How does a party’s insolvency impact pending arbitration proceedings?

Under Royal Decree 1/2020 of 5 May 2020 recasting the Spanish Insolvency Act (the “Spanish Insolvency Act”), ongoing arbitration proceedings are not stayed if one party becomes insolvent or files for bankruptcy during the arbitration. In fact, such proceedings must always continue until a final arbitral award is rendered.

In this context, unless the parties agree otherwise, the date of receipt by the respondent of the request for arbitration marks the starting point of an arbitration (Article 27 of the Arbitration Act 60/2003 of 23 December (the “Spanish Arbitration Act”)). The arbitration ends when the arbitral award becomes final. In the absence of an appeals procedure under Spanish law, it must be understood that the award is final when it is issued by the arbitral tribunal.

Between these two points in proceedings, a declaration of insolvency would not affect the concerned parties’ standing in arbitration and the insolvency court must wait until the arbitration is resolved. The insolvency court is bound by the final award, further to which it would assess the claim recognised in the award and include it in the insolvency procedure as a valid claim against the insolvent party (Spanish Insolvency Act, Article 141). Conversely, if the insolvent party obtains an award recognising a valid claim against the counterparty, the insolvent party would have a valid claim that could be enforced and thus considered in the insolvency procedure.

An insolvency procedure may affect the legal capacity of an insolvent party involved in an ongoing arbitration. In this regard, the result of the declaration of insolvency can be twofold (Spanish Insolvency Act, Articles 119 et seq.).

If an insolvency administrator supervises the insolvent entity’s management (intervención), the insolvent party will retain its legal capacity to act in arbitration. However, it will require the administrator’s consent for certain actions (i.e., to withdraw, settle or reach an award by consent) when the dispute may affect the insolvency estate.

Where the insolvency administrator takes over the management (suspensión), the debtor would be replaced in the pending arbitration by the insolvency administrator, who, in this case, would need authorisation from the insolvency judge to withdraw, settle or reach an award by consent. In this case, the arbitral tribunal would grant the insolvency administrator, at least, five days to acquaint him/herself with the details of the case (Spanish Insolvency Act, Article 120.2). However, claims in a pending arbitration do not need to be amended when the insolvent party is replaced by the insolvency administrator.

Set-off is not permitted once a declaration of insolvency has been made except when the requirements for compensation were met before the opening of the insolvency proceedings. In the latter case, the fact that the creditor notifies the insolvency administrator of the existence of the claim does not prevent the judicial declaration of set-off (Spanish Insolvency Act, Article 153).

However, this prohibition does not apply to cases where there is not a strict set-off but a contract settlement (liquidación contractual) within the framework of the relevant contract. Article 153 of the Spanish Insolvency Act states that in any case, the provisions of private international law in this regard remain unaffected.

Moreover, the disputes in relation to the amount of the claims to be set-off and the concurrence of the conditions for set-off are resolved by the insolvency court.

Can arbitration proceedings be commenced by or against an insolvent entity?

Can one initiate arbitration against an insolvent entity?

The declaration of insolvency does not, in itself, affect the validity of arbitration agreements concluded by the insolvent entity before the arbitration. Provided that the underlying contract contains a valid arbitration agreement, the parties to the contract, including the insolvency administrator, would be bound by such agreement. This means that arbitration may be brought by or against an insolvent party to resolve claims arising out of agreements concluded before the insolvency procedure (as long as they are unrelated to the insolvency procedure).

The above, however, does not preclude the insolvency administrator from bringing a claim on behalf of the insolvent company before a state court even if jurisdiction would lie with the arbitral tribunal. The court would hear the dispute if: (i) the respondent does not challenge the court’s jurisdiction and defends the claim; or (ii) if the parties agree to stay the enforcement of the arbitration agreement in favour of the jurisdiction of the court.

The insolvent entity or the insolvency administrator may request the insolvency court to stay the effects of an arbitration clause included in the underlying contract (Spanish Insolvency Act, Article 140.3). Such a stay may be requested only if (i) the arbitration has not yet commenced; and (ii) the insolvent party or/ the insolvency administrator, as the case may be, demonstrates that bringing the case to arbitration would be detrimental to the conduct of the insolvency procedure. In this regard, the Spanish Insolvency Act clarifies that the provisions of international treaties remain unaffected.

The possibility to stay the effects of an arbitration clause is applied restrictively by Spanish courts. When reviewing such an application, Spanish case-law has established that “detrimental for the conduct of insolvency proceedings” should be interpreted taking into account the collective interest of all creditors and the interest of the insolvency estate. This interest is assessed mainly against economic or asset-based criteria and the need to preserve, or, where appropriate, increase, the integrity and value of the insolvent entity’s assets for the benefit of the creditors.

Although debated in Spanish case law for many years, courts have recently held that an insolvent entity’s inability to pay the costs of an arbitration could be a valid ground to stay the effects of an arbitration clause. Given that the suspension of the agreement reactivates the ordinary rules of international jurisdiction, it is necessary to compare the costs of arbitration with the costs of submitting the dispute to the courts.

Lastly, an arbitration agreement will not cover specific insolvency matters which could potentially arise out of or in connection with the contract in which it is contained. In principle, the insolvency court would not have jurisdiction over questions based on civil and commercial law. Such matters would be covered by the arbitration agreement.

Can an insolvent entity commence arbitration?

In principle, there are no obstacles for an insolvent party to start arbitration proceedings. If the effects of the relevant arbitration agreement have not been stayed, a dispute related to the underlying contract would be resolved in accordance with the agreed forum (i.e., arbitration).

The requirements for initiating a new arbitration depend on the insolvency administrator’s intervention regime established by the insolvency court. When the insolvent company’s directors remain in control under the supervision of the court-appointed administrator (intervención), they may start new proceedings, but they will require the insolvency administrator’s approval if the dispute could affect the insolvency estate.

Furthermore, if the insolvency administrator considers that the commencement of an arbitration is in the interest of the insolvency estate, it may request the insolvency court’s permission to file the corresponding request for arbitration or statement of claim on behalf of the debtor.

When the court-appointed administrator assumes an executive function and takes control of the company (suspensión), it will be the only one entitled to commence arbitration on behalf of the debtor.

It should be noted that insolvent entities rarely commence arbitration in Spain. Factors such as costs and the duration of arbitration discourage insolvency administrators from choosing this dispute resolution method.

Spanish insolvency law also provides useful tools, such as claw-back actions or the possibility of terminating an enforceable contract in the interest of the estate, that would, according to case law, take precedence regardless of the arbitration clause in the relevant contract and may seem more attractive for an insolvency administration.

However, this has started to change in recent years due to the emergence of litigation funding in Spain. Recent relevant precedents show that this alternative is a useful path of action for insolvent companies with limited funds and also an attractive investment model in the Spanish restructuring market.

What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?

As previously indicated, the order opening insolvency proceedings does not affect the validity of the insolvent company’s arbitration agreements, and pending arbitrations proceed until a final award is rendered.

The Spanish Arbitration Act prevents Spanish courts from hearing disputes submitted to arbitration. In principle courts would enforce the relevant arbitration agreement and dismiss the claim commenced in breach of it unless the defendant defends the claim without objecting to the court’s jurisdiction. In the latter case, the parties are deemed to have agreed to waive the arbitration agreement.

In general terms, and provided that the arbitration clause is valid and enforceable, if a claim is brought to a court in breach of parties' submission to arbitration, the defendant is entitled to file a motion for lack of jurisdiction (declinatoria) within 10 days of filing the defence. Although the Spanish Insolvency Act does not contain a specific provision in this regard, it refers to the Spanish Civil Procedure Act 1/2000 of 7 January (the “Spanish Civil Procedure Act”) for specific rules of procedure.

Furthermore, the regulation of incidental insolvency proceedings (incidentes concursales), which is the procedural mechanism that would be used for an eventual claim that affects the insolvency estate, expressly provides for the general rules of the Spanish Civil Procedure Act to apply.

Finally, it must be noted that the time limit to file the defence in an incidental insolvency proceeding is exactly the same as for challenging the jurisdiction of the insolvency court (i.e. 10 days). Spanish courts have nevertheless stated that the motion for lack of jurisdiction is not required to be filed within this time, but in advance of the defence.

How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?

For arbitrations that are still pending when claims must be notified by creditors, the claim in the arbitration would be treated as contingent and provisional.

If an arbitral award has already been rendered, the insolvency court would consider the rights recognised in the arbitral award and include them in the insolvency procedure either: (i) as a debt (a claim) if it is a valid claim against the insolvent party; or (ii) as an asset if it is a valid claim of the insolvent party against its counterparty in the arbitration.

If the claim is recorded as a debt, the creditor would request the inclusion of its claim (as recognised in the arbitral award) in the definitive list of creditors and the insolvency administrator is bound to grant this request(Spanish Insolvency Act, Article 260.1). The arbitral award will be ranked depending on the nature of the claim.

Concerning the treatment and recognition of foreign arbitral awards rendered in arbitrations involving a party subject to insolvency proceedings in Spain, Spanish courts consider that the insolvency court has jurisdiction to decide on the recognition of awards rendered against an insolvent party in accordance with Article 44 of Law 29/2015, of 30 July 2015, on international legal cooperation in civil matters. According to this provision, when recognition of a foreign award is sought incidentally in an ongoing insolvency procedure, the insolvency court would rule on such recognition on a case by case basis.

Furthermore, it is worth noting that arbitral awards cannot be appealed under Spanish law. Instead, the award becomes final producing res judicata effects when it is rendered by the arbitral tribunal.

However, parties to an arbitration (either the insolvent party/insolvency administrator or the opposing party) where appropriate, may bring an action to set aside the award (Spanish Arbitration Act, Article 40), or an action to have the award reviewed in accordance with the provisions applicable to final judgments under the Spanish Civil Procedure Act. It should be underlined that the latter option is quite exceptional, and its use is extremely unusual.

Without prejudice to the aforementioned, it is noteworthy that the possibility of setting aside an arbitral award is very restricted under Spanish law(Spanish Arbitration Act, Article 41).

Furthermore, the Spanish Constitutional Court issued a ruling of high relevance on 15 February 2021, whereby it reiterated that the judicial review in setting-aside proceedings, especially on grounds of public order, should not allow for a substantive review of the merits, nor should it be considered a second instance.

Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?

In relation to insolvency, and in order to alleviate the liquidity difficulties faced by Spanish companies as a result of the situation created by the SARS-CoV-2 / Covid-19 pandemic, a series of specific insolvency regulations (namely Royal Decree 16/2020 of 28 April 2020, Law 3/2020 of 18 September 2020, and Royal Decree-Law 34/2020 of 17 November 2020) were approved in less than eight months.

These legal instruments introduce a special regime based on the suspension and extension of time limits for a number of procedural acts, which coexist with the Spanish Insolvency Act (in some cases, up until 14 March 2022); mainly:

  • extension or suspension until 14 March 2021 of time limits for certain acts, including, but not limited to, the debtor’s obligation to voluntarily file for insolvency or the court's obligation to process creditors’ filings for insolvency proceedings;
  • extension of the time limit for the renegotiation of creditors' arrangements, out-of-court payment agreements already signed, renegotiation of refinancing agreements or proposition of new ones; and suspension of the admission of applications by creditors for non-compliance with these arrangements or agreements,; depending on the case up until 31 January 2021; 
  • until 14 March 2022, consideration as ordinary debts of certain debts (for instance, debts derived from cash loans from closely related parties after the state of emergency was first declared in Spain), without prejudice to any seniority that they may be due; and
  • preferential treatment granted to certain acts (such as insolvency processes in labour matters), until 14 March 2021.