How does a party’s insolvency impact pending arbitration proceedings?
The impact that a party’s insolvency has on pending arbitration proceedings depends on the type of insolvency proceedings that have been commenced. These are examined in turn below.
In the UK, the term ‘bankruptcy’ refers to the insolvency procedure that applies to individuals and partnerships (as opposed to companies). If a party files for bankruptcy during a pending arbitration, the court may order a stay of the arbitration proceedings at any time when the bankruptcy proceedings are pending or after the making of a bankruptcy order (Insolvency Act 1986, Section 285(1)). However, no automatic stay is effected by reason of the bankruptcy alone. Furthermore, the bankruptcy of one party does not revoke the arbitral tribunal’s authority.
The trustee in bankruptcy can choose whether to step into the shoes of the bankrupt in the pending arbitration. Of course, whether a trustee wishes to do so may be dependent on whether it is the claimant or respondent in the proceedings, or whether there is a counterclaim with good prospects of success. As with administration and winding up, there is no need to amend the claim to name the trustee as a defendant rather than the bankrupt entity. The claim is still against the insolvent party: decisions in the proceedings are simply made by the trustee, rather than the insolvent party themselves.
The parties will bear their own costs in respect of stayed arbitration proceedings, subject to any award that the arbitral tribunal itself may make in respect of costs. Any award in respect of costs incurred pre-insolvency that is made against the insolvent debtor is likely to rank as an unsecured claim and thus pari passu with the creditors generally.
An arbitration may not be continued against a company in administration, absent: (i) consent of the administrator; or (ii) permission of the court, cf. Insolvency Act 1986 Sch. B1 para 43(6). However, the administrator (or administrative receiver) could elect to continue the arbitration if the company itself asserts a claim in the arbitration (Insolvency Act 1986, Sch. 1 para 6).
Voluntary winding up
If one party is a corporate entity that is subject to voluntary winding up proceedings, these do not render inoperative the arbitration agreement.
The liquidator may continue arbitration proceedings in the name of and on behalf of the company in question, without seeking permission from the court (Insolvency Act 1986 Sch. 4 Pt II para 4).
Compulsory winding up
At the point of a winding-up petition being presented, there is no automatic stay of pending arbitration proceedings though a court may order a stay at any time between presentation of the petition and the making of the winding up order (Insolvency Act 1986, Section.126(1)). Once a winding-up order has been made or a provisional liquidator appointed, a stay is imposed on arbitration proceedings unless the court permits them to proceed. The court may grant permission subject to such terms as the court sees fit (Insolvency Act 1986, Section 130(2)).
The liquidator that is appointed may, with permission of the court or the creditors’ committee, bring or defend arbitration proceedings in the name of and on behalf of the company (Insolvency Act 1986, Section 167(1) and Sch.4 Pt II para 4). When deciding whether to exercise its discretion to lift or modify an automatic stay, or to order a stay in its discretion, the court will consider all the facts to decide what is right and fair in the circumstances, with particular focus on the interest of creditors.
Foreign insolvency proceedings
The situation arising when one of the parties to an English-seated arbitration enters into insolvency proceedings in a foreign jurisdiction has changed following the end of the Brexit transition period because the EU Insolvency Regulation no longer applies in England. Instead, both EU and non-EU foreign insolvency proceedings may be recognised by the English Court pursuant to the Cross-Border Insolvency Regulations 2006 (“CBIR 2006”).
Foreign insolvency proceedings that are recognised as foreign main proceedings (proceedings that take place in the state where the debtor has its centre of main interests) impose an automatic stay on arbitration proceedings as if the debtor had been made the subject of a winding up order (CBIR 2006, Sch.1 Ch.III Art. 20(1) and (2)). The court has, however, a discretion to lift or modify the stay on such terms as it thinks fit (CBIR 2006, Sch.1 Ch.III Art. 20(6)). No automatic stay applies to foreign non-main proceedings (proceedings that take place in another state in which the debtor has an establishment, as defined in the CBIR 2006), but discretionary relief may be granted by the court to protect the debtor’s assets or creditors’ interests, which can include staying arbitration proceedings (CBIR2006, Sch.1 Ch.III Art. 21(1)(a)).
Can arbitration proceedings be commenced by or against an insolvent entity?
The position differs depending on the type of insolvency proceeding that the party in question is undergoing. There are also certain insolvency-related matters that are not arbitrable.
The trustee in bankruptcy can choose whether or not to adopt the contract containing the arbitration clause. If the contract is adopted, then the arbitration agreement is enforceable both by and against the trustee (Insolvency Act 1986, section 349A(2)) and the trustee may initiate arbitration.
If the contract is not adopted and a dispute arises under the contract which needs to be resolved for the purposes of the bankruptcy, then either the trustee in bankruptcy, with the permission of the creditors’ committee, or any other party to the contract may apply to the court for a determination as to whether the matter should be referred to arbitration (Insolvency Act 1986, Section 349A(3)). The trustee will then be bound by the arbitration agreement if the court orders that the matter should be referred to arbitration.
While the administrator or administrative receiver has the power to refer to arbitration any question falling within the scope of an arbitration agreement and affecting the company (Insolvency Act 1986, Sch. 1 para 6), once an administration order has been made then no arbitration proceedings may be brought against the company or its property without consent of the administrator or permission of the court (Insolvency Act 1986, Sch. B1 para 43(6)). The administrator has the power to bring proceedings (including arbitration) on the insolvent company’s behalf (Insolvency Act 1986, Sch. 1 para 5).
Voluntary winding up
The winding up of a company does not render inoperative an arbitration agreement. Therefore, if there is a dispute about the amount of a proof of debt properly to be admitted by the liquidator, if the dispute falls within the scope of an arbitration agreement then it will need to be resolved in arbitration proceedings (Syska v Vivendi Universal SA  EWCA Civ 677 at  (Longmore LJ); Philpott v Lycee Francais Charles de Gaulle School  EWHC 1065  (Judge Purle QC)).
Any arbitration proceedings that may be commenced must start before the winding-up is completed and the company deregistered, as then the company ceases to exist, and any arbitration agreement previously entered into by the company will become a nullity.
Leave of the court is not required for a liquidator to start or defend an arbitration in the name of and on behalf of the company in a voluntary winding up. Rather, a liquidator has the power to bring proceedings (including arbitration proceedings) on the insolvent party’s behalf (Insolvency Act 1986, Sch.4 Pt II para 4).
Compulsory winding up
Once a winding-up order has been made or a provisional liquidator appointed, arbitration proceedings may not be brought against the company or its property without permission of the court and subject to such terms as the court may impose (Insolvency Act 1986, Section 130(2)).
Once the winding-up is completed (whether it is voluntary or compulsory), the company ceases to exist and any arbitration agreement previously entered into becomes a nullity. A liquidator has the power to bring any proceedings (including arbitration proceedings) on the insolvent party’s behalf (Insolvency Act 1986, Sch.4 Pt II para 4).
Certain insolvency related claims are not arbitrable. For instance, where a dispute involves claims against the directors of an insolvent company for fraudulent or wrongful trading, including by a liquidator, the dispute will not be arbitrable.
However, there is some authority to suggest that an arbitration concerning a debt claim can determine whether the debt should be set aside as a transaction at an undervalue, unfair preference or fraudulent transaction if the arbitration clause is sufficiently broad (Nori Holding Ltd v Public Joint-Stock Company 'Bank Otkritie Financial Corporation' (Rev 1)  EWHC 1343 (Comm)  (Males J)).
A debtor whose proof of debt is disputed may still seek to insist on having that dispute with the liquidator resolved in arbitration if it is within the scope of an arbitration clause (see. Philpott v Lycee Francais Charles De Gaulle School  EWHC 1065 (Ch) at  (Judge Purle QC), citing Fulham Football Club (1987) Ltd v Richards  EWCA Civ 855 at  (Longmore LJ)).
Where insolvency proceedings are commenced under English law, special statutory provisions relating to set-off are applicable (Rule 14.25 (liquidation) and Rule 14.24 (administration) of the Insolvency (England and Wales) Rules 2016). These rules are mandatory, and the parties cannot contract out of, or vary, their operation. Set-off in these circumstances is subject to certain requirements and restrictions (for example, the concept of mutuality requires that one person’s claims should not be used to pay another’s debt). A further question that sometimes arises is whether there can be set-off between claims arising out of the insolvency procedure (for example, voidable transactions) and claims unrelated to the insolvency (for example, the company’s pre-insolvency debts). The better view is that set-off is unlikely because the two categories of claims lack the requisite quality of mutuality. The practical consequence is that the creditor cannot use this sort of set-off to improve its position in the winding-up.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
Two processes are available.
First, in the court hearing of the insolvency proceedings, where a winding-up petition is presented in relation to a debt, and the debt is subject to an arbitration agreement, the winding-up petition can be stayed or dismissed in favour of the arbitration proceedings (Salford Estates (No 2) Ltd v Altomart Ltd (No 2)  Ch 589, 600-601 (Etherton C)).
Second, the insolvent company may also seek an anti-suit injunction from the arbitral tribunal to restrain the creditor from pursuing the insolvency proceedings (see e.g. Riverrock Securities Ltd v International Bank of St Petersburg  EWHC 2483 (Comm) (Foxton J)).
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
Recognition and enforcement can be impacted by insolvency proceedings in three main ways.
First, a creditor may not bring enforcement proceedings against a party subject to compulsory liquidation (Insolvency Act 1986, Section 130(2)) or administration (Insolvency Act 1986 Sch. B1 para 43(6)), save as set out above. Having said that, any stay that is granted does not render an award null and void unless the insolvent party subject to the arbitration proceedings has been dissolved and ceased to exist as a legal entity prior to the award being granted (Baytur SA v Finagro Holdings SA  Q.B. 610, 619 (Lloyd LJ)). On the other hand, the insolvent party can still bring proceedings to enforce an award against its debtor.
Secondly, where a party that is factually insolvent (but not yet subject to insolvency proceedings) voluntarily makes payment of the award, such payment may in theory be vulnerable to being set aside as preferences, if insolvency proceedings begin shortly afterwards (Insolvency Act 1986, Section 239(2)). This will depend very much upon the circumstances in which such voluntary payments are made.
Third, the insolvency may affect the amount actually recovered. For example, if the underlying claim that was the subject of arbitral proceedings was itself an unsecured claim, and an award was issued in respect of this unsecured claim, this would result in the creditor ranking pari passu to other unsecured creditors in the relevant insolvency proceedings and behind secured and preferential creditors pursuant to the insolvency rules relating to distribution to creditors.
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
The UK has introduced a special insolvency regime in response to the Covid-19 pandemic. The Corporate Insolvency and Governance Act 2020 (“CIGA”), which came into force on 26 June 2020, introduces both permanent and temporary reforms designed to ease the burden on both companies and directors caused by the Covid-19 pandemic. Several Regulations have been introduced since then which modify a number of the time limits on the temporary measures set out in the CIGA.
The permanent reforms introduced include: (a) a new free-standing moratorium; (b) a restructuring plan process; and (c) restrictions on ‘ipso facto’ termination of contracts for the supply of goods and services where one party undergoes an insolvency process. The new moratorium can be used to support a rescue of a company as a going concern, and aims to provide companies some breathing space from creditor action while they seek a rescue plan. During the moratorium no creditor can take enforcement action against the debtor company without leave of the court. The restructuring plan process is procedurally similar to a scheme of arrangement but further introduces a “cross-class cram-down” that will allow dissenting classes of creditors to be bound by any plan.
The temporary reforms introduced include: (a) restrictions on creditors initiating winding-up processes; (b) the temporary suspension of liability under wrongful trading rules; and (c) the relaxation of meeting and filing requirements to allow greater flexibility. Restrictions on using winding-up processes as well as the relaxation of meeting and filing requirements are currently in place until 30 March 2021 whilst the suspension on wrongful trading liabilities is in place until 30 April 2021.
Whilst none of the insolvency measures brought in by way of the UK’s response to the Covid-19 pandemic are arbitration-specific, creditors of claims subject to an arbitration agreement should be aware of them.