How does a party’s insolvency impact pending arbitration proceedings?
The impact of a party’s insolvency on pending arbitration proceedings differs, depending on which party initiated the proceedings and the nature of the claim submitted.
If the arbitration has been initiated by the party which is later declared insolvent, the arbitration proceedings will be suspended upon request of the respondent. During this suspension, the respondent may summon the official receiver (curator) to take over the arbitration. The receiver may also do so at its own initiative.
Once the receiver takes over the arbitration proceedings, the insolvent estate is bound by an arbitral tribunal’s award. If the receiver does not take over the arbitration, the tribunal may terminate the proceedings upon the respondent’s request. However, if the respondent does not submit such a request, the arbitration will proceed.
If the arbitration continues without the receiver formally taking it over, the estate will not be liable for the arbitration costs incurred. It will, however, be bound by the tribunal’s decision in the arbitral award (Bankruptcy Act, Article 27).
For arbitrations initiated against a party which is later declared insolvent, the proceedings are affected differently depending on the type of claims in dispute.
Claims concerning rights or obligations comprised in the estate directly affect the size of it (boedelprocedures), as those claims are paid directly from the estate with priority over other claims (the former being, e.g., claims against the insolvent debtor for termination of a reciprocal agreement, revendicatory claims that aim to recover goods or claims related to a right of mortgage or pledge).
In the event of such claims, the claimant may request to stay the arbitration and summon the receiver to take over the proceedings. Once the receiver has been summoned, the insolvent estate is bound by the tribunal’s decision in the arbitral award, even if the receiver refuses to appear in the proceedings (Bankruptcy Act, Article 28).
If the claim aims to procure the performance of an obligation from the estate (betalingsprocedures), e.g. claims concerning damages, the supply of certain goods or the provision of services), the arbitration is automatically stayed (Bankruptcy Act, Article 29) pending the outcome of a “verification” process (ter verificatie aanmelden) (Bankruptcy Act, Article 26). Under the verification process, creditors may only file such claims with the receiver, who will review each claim and verify its legitimacy and rank in comparison with other submitted claims.
The stayed arbitration only resumes if the underlying claim and the outcome of the verification process are disputed by the receiver or another creditor. In this case, the receiver or the disputing creditor would become a party to the pending arbitration against the creditor who filed the claim. The receiver or the disputing party would be bound by the previous steps in the arbitration (e.g. the taking of evidence, the choice of arbitrators, and interim decisions). The estate is bound by decisions and awards thus rendered.
Under specific circumstances, the receiver may, on its own motion and without court intervention, annul (i.e. declare void) the insolvent debtor’s legal acts if the act caused prejudice to other creditors (Bankruptcy Act, Articles 42 and 47). The validity of such extrajudicial annulments can be confirmed or rejected at the request of the parties directly involved, both in Dutch court proceedings and arbitration if the parties expressly agree to it (Dutch Civil Code, Articles 3:50, 3:302 and 3:305). The receiver is not bound by any pre-existing arbitration agreement in this respect.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
In principle, the official receiver is bound by arbitration agreements validly entered into by the insolvent party before its insolvency. Again, the impact of a party’s insolvency on the commencement of an arbitration differs, depending on the nature of the claim.
If the claim concerns rights or obligations comprised in the estate, the creditor may initiate arbitration against the receiver (Bankruptcy Act, Article 25). Such claims directly affect the size of the estate and include, for example, claims against the insolvent debtor for termination of a reciprocal agreement, revendicatory claims that aim to recover goods or claims related to a right of mortgage or pledge.
If the claim aims to procure the performance of an obligation from the estate, the creditor can only file its claim with the receiver for verification (ter verificatie aanmelden) (Bankruptcy Act, Article 26). In principle, claims arising after the declaration of bankruptcy cannot be filed for verification (fixatiebeginsel).
However, claims relating to contracts validly concluded before the insolvency may be filed, albeit as unsecured claims. Examples of such claims are claims concerning the payment of rental fees by the insolvent debtor or, if the receiver has not terminated the contract (Bankruptcy Act, Article 39), a claim for damages arising out of such contract.
During the verification process, the receiver checks the legitimacy of the claims submitted against the insolvent party. If verification of a claim is disputed and the creditor who submitted the claim and insolvent debtor have entered into a valid arbitration agreement prior to the debtor’s insolvency, the verification of the claim may be decided upon in arbitration (Bankruptcy Act, Articles 26 and 122). The disputing creditor is bound by the arbitration agreement and thus steps into the position of the debtor.
Can an insolvent party commence arbitration proceedings?
As judicial administrator in the administration and liquidation of the estate, the receiver exercises the property rights of the insolvent party with the same powers and restrictions as they applied to the insolvent party. In principle, the official receiver is bound by arbitration agreements that were validly entered into by the insolvent party before its insolvency. The receiver may thus actively commence arbitration on the basis of such arbitration agreements.
Dutch law does not allow a party to enter into an arbitration agreement after that party has been declared insolvent (Bankruptcy Act, Article 23). Arguably, the receiver may in fact enter into an arbitration agreement as judicial administrator of the estate, with the supervisory judge of the competent court’s permission.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
Like many other jurisdictions, arbitral tribunals seated in the Netherlands cannot declare a party bankrupt (Bankruptcy Act, Articles 1 and 2). Additionally, Dutch courts have exclusive jurisdiction over insolvency-related procedures such as the appointment of the receiver and the confirmation of a restructuring plan.
If the creditor’s claim concerns rights or obligations comprised in the estate, and the receiver acts (or has been summoned to act) in the arbitration on behalf of the insolvent party, the pending arbitration proceeds and the estate are bound by the tribunal’s award. Accordingly, such claims are usually not heard in insolvency proceedings and there is no need to raise any arbitration defences.
If the creditor’s claim aims to procure the performance of an obligation from the estate, the creditor must submit its claim to the receiver for verification. However, if verification of the claim is disputed by the receiver or another creditor, and a valid arbitration agreement exists or an arbitration is already pending, the verification will be decided upon in arbitration.
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
An arbitral award rendered against an insolvent party is fully enforceable and may be recognised and enforced in the Netherlands.
Arbitral awards may be enforced upon leave for enforcement granted by the provisional relief judge (in case of awards rendered in the Netherlands) or the competent Court of Appeal (in case of awards rendered outside the Netherlands). In practice, the proceedings before the provisional relief judge are ex parte, although the judge may require both parties to appear.
Both the provisional relief judge and Court of Appeal will review the request for leave for enforcement summarily and may only deny the request on the basis of limited statutory grounds (Dutch Code of Civil Procedure, Articles 1062 and 1063 for awards rendered in the Netherlands, and Articles 1075 and 1076 Dutch Code of Civil Procedure for awards rendered outside the Netherlands). Once leave for enforcement is granted, the arbitral award may be executed in the Netherlands in the same manner as a court judgment.
In order to enforce a domestic or foreign arbitral award against an insolvent party, the creditor must file its claim resulting from the award with the official receiver for verification. In practice, the receiver will usually recognise and verify an enforceable arbitral award rendered against the insolvent party.
The rank of the arbitral award in comparison to other claims depends on the nature of the specific claim underlying the award and the parties involved in the arbitration. When submitting the arbitral award to the receiver for verification, the creditor must explain whether its claim should be treated in a preferential manner (and, if so, how the claim should be ranked).
Generally, contractual claims fall into the category of unsecured claims that are last in rank. Preferential treatment is, for example, given to rights of pledge and tax liabilities.
In principle, an arbitral award may be challenged within three months of its delivery before the competent Court of Appeal (Dutch Code of Civil Procedure, Articles 1064 and 1064a). Such challenge proceedings are not affected by the insolvency of either party. Annulment proceedings do not automatically stay the enforcement of an arbitral award, unless the Court of Appeal so decides at a party’s request (Dutch Code of Civil Procedure, Articles 1065a and 1066).
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
No specific insolvency regime has been introduced in response to the Covid-19 pandemic.
However, a new act on extrajudicial restructuring (Wet homologatie onderhands akkoord, or “WHOA”) entered into force on 1 January 2021. The act is not a direct response to the pandemic but may nevertheless assist distressed companies in restructuring their debts and preventing insolvency.
The WHOA allows a debtor to establish a tailor-made restructuring plan with creditors and shareholders with limited court involvement and without commencing formal insolvency proceedings. Key restructuring options under the WHOA include:
- the unilateral amendment or termination of contracts entered into by the debtor (including the amendment of loan facilities):
The debtor may propose to its counterparty the amendment or termination of contracts. If the debtor’s proposal is not accepted by its counterparty, the debtor may nevertheless amend or terminate the contract, with the court’s permission. Notably, the counterparty’s right to damages as a result of the amendment or termination may also be limited or excluded in the restructuring plan;
- the postponement or write-off of the debtor’s (payment) obligations;
- a debt-for-equity swap;
- interim financing to be provided to the debtor with first ranking security in favour of the lender; and
- the appointment by the court of an observer, who will monitor the preparation and negotiation of the restructuring plan.
The final restructuring plan may be submitted to the court for confirmation. After confirmation by the court, the restructuring plan becomes binding on the debtor, all creditors and shareholders whose rights are affected by the plan, including any dissenting parties (except for a strictly defined group of small-sized creditors).