How does a party’s insolvency impact pending arbitration proceedings?
Once a court grants a winding-up order or a special resolution for the voluntary winding up of the company has been registered, all legal proceedings including arbitration proceedings whether by or against the company are suspended until the appointment of the liquidator.
In the event that winding-up proceedings have commenced but no winding-up order has been granted yet, and there are proceedings pending by or against the company, the company or any creditor or member of the company may approach the Court for a stay of the proceedings.
Given that there is no insolvency registry in South Africa, in practice it is not uncommon to have commenced proceedings against an entity only to discover that the company has been liquidated.
Once the liquidator is appointed, the liquidator will determine whether to continue with the proceedings or not. If the liquidator elects not to continue with the proceedings the liquidator would have to formally withdraw from the proceedings. Although the other party to the litigation would be entitled to a costs award, this would be a claim against the company and be a concurrent claim.
The liquidator is in the same shoes as the company, and should it decide to proceed, the liquidator is bound by all previous steps and processes undertaken by the company. This would include the taking of evidence, the appointment of an arbitrator as well as any procedural steps agreed upon prior to liquidation. As such, the liquidator as the litigant in the matter can decide whether it is necessary to amend or institute fresh claims.
If the liquidator is the defendant, the plaintiff creditor would assess whether it makes commercial sense to proceed with the litigation or not, given that even in the event that the plaintiff creditor is successful in its litigation, it would not be in a better position than if its claim were accepted by the liquidators.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
In the event that the company has been placed under winding-up, any arbitration agreement that may have been entered into by the company and any third party remains valid, unless the agreement itself provides for its termination in the event of either party being placed under liquidation.
Given that the liquidator steps into the shoes of the company, the liquidator is bound by the terms of the arbitration agreement and is not able to avoid the arbitration agreement and proceed directly to the courts.
In the event that a third party wishes to continue with pending proceedings alternatively to institute fresh proceedings, the cause of which arose prior to the commencement of the winding-up, the third party must within four weeks after the appointment of the liquidator, provide the liquidator with no less than three weeks' notice before continuing or instituting proceedings.
This is to allow the liquidator an opportunity to consider the nature and validity of the claim or pending claim and decide whether to continue with such proceedings.
Although a third party may institute proceedings against a company in liquidation, the third party would carefully consider whether to proceed as even if successful, it would not receive full payment of any claim. The costs to be incurred and any potential award would be key factors in the decision as to whether to proceed or not.
Can an insolvent entity commence arbitration?
The insolvent company represented by its liquidator can decide on whether to commence proceedings or not. The power to commence or defend proceedings are normally granted to liquidators by creditors and members at a meeting of creditors and members In the event that instructions can not be obtained from creditors or members because the meeting has as yet not been convened then the liquidator may approach the court for authorisation to institute the proceedings.
Should there be no directions or should no consent have been given by creditors or members, or should there be a difference in the directions given by members and creditors, then the liquidator can approach the Court to provide directions.
It is quite common for liquidators to utilise arbitration proceedings as they are often viewed as quicker and less expensive than court proceedings.
Where it is believed that the proceedings commenced are frivolous or vexatious the defendant could seek security for costs from the liquidator.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
In the event of an arbitration agreement being in place, any party including the liquidator could insist on compliance with the agreement and so oust the jurisdiction of the Court to entertain the matter. This would only apply where there is an existing agreement in place.
Certain issues such as the voidability of dispositions, setting aside of subpoenas etc. can by their very nature only be dealt with by a Court.
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
In the event that there is an arbitral award against an insolvent party, the duly appointed liquidator will treat the arbitral award no different than any other court order.
The mere fact that the award is an arbitral award or even a court order, does not elevate the status of the claim any further.
As such, the award would either be treated as a secured claim in the event that there was security underpinning the claim, or if not, it would be treated as a concurrent claim and rank pari passu with other concurrent creditors in the company.