How does a party’s insolvency impact pending arbitration proceedings?
Article 18 of the Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast) provides that the effects of insolvency proceedings on a pending lawsuit or pending arbitral proceedings concerning an asset or a right which forms part of a debtor’s insolvency estate shall be governed solely by the law of the Member State in which that lawsuit is pending or the arbitral tribunal has its seat.
Luxembourg law does not provide for any specific provisions on the impact of insolvency proceedings on pending or future arbitrations. Pursuant to Belgian law upon which Luxembourg insolvency law is based, the insolvency administrator (curateur) must decide whether to continue any pending arbitration. As soon as the debtor is declared insolvent, a moratorium in respect of arbitral proceedings (and proceedings before state courts) would be implemented.
If the insolvency administrator decides to continue the arbitration, the arbitral tribunal would be notified thereof and the insolvency administrator would officially resume the proceedings on behalf of the insolvent party, and proceedings resume where they were left off.
If the insolvency administrator accepts a claim brought against the insolvent party, the arbitration would come to an end.
The insolvency administrator’s decision to withdraw from an arbitration does not preclude him/her from challenging the claim in accordance with the national procedural rules set out under Luxembourg insolvency laws. In such a case, however, the domestic court having to decide on the merits of the claim may stay the court proceedings pending the outcome of the arbitration. The arbitral tribunal would be competent to determine the merits of the claim but could not order the debtor to pay. Indeed, during the insolvency proceedings, unsecured and privileged creditors cannot seek an order against the insolvent party or its administrator. They may only file a claim notification or bring an action for their claims to be recognised (Supreme Court, 13 November 1997, P.30, p.265).
Certain acts performed by the insolvent entity in the period between the cessation of payments and the insolvency declaration (the so-called “suspect period” or période suspecte) could be detrimental to the rights of the creditors. Such acts (e.g. payments that have been made in relation to debts that are not yet due or assets that have sold under their value) are deemed null and void.
Other acts are not automatically deemed null and void but may still be declared so if the counterparty who received payments or who dealt with the insolvent party was aware that the insolvent party had ceased payments.
The judgment declaring insolvency can set the period of cessation of payments by the insolvent party to a date prior to the insolvency declaration. However, this date cannot precede the date of the judgment by more than 6 months.
Equally, all acts or payments that have been made fraudulently to creditors, i.e. carried out by the debtor in full knowledge of their prejudicial impact on other creditors (e.g. by decreasing the estate, by ignoring the preferential ranking of claims, etc.) are deemed null and void, regardless of their date.
Any dispute in relation to the insolvent debtor’s transactions would be contested before state courts. In practice, an administrator’s decision to pursue an arbitration will largely depend on the availability of any assets to fund the arbitration.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
Pursuant to Article 452 of the Luxembourg Commercial Code providing for the core principle of stay of enforcement, creditors are precluded from bringing a claim against the insolvent party or its administrator during the insolvency proceedings.
The rule is a matter of domestic and international public policy and applies to arbitration proceedings seated in Luxembourg. The stay, however, does not put an end to the arbitration.
In 2020, a draft bill aimed at modernising Luxembourg arbitration law was submitted by the government. The new text provides that the opening of an insolvency procedure does not prevent the enforcement of arbitration agreements that have been previously concluded by the insolvent party. Arbitration agreements may also be entered into by an insolvent party during the insolvency procedure. The draft bill further provides that disputes arising out of the insolvency procedure are not arbitrable.
Can an insolvent entity commence arbitration?
Under Luxembourg law, an insolvency administrator may bring legal proceedings either on behalf on an insolvent party or on behalf of the insolvent party’s creditors.
The insolvency administrator is bound by arbitration agreements validly concluded by the insolvent entity prior or after the insolvency declaration. He/she may therefore initiate arbitration on behalf of the insolvent party to resolve claims arising out of agreements concluded before or after the start of the insolvency procedure and that are unrelated to the insolvency procedure. Disputes arising from the insolvency procedure, such as a dispute relating to a statement of claim, are under the exclusive jurisdiction of the state courts.
The insolvency administrator may attempt to avoid an arbitration, arguing that the arbitration agreement would not bind the insolvent party’s creditors, and instead apply to domestic courts on behalf of these creditors.
No contractual set-off is permitted after the insolvency proceedings are opened or during the suspect period. The only exception thereto is for conventional netting and set-off clauses covered by the Law of 5 August 2005 on financial collateral arrangements. Statutory set-offs may be allowed during the suspect period, provided that the set-offer order has become final.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
No claim can be brought against the insolvent party after the opening of the insolvency proceeding.
If the arbitration proceedings are pending at the time of the opening of the insolvency proceeding, the administrator can either decide to continue such proceedings or challenge the claim before domestic courts under the insolvency laws, or both
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
A creditor whose claim stems from an arbitral award rendered against an insolvent party is treated as an unsecured creditor under Luxembourg insolvency laws.
Pursuant to the public policy principle of equal treatment among unsecured creditors to the insolvency proceedings as set out under Article 562 of the Luxembourg Commercial Code, no preferential treatment will be afforded to claims arising out of an arbitral award.
The insolvency of a party does not deprive the administrator and the opposing party from challenging an arbitral award as both may appeal the award. The procedure to appeal the award will depend on whether it is a so-called domestic or international award.
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
No specific measures have been adopted in response to the Covid-19 pandemic. The only measure concerns the suspension of the one-month time-limit for a commercial company’s management to file for insolvency, as set out under Article 440 of the Luxembourg Commercial Code, until 30 June 2021 (as provided by the law of 19 December 2020).
Although the management is currently under no obligation to file for insolvency if the conditions for insolvency have been met, this does not preclude a creditor of the company to file an insolvency petition against the company if the conditions for insolvency are met, say in the case the company is unable to pay its debts as they become due and it is unable to raise further credit to settle its debts.