterparty’s insolvency.

Structure

1. National Reports

Since the national jurisdiction in which the insolvency is carried out, is also likely to be the place at which enforcement is sought, national reports form an essential cornerstone of the Toolkit.

Authored by leading experts of 19 countries, they are based on a 35-question survey to offer more clarity as to how the jurisdiction-specific laws approach issues concerning the intersection of insolvency and arbitration in a variety of circumstances.

Section I centres on the impact of national insolvency on domestic or foreign arbitration. It is comprised of three parts.

Part I focuses on the impact that insolvency proceedings may have on the ability to commence or continue an arbitration. Questions concerned include issues pertaining to automatic stays; areas of law precluded from arbitration; distinctions drawn between arbitration proceedings affected by insolvencies that are aimed at company liquidation versus financial rehabilitation as well as differentiations being made between arbitration proceedings pending at the time of the opening and those initiated following the onset of insolvency proceedings.

Part II addresses procedural and administrative aspects that may arise as arbitration and insolvency proceedings are pursued simultaneously. Attention is drawn to the impact that the opening of insolvency proceedings may have on the validity of interim measures; the capacity of insolvent parties to settle disputes as well as the ability of debtors to arbitrate in their own name.

Part III examines the enforceability of awards. It seeks to answer questions regarding the status of pursued claims if the final award has not been rendered or has become enforceable; whether the credit contained in an arbitration award amounts to a valid title for the purposes of the insolvency proceedings as well as what additional requirements may apply in order for foreign awards to be accepted.

The second scenario in which arbitration and insolvency may intersect is addressed in Section II and concerns insolvency proceedings opened in a jurisdiction other than that surveyed and the concomitant effects on arbitrations seated within the latter. Issues discussed, inter alia, revolve around the need for formal recognition of foreign insolvency proceedings, the applicability of the UNCITRAL Model Law on Cross-Border Insolvency (1997)⁶ and the recognition of foreign insolvencies under the EU Insolvency Regulation (2015).⁷

2. Explanatory Report

The Explanatory and National Reports follows the same overall structure and are to be used in conjunction. Unlike the latter, however, the Explanatory Report seeks to provide context behind each survey question and summarize prevailing and secondary approaches seen in the National Reports.

3. Checklist

The Checklist forms the final part of the Toolkit. It is not intended to be exhaustive of all possible nuances that may arise under the specific laws applicable to the arbitration, nor is it designed to address every question that may be posited to the arbitrators for resolution. Rather it constitutes a practical framework that allows arbitrators, parties and counsel to recognise and address the potential impact of insolvency on the proceedings as early as possible to avoid potentially irreversible consequences.

In the face of global recession as well as the expected rise in cross-border insolvencies and disputes, the disparity between competing public policy interests between international arbitration on the one hand and national insolvency legislation on the other is likely to become ever more critical. In recent years, important strides have been made towards developing regulations aimed at ensuring a more consistent approach. The EU Regulation on Insolvency as well as the UNCITRAL Model Law on Cross Border Insolvency and Legislative Guide on Insolvency Law are examples that are reflective of the desirability towards more transnational regulation. The development of such a legislative guide no doubt involves a number of challenges. Nevertheless, the commensurate benefits may include greater certainty and predictability for the international business community, reduced transaction costs, enhanced transparency and greater confidence in the international legal system.

The new Toolkit may not offer a universal set of principles that is capable of addressing the wide array of scenarios in which arbitration and insolvency may overlap, nor does it claim to do so. It does, however, propose solutions that could path the way for the development of a consistent approach in determining the arbitrability of insolvency disputes.

Footnotes

1 Available via: https://www.ibanet.org/LPD/Dispute_Resolution_Section/Arbitration/toolkit-arbitration-insolvency.aspx.

2 Rogers, J.; Stathard, P. [2020] ‘Insolvency and International Arbitration’ in International Arbitration Report. Issue 14, p10. Available via: https://www.nortonrosefulbright.com/-/media/files/nrf/nrfweb/knowledge-pdfs/international-arbitration-report—issue-14.pdf?la=en&revision=6edf090e-2dae-4845-a812-c912f12016d0.

3 IBA Insolvency and Arbitration Toolkit, supra 1, p1.

4 IBA Insolvency and Arbitration Toolkit, supra 1, p1.

5 Rogers, J.; Stathard, P., supra 2, p10.

6 Available via: https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency.

7 Available via: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R0848.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.