How does a party’s insolvency impact pending arbitration proceedings?
Belgian insolvency law (Book XX of the Code of Economic Law) provides for two different types of insolvency proceedings: formal bankruptcy and judicial reorganisation.
Judicial reorganisation does not have an impact on pending arbitration (or court) proceedings. However, during a judicial reorganisation, a temporary moratorium will be imposed during which arbitral awards (and judgments) cannot be enforced against the undertaking’s assets.
In case of bankruptcy, all proceedings, including arbitration, or enforcement measures against the debtor are automatically suspended as of the date of judgment declaring it bankrupt. The claimant in a pending arbitration is then required to file a notice of its claim with the bankruptcy trustee through a centralised online insolvency register.
The bankruptcy trustee appointed by the bankruptcy judgment has full control over the bankruptcy estate and is required to draw up a list of the bankrupt company’s liabilities by a date set in the bankruptcy judgment. In doing so, the bankruptcy trustee must decide whether to accept the claim notified by the creditor. If the claim is accepted, the proceedings are terminated in so far as they are directed against the bankruptcy trustee.
However, if the bankruptcy trustee does not accept the claim or reserves his/her decision, the arbitration may continue. The bankruptcy trustee is then deemed to act in the arbitration on behalf of the bankruptcy estate. The claims do not have to be amended when the insolvent party is replaced by an insolvency administrator.
In a case unrelated to insolvency proceedings, the Belgian Supreme Court ruled on 7 November 2019, that an arbitration clause may be disregarded if it imposes a manifestly unreasonable financial burden on a party, thereby breaching the party’s right of access to justice. To date, no published ruling has applied this reasoning in the context of insolvency proceedings.
However, one could expect bankruptcy trustees to argue that significantly high arbitration fees (which the other party is unwilling to pay) constitute an unreasonable financial burden on the bankruptcy estate, thereby allowing them to disregard the arbitration clause in favour of state courts. In Belgium, court fees are indeed marginal compared to arbitration costs.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
A judicial reorganisation does not affect a party’s ability to initiate arbitration against a party subject to reorganisation proceedings.
Where the potential defendant has been declared bankrupt, in principle, legal proceedings cannot be brought directly against it. Rather, all creditors are required to file a notice of claim with the bankruptcy trustee. Setting-off between a claim arising out of the insolvency procedure and a claim unrelated to the insolvency (i.e. arising out of agreements concluded before the insolvency) are possible where both claims are closely related.
If the bankruptcy trustee rejects the creditor’s claim in his/her final report, the concerned creditor may bring the matter before the Enterprise Court (ondernemingsrechtbank or Tribunal de l'entreprise). The Enterprise Court will either rule on the dispute or decline jurisdiction in favour of another court or an arbitral tribunal in the presence of an arbitration agreement.
Bankruptcy trustees are generally bound by arbitration agreements that have validly been entered into before the bankruptcy. Arbitration may therefore be initiated against a bankrupt debtor only to the extent that the bankruptcy trustee contests the underlying claim, and only after the matter has been brought before the Enterprise Court.
The only exception is when claims which would not have arisen but for the bankruptcy, and which are directly related to it, fall within the exclusive jurisdiction of the Enterprise Court (such as, for instance, the claims of the bankruptcy trustee challenging the debtor’s transactions because they are deemed fraudulent or occurred after the taking over of the administration of the bankruptcy estate by the bankruptcy trustee). Given that the Enterprise Court’s jurisdiction is considered to be a matter of public policy, arbitration agreements relating to claims falling under this category will not be enforceable.
Can an insolvent entity commence arbitration?
An insolvent party may initiate arbitration proceedings through the bankruptcy trustee acting on its behalf. The bankruptcy trustee has the obligation to liquidate the bankruptcy estate’s assets in order to be able to pay the creditors. If the bankruptcy estate has claims against a third party that are subject to an arbitration agreement, the bankruptcy trustee may commence arbitration proceedings.
In Belgium, it is generally accepted that where an arbitration agreement applies to claims of the bankruptcy estate, the bankruptcy trustee is bound by that clause. Hence, these claims may only be resolved by arbitration.
The arbitration agreement may nevertheless be challenged if (i) it was entered into with a view to prejudicing the other creditors and/or (ii) it was entered into during the so-called “suspect period”, i.e. a period of time prior to the bankruptcy, determined by the Enterprise Court, during which the actions taken by the debtor may be declared null and void.
In practice, it remains uncommon for bankruptcy trustees to initiate arbitration proceedings, barring exceptionally large bankruptcy estates. Trustees usually have limited funds at their disposal to liquidate and manage the bankruptcy estate and will therefore shy away from costly (arbitration) proceedings.
It remains to be seen whether the Belgian Supreme Court’s 2019 decision will lead bankruptcy trustees to attempt to avoid enforcing an arbitration agreement on the basis that the arbitration fees would impose a manifestly unreasonable financial burden on the bankruptcy estate.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
In case of bankruptcy, all proceedings or enforcement measures against the debtor are automatically suspended as of the date of the judgment declaring it bankrupt. The bankruptcy trustee is required to establish a list of the bankrupt company’s liabilities by a date set in the bankruptcy judgment. If she/he accepts the claim, the arbitration proceedings are terminated in so far as they are directed against the bankruptcy trustee. However, if the bankruptcy trustee does not accept the claim or reserves his/her decision, the arbitration may proceed.
If the advance on costs of the pending arbitration has not been paid, it remains to be seen whether the 2019 Supreme Court decision will allow the bankruptcy trustee or the creditor to continue the proceedings before the Enterprise Court.
How does a party’s insolvency impact pending arbitration proceedings?
During a judicial reorganisation, a temporary moratorium will be imposed during which arbitral awards (and judgments) are not enforced against the undertaking’s assets.
Similarly, in case of bankruptcy, enforcement measures against the debtor are automatically suspended as of the judgment declaring it bankrupt. The award creditor is then required to file a notice of its claim with the bankruptcy trustee. If the trustee and/or the non-bankrupt party challenge the arbitral award, they would have to lodge setting aside proceedings with the Court of First Instance.
Once all creditor claims are listed, the debtor’s assets will be apportioned among them. As such, the fact that the creditor’s claim is established by an arbitral award, regardless of whether it is domestic or international, does not impact the rank of such claim.
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
The Belgian government first adopted measures on 24 April 2020, to prevent undertakings from being forced into insolvency as a result of the first mandatory closure of consumer-facing businesses. This initial set of measures expired on 17 June 2020.
Parliament passed new measures to protect consumer-facing businesses on 20 December 2020, following their second mandatory closure. Those measures applied only to undertakings (i) that were required to close by the Ministerial Decree of 1 November 2020, (ii) whose continued existence was threatened by the Covid-19 pandemic and its consequences, and (iii) that had not ceased paying their creditors on or before 18 March 2020.
The key features of those measures were the following:
- no enforcement measures could be taken against those enterprises, with limited exceptions;
- the enterprise could not be summoned in proceedings to have it declared bankrupt, except (i) by summons issued by the Public Prosecutor, (ii) by declaration of the provisional administrator who may be appointed by the Enterprise Court before the bankruptcy proceedings, or (iii) with the agreement of the debtor;
- enterprises were not required to file for bankruptcy, but are still allowed to do so;
- the payment terms laid down in a judicial reorganisation plan pertaining to the enterprise were suspended until 31 January 2021; and
- agreements entered into before the entry into force of the act (i.e. 24 December 2020) could not be terminated for payment defaults, except for employment agreements.
However, any interested party could request the President of the Enterprise Court to lift the protective measures for a specific undertaking, provided there are special circumstances which would justify it. To incentivise the extension of financing to undertakings in financial difficulty, the act contained a specific safeguard for the rights of lenders providing new financing during the moratorium to collect their outstanding claims in case of a subsequent bankruptcy.
That second set of measures applied until 31 January 2021, at which point the government decided not to extend them. Rather, a draft bill has been introduced in Parliament which aims to facilitate access to judicial reorganisations by (i) reducing barriers to bring proceedings for a reorganisation, (ii) allowing silent pre-packs, and (iii) providing a tax exemption for write-offs and provisions for certain creditors. That bill is currently still being discussed, with no clear timeline as to its adoption.
In the meantime, the Belgian tax and social security administrations have implemented a “de facto moratorium” by refraining from summoning in courts companies in default of payment.