Introducing the IBA Arbitration Committee's Toolkit on Insolvency and Arbitration - webinar report

Thursday 3 June 2021

Benedetta Mazzotti
De Berti Jacchia, Milan
​​​​​​​b.mazzotti@dejalex.com

​​​​​​​Moderator

  • Jennifer Permesly, Skadden Arps Slate Meagher & Flom, New York

Speakers

  • Alipak Banerjee, Nishith Desai Associates, New Delhi
  • Tosin Iyayi, Aluko & Oyebode, Lagos
  • Felipe Ossa, Claro y Cia, Santiago
  • Dr Manuel Penades, King´s College, London

This webinar, on Thursday 8 April 2021, presented the IBA Arbitration Committee's Toolkit on Insolvency and Arbitration, published in March 2021. It addressed the following topics:

  • general presentation of the IBA Toolkit on Insolvency and Arbitration;
  • conflict of laws issues arising out of the intersections between the insolvency and arbitration;
  • mechanisms set forth under national jurisdictions to regulate the compresence of insolvency and arbitration proceedings (with particular respect to South American countries);
  • procedural adaptations that need to be made in case of arbitration and insolvency proceedings pending;
  • enforcement issues; and
  • questions and answers.

General presentation of the IBA Toolkit on Insolvency and Arbitration

Jennifer Permesly started the session by introducing the project. It was conceived within the IBA Arbitration Committee with the purpose of elaborating an instrument providing guidance to parties, counsels and arbitrators in situations where intersections between insolvency and arbitration proceedings occur.

This may present a conundrum for different reasons: interests underlying either procedure may often clash as arbitration is a private, out-of-court and tailored dispute resolution process, whereas insolvency proceedings are court-based procedures, aimed at channelling all disputes pending against the debtor in one single forum and protecting collective interests by basing the proceeding on a principle of equality of creditors and pro rata basis distribution of assets. Also, choice of law questions arise when the arbitration and the insolvency proceedings take place in different jurisdictions. Finally, there is no universal or uniform approach to the issue as national laws vary greatly as well as conclusions and solutions applied in practice may be drastically divergent.

The starting point of the IBA Toolkit on Insolvency and Arbitration is national law. The first part of the Toolkit includes 19 reports relating to different jurisdictions providing a survey on how each one deals with the intersections between arbitration and insolvency, based on several questions set out by the Committee. The second part of the Toolkit consists in an Explanatory Report which reproduces such questions and outlines the relevant takeaways. Finally, the third part of the Toolkit provides a checklist, essentially based on a floating chart mechanism, to serve as a tool for arbitrators, counsels and parties to identify the issues to be taken into consideration and possible method of resolution.

Conflict of laws issues arising out of the intersections between the insolvency and arbitration

Manuel Penades stated that when dealing with intersections between insolvency and arbitration, it is necessary to first draw a distinction as to whether the insolvency proceeding and the arbitration proceeding are based in the same territory or not. This is clearly reflected in the structure of the Toolkit, which is divided into two different sections: the first one addresses the impact of local insolvency proceedings on arbitration, while the second section addresses the impact of foreign insolvency proceedings on arbitration.

Penades proceeded to clarify that, in the first case, national insolvency rules – including those on the effects of insolvency over pending and/or new arbitration procedures – will be part of the lex arbitri so that conflict of laws issues will be quite limited. Indeed, arbitral tribunals will generally apply such rules as deemed mandatory. This is clearly illustrated by Question 14 of the Explanatory Report.

Conversely, when different fora are involved, arbitrators, counsels and parties find themselves in the dilemma of identifying which law governs the effects of the insolvency on arbitration.

The issue may be addressed from a double perspective. One perspective reflects the insolvency law standpoint (ie, am I going to allow that the insolvent debtor enters into/participate in the arbitration?) whereas the second perspective looks at the issue from the point of view of the lex arbitri (ie, am I going to allow that the parties are deprived of their choice because of the opening of an insolvency proceeding placed abroad?).

Based on Penades’s experience, the approach will very much depend on the specific issue(s) of each case. However, there is a general view that arbitrators should apply concepts pertaining to the law of arbitration and, in many cases, this will lead to the conclusion that arbitration should be allowed to continue subject to certain procedural adaptation.

Notwithstanding this arbitration-centred approach, many further considerations – that the Toolkit acknowledges and summarises – should in any case be taken into account. The first is, again, the territorial element (see Questions 3g and 15 of the Toolkit). As a matter of fact, even when arbitration and insolvency proceedings take place in different jurisdictions, conflict of laws may not arise as state law might not want to apply extraterritorially. Penades referred as examples the cases of English law (which in case of English-based insolvency proceedings would require a stay only of arbitrations seated within the territory, while arbitrations seated abroad would in principle be able to continue) and Swiss law (under which arbitrations would be rarely affected by foreign insolvency proceedings as opposed to local insolvency proceedings).

In any case, very often the law of the seat will contain rules on the impact of foreign insolvency on arbitration. Those insolvency rules have been found by national rapporteurs to be crucial rules of mandatory application for arbitrators seating in those jurisdictions (see Questions 32 and 33 of the Toolkit).

Penades also emphasised that such impact will also depend upon whether the foreign insolvency has been recognised within the jurisdiction of the seat or not. Depending on national law, this may sometimes require a formal recourse to, or declaration by, national courts (this is the case, for instance, in Brazil, Chile and Singapore) whereas in other jurisdictions the recognition is automatic (eg, in the framework of the European insolvency regulation).

The consequences following the recognition of the insolvency proceeding will vary depending upon national laws. Generally speaking, in case of legal systems based on the UNCITRAL Model Law, an automatic stay on arbitration is imposed in accordance with Article 20 of the same. Certain exceptions and conditions entailing a lift of such stay may also be provided for. In this respect, Permesly noted however that many states have in any case opted out from the application of article 20 so the sole fact that a jurisdiction applies the UNCITRAL Model Law does not automatically imply that a stay will be actually implemented.

Finally, according to Penades, the impact of insolvency on arbitration may also vary depending upon the status of the arbitration procedure(s). In particular, according to the European insolvency regulation, the law of the arbitration seat will govern the effects of insolvency over the proceeding if the arbitration was already pending at the time of institution of the insolvency procedure; on the contrary, any intersections arising out in the context of the new arbitrations will be subject to the law of the insolvency forum.

Penades also mentioned the Vivendi v Elektrim case as a typical evidence of the existence of different conflict of laws approaches. The case involved two arbitration proceedings. Upon declaration of insolvency of one of the respondents, Elektrim, in the London-seated branch of the arbitration, the European insolvency regulations applicable pro tempore led to the application of English law as law of the seat. Based on English insolvency law, the arbitration proceeding was allowed to continue. On the contrary, in the second branch of the arbitration, an ICC arbitration based in Geneva, the arbitral tribunal looked at the issue not in light of insolvency law, but from the point of view of the classical arbitration categories – ie whether Elektrim had the capacity to arbitrate – and applied Polish law as the law governing the personal status of that party. As Polish law deprived insolvent parties to take part into arbitration proceedings, they concluded that the arbitration should have stayed.

Mechanisms set forth under national jurisdictions to regulate the compresence of insolvency and arbitration proceedings

As highlighted by Felipe Ossa, the first part of the national reports section intends to establish if and how the opening of local insolvency proceeding affects the possibility to commence or to continue with an arbitral proceeding, in parallel.

Felipe set out four possible scenarios, based on the approaches adopted within the several jurisdictions surveyed:

  • some jurisdictions purport to prohibit any proceedings, including arbitration, which involve the debtor;
  • some prohibit arbitration only in certain circumstances or authorise arbitration subject to limitations;
  • others provide that insolvency should not impact arbitration at all; and
  • some jurisdictions do not have a well-defined regime and require a case-by-case analysis.

In South American countries, notwithstanding the fact that they generally share the same legal system as to civil and commercial law, the solutions applied vary widely and are based on several criteria. According to Ossa , the impact of insolvency on arbitration may depend on:

  1. the procedural position of the insolvent party (namely, the arbitration will be required to stay in case the debtor is the respondent as a ruling against it could have affect its capacity to repay the creditors);
  2. the nature of the relief sought in the arbitration, whether it is a compensatory relief or a mere declaratory relief (eg Colombia and Peru); or
  3. the status of the arbitration (in fact, certain countries allow to continue existing arbitration while they limit and/or prohibit the possibility to commence future proceedings, eg Chile). Interestingly, in Colombia, what matters is when the debtor entered into the arbitral agreement (whether before or after the institution of the insolvency) rather than when the arbitration started.

On the above point under (2), Permesly pointed out how it was essential for counsels to know such criteria (see the distinction based upon the nature of the relief) to structure their strategy in arbitration.

Ossa also spoke about whether the insolvency administrator may or may not enter into new arbitration agreements. He noted that, in this respect, the national reports show a very similar approach in almost all countries. The administrator generally has such power as included in its wide faculties to manage the insolvency estate. However, in some jurisdictions, such as Chile, new arbitration agreements might need to be approved by the insolvency court or the committee of creditors.

Permesly then asked whether there was a way to get around the national mechanisms governing the effects of insolvency over arbitration – for instance, whether it was possible to file recourse to the court asking for the arbitration to continue notwithstanding a stay, as indeed happens in the United States. Ossa clarified that the answer varies widely among each jurisdiction and, in particular, it depends on whether the rules that govern the impact of insolvency on arbitration are designed as mandatory and even as part of public policy (which is the case in most Latin American countries). On the other hand, in certain jurisdictions, there is room for discretion upon the insolvency court to lift a stay of arbitration, upon application of the debtor and/or the counterparty in the arbitration and/or the insolvency administrator.

Ossa finally noted that the mandatory nature of such rules has important consequences for arbitrators, insofar that compliance with such rules is required in deciding onto their own jurisdiction as well as on the conduct or the stay of the arbitration. Ultimately, compliance with such rules shall affect the validity and enforceability of the award, also within the insolvency proceeding.

Procedural adaptations that need to be made in case of arbitration and insolvency proceedings pending

Permesly then turned to Tosin Iyayi, who has acted as national rapporteur for Nigeria. She was asked to comment on the steps that can be taken by an insolvent party or by the other party in an arbitration, pending the insolvency proceeding (addressed under Part 2 of the national reports and the Explanatory Report of the Toolkit).

Iyayi noted that, typically, under Nigerian law, an authorisation from the insolvency court is required in order to continue an arbitration proceeding. This is because any award possibly issued will need to comply with the other creditors’ rights and other pending claims against the debtor. Also, as the appointed insolvency administrator replaces the insolvent entity, any actions that need to be brought by or against that entity shall in any case be subject to the permission of the insolvency administrator and, in certain cases, the latter might be required to seek the consent of a creditors’ committee.

According to Iyayi, similar mechanisms also applied in other African jurisdictions, including Egypt, as the insolvent party loses the capacity to continue to arbitrate autonomously and any actions is passed onto the insolvency administrator.

Permesly then asked about the admissibility of remedies like interim measures or settlements, pending an insolvency proceeding. Iyayi confirmed that arbitrators can still issue interim orders although these will still be subject to overriding principles governing credits’ ranking within the insolvency procedure and, therefore, they cannot supersede, per se, other creditors’ claims.

Permesly then proceeded by noting that Nigeria, among the countries surveyed in the context of the Toolkit project, has fewer developed laws on the intersections between insolvency and arbitration, and asked what was the best approach to deal with this situation. Iyayi mentioned that the issue may be addressed by referring to the rules set forth under the insolvency law in relation to litigation. Permesly also observed that hopefully the Toolkit might provide guidance in cases where national legislation is not well defined on the subject by giving an overview of the legal framework across the countries and the possible trends emerging from there.

Enforcement issues

Alipak Banerjee then dealt with enforcement issues that may arise in the context of arbitration and insolvency and in particular with the measures that might need to be taken to ensure the enforceability of the award (covered under Question 9 of the Toolkit).

He started by explaining that – assuming that insolvency law allows the arbitration to commence or continue, under certain jurisdictions – it will also be necessary to participate at the same time in the insolvency process. Failing such participation, the enforceability of the award might be prejudiced. Indeed, most jurisdictions provide for such a pre-condition to be met within the insolvency proceeding in order to continue or commence an arbitration (eg, Brazil, Colombia, Egypt, England, France and Germany).

Banerjee then focused on the competence to deal with the claim, once this is in fact submitted within the insolvency proceeding. For example, in the event the claim is rejected or challenged by the administrator, should such challenge be appealed before the insolvency court or the arbitral tribunal? The position on this point varies across the different jurisdictions: while certain jurisdictions, such as Colombia, France, Germany and the Netherlands, give prevalence to the agreement to arbitrate entered into by the parties, others require all disputes relating to claims submitted to insolvency proceedings to be resolved through court-mechanisms as provided under national law.

Banerjee also spoke about whether the filing of a claim within the insolvency proceeding may amount to a choice of jurisdiction in favour of the insolvency court. He noted that, in this respect, there is a general consensus across different jurisdictions to exclude this and mentioned Germany, Poland, Switzerland as relevant examples.

Banerjee went on to describe how the enforcement process works in the context of insolvency. Generally speaking, it is prohibited under national law to enforce an arbitral award in the event an insolvency proceeding is pending (this is the case in England, France, Germany, Hong Kong and India). Certain jurisdictions such as Brazil, India, Spain and Switzerland also provide for a suspension and prohibition of pending enforcement actions. Few exceptions are sometime set forth in the event of secured creditors (see for example Egypt, the Netherlands and Chile). The issue is addressed under Questions 23 and 24 of the Toolkit.

Further, it was analysed whether a credit recognised under an arbitration award may be deemed a valid title for the purpose of insolvency proceedings. Banerjee specified that, in the vast majority of jurisdictions, an arbitral award is a valid proof of credit within insolvency proceedings (eg, France, Germany and Switzerland). However, in some other countries it is subject to verification by the insolvency administrator and may be challenged by the same and/or by other creditors. Certain requirements might be provided for also (eg, in India it is commonly required for the credit to be undisputed in order to represent a basis to institute an insolvency proceeding, although exceptions in case law are recorded).

In the event of a foreign award, this must generally comply with the applicable requirements set out under national law in relation to recognition (eg, India, Chile, Netherlands and Singapore).

Afterwards, Banerjee turned to consider whether insolvency rules are a matter of public policy which is the case of most jurisdictions, as well as whether the principle of equality of creditors forms part of public policy and, if such, if this relates only to substantive equality or extends to procedural equality.

He clarified that this distinction may indeed affect the decision of the arbitral tribunal over its own jurisdiction. In any case, most jurisdictions do not consider such principle as part of public policy under both perspectives.

Permesly then illustrated briefly all the questions addressed under Category 5 of the Toolkit Checklist, which relate to enforcement. She also noted that one area where the national reports were in fact consistent was the necessity to take certain steps in the insolvency proceeding to allow the insolvency court to know the existence of the claim and of the parallel proceeding.

She also mentioned an interesting case. A 1975 decision of the New York Second Circuit Court, that overturned the decision of the local insolvency court, enforced an arbitral award rendered in a Tokyo-based arbitration, stating that the arbitration legitimately took place as it could not be affected by the stay mechanism applicable under US law, excluding that US courts had personal jurisdiction over the creditor based in Japan. This illustrates how essential is to know the legal framework in order to take all the steps necessary to ensure that the award will be enforceable.

Penades also intervened and highlighted that it was important for arbitrators to take into account, in the context of the applicable legal framework, any restriction to their powers based on the nature of the relief. Indeed, there may be cases where creditors have filed their claims within the insolvency proceeding, but they still want to enforce it against a counterclaim or a set-off within arbitration, which would end in a compensatory order rather than a mere declaratory order.

Permesly then asked Banerjee to comment on how it would be addressed the absence, in India, of a very well-defined cross border legal framework in relation to insolvency proceedings. Banerjee noted that, although the Indian insolvency code does provide for a regulation of foreign jurisdictions, these provisions are not reciprocal with any other country. Cross-border insolvency procedures are then dealt with on a case-by-case basis.

Questions and answers

After the floor was opened, a number of participants proposed questions.

One question was about investment arbitration, and about the possible impact of the fact that the claimant may find itself insolvent because of the actions of the respondent state depriving investor itself from certain rights. In this respect, Penades observed that in these circumstances – when the claimant may have become insolvent due to a bad faith or fraudulent conduct of the state – the arbitral tribunal needs to consider how genuine is the insolvency status of the party is. Requirements of authenticity should also be evaluated in the context of recognition of a foreign insolvency proceeding in the seat of arbitration.

A second question referred to the possibility of certain type of securities able to shield the insolvency process. Penades commented that this would depend on the features of the national insolvency law applicable but, in his experience, security for costs does not make the arbitration procedure survive. There is actually case law from the Court of Justice of the European Union in favour of lifting interim measures aimed at securing enforcement because they frustrate the purpose of insolvency.

A further question related to multiparty arbitration; Penades stated that there is no universal approach as to whether the arbitration may survive in the event one party only becomes insolvent.

Another question was about the recognition procedure of a foreign award in the context of an insolvency procedure. Permesly mentioned that would depend on the arbitral law of the relevant jurisdiction as in certain cases it may be required the award to be recognised first, in compliance with the New York Convention, before being enforced, while in other countries, it may be recognised and enforced directly by the insolvency court, depending on the type and powers of the ccourt.

The last question related to the power of the insolvency administrator to appoint an arbitrator. The speakers generally confirmed that this was the case as the administrator steps into the shoes of the insolvent party. Penades also pointed out that, in this case, any consideration as conflict of interests should have also been made in relation to the administrator.