Australian insolvency law provides for a number of insolvency procedures:
- administration involves the appointment of an insolvency practitioner as a voluntary administrator to take control of the affairs of the company for a short period to provide for the affairs of the company to be administered in a way that:
1. maximises the chances of the company, or as much as possible of its business, continuing in existence; or
2. (if that is not possible) results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
- small business restructuring is a new process, as of 1 January 2021, in which certain eligible companies may appoint a “small business restructuring practitioner” to develop and propose a debt restructuring plan to creditors while the directors of the company maintain control of the business;
- a deed of company arrangement is a binding arrangement between a company and its creditors, administered by an insolvency practitioner, governing how the company's property and affairs will be dealt with, and is one of the possible outcomes of the voluntary administration procedure;
- liquidation or winding up is the winding up of a company and the distribution of its assets to creditors and (if there is any surplus) members, by an insolvency practitioner appointed as a liquidator – in an insolvent context, it can be initiated by the company's members, creditors (including as the outcome of a voluntary administration) or by an order of an Australian court;
- receivership involves the appointment (usually by a secured creditor) of an insolvency practitioner as a receiver to the secured property of a company to realise that property; and
- bankruptcy involves the administration of the affairs of an insolvent natural person by an insolvency practitioner or government entity, as trustee of the bankrupt estate of the person.
How does a party’s insolvency impact pending arbitration proceedings?
The impact of a party's insolvency on pending arbitration proceedings depends on whether the insolvent party is the claimant or the respondent in the pending arbitration, and on the type of insolvency administration to which the insolvent party is subject.
Where a corporation which is the claimant in a pending arbitration becomes subject to a form of insolvency administration, there is no procedural hurdle for the continuation of the proceedings; the insolvency administrator appointed to the company (who may be an administrator, receiver or liquidator) has the power to pursue any claim in the name of, and on behalf of, the company in the arbitration and will generally be bound by previous procedural steps or decisions made in the proceedings, in addition to duties of confidentiality (Corporations Act 2001 (Cth), Sections 420(2)(k) and (2)(w), 437A(1)(d) and 477(2)(a); Corporations Regulations 2001 (Cth) sch. 8A, cl. 2(j)). There is no need for the insolvency administrator to be joined as a party to the arbitration or to amend the claim. However, in the usual course, the other parties to the arbitration and the tribunal will be notified of the appointment by the insolvency administrators. If an insolvency administrator elects not to continue with a pending arbitration, the insolvent claimant is bound by the insolvency administrator 's decision to withdraw from the arbitration as if the claimant itself had taken that step. However, any previous or consequential orders made in favour of the respondent (e.g. in respect of costs) would likely be provable in the insolvency administration of the insolvent claimant.
If the respondent in a pending arbitration becomes subject to a form of insolvency administration, the ability of the claimant to continue with the proceeding may be restricted. This is because the Corporations Act 2001 and the Bankruptcy Act 1966 impose an automatic “stay” on various types of legal proceedings against insolvent companies and bankrupt individuals. Whether or not there is a stay depends on the type of insolvency administration.
If the claimant is an individual subject to personal bankruptcy, an arbitration will be stayed unless and until the trustee in bankruptcy elects to continue the action (Bankruptcy Act 1966 (Cth), Section 60(2)-(3)).
If an individual respondent becomes bankrupt, any legal proceedings, including an arbitration, in respect of a provable debt are stayed unless leave of the court is obtained (Bankruptcy Act 1966 (Cth), Section 58(3)). In determining whether leave is to be granted for an arbitration to proceed, the court will consider whether the balance of convenience lies in allowing the claimant to proceed with the arbitration or in pursuing the claim by lodging a proof of debt in the respondent's bankruptcy (where it will be adjudicated on by the trustee in bankruptcy). Claims not in respect of a provable debt are not stayed.
Voluntary administration and winding up in insolvency
In the case of a respondent which is in voluntary administration, under a “small business restructuring” or which is being wound up in insolvency or by an Australian court, there is no automatic stay on pending arbitration proceedings (Auburn Council v Austin Australia Pty Ltd  NSWSC 141; Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207. See Corporations Act 2001 (Cth), Sections 440D, 453S and 471B). The applicable provisions of the Corporations Act 2001 only stay court proceedings against companies subject to those insolvency administrations. A voluntary administrator may, however, apply to a court for orders extending the automatic stay in a voluntary administration to arbitration proceedings pursuant to Corporations Act 2001 (Cth), Section 447A (e.g. Re THO Services Ltd  NSWSC 509).
A pending arbitration that substantively concerns an insolvency procedure (e.g. winding up a company or concerning a voidable transaction) may be set aside on the basis that the subject matter is not arbitrable.
Voluntary winding up
If a respondent is subject to a voluntary winding up, any action or other civil proceeding against the party is stayed unless leave of the court is obtained (Corporations Act 2001 (Cth), Section 500(2)). This would likely include any pending arbitrations.
There is no automatic stay of proceedings where a receiver is appointed to the assets of a company.
Deed of company arrangement
If a respondent is subject to a deed of company arrangement, any proceedings brought by a person bound by the deed against the respondent or in relation to its property are stayed unless leave of the court is obtained (Corporations Act 2001 (Cth), Section 444E(3)). This would likely include any pending arbitrations concerning claims which arose before the voluntary administration of the respondent. However, it should be noted that a deed of company arrangement will bind (and may compromise) all claims admissible under the deed, other than the claims of secured creditors who do not vote in favour of the deed (Corporations Act 2001 (Cth), Section 444D).
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
In addition to providing an automatic stay of certain proceedings that have already commenced, the provisions of the Corporations Act 2001 and Bankruptcy Act 1966 may also preclude arbitration proceedings from being initiated against an insolvent company or bankrupt individual, whether the arbitration is in relation to claims arising before or after the insolvency or bankruptcy. Therefore, consistent with the above:
- arbitration can be commenced against a corporation which is in voluntary administration, under small debt restructuring, in receivership, or which is being wound up in insolvency or by a court;
- arbitration generally cannot be commenced in Australia against companies subject to a deed of company arrangement (where the claimant is bound by the deed pursuant to Corporations Act 2001 (Cth), section 444D) or companies subject to a voluntary winding up, except with the leave of a court; and
- arbitration generally cannot be commenced against a bankrupt individual in Australia in respect of a provable debt, except with the leave of a court (Bankruptcy Act 1966 (Cth), section 58(3)).
Any arbitration proceedings that are permitted must be within the scope of the arbitration agreement and must be arbitrable under domestic law. Generally, disputes that affect the rights of third parties or which have public policy implications may be determined by domestic courts not to be arbitrable.
In an insolvency context, a claim against an insolvent party that is unrelated or only incidental to the party's insolvency administration may be arbitrable. However, a claim that affects the rights of third parties (such as other creditors of the insolvent party) or which concern the exercise of powers reposed in a court or in the insolvency administrator is unlikely to be arbitrable (ACD Tridon Inc v Tridon Australia Pty Ltd  NSWSC 896; WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd  FCA 1164).
For example, a dispute regarding the existence and quantum of a debt that was the subject of a liquidator's rejection of a proof of debt has been held to be arbitrable, as the issue did not specifically involve the exercise of the liquidator's statutory powers (WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd  FCA 1164 at , citing Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332).
However, given public policy considerations and the potential effect on the rights of third parties, the determination of whether to wind up a company is not arbitrable (WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd  FCA 1164 at ).
Difficult questions can also arise where the dispute in question concerns ownership or other proprietary or security rights in respect of property of an insolvent party, or where injunctive or declaratory relief is sought against an insolvent party. Those questions will usually require consideration by a court deciding whether to grant leave to proceed with an arbitration or with enforcement of an arbitral award.
Can an insolvent entity commence arbitration?
An insolvent party can initiate an arbitration, whether in relation to claims arising before or after insolvency or bankruptcy but, generally, the decision whether to do so will rest with the insolvency administrator. A voluntary administrator, receiver or liquidator has power under the Corporations Act 2001 to bring proceedings on behalf of a company to which he/she is appointed, which would include arbitration proceedings (Corporations Act 2001 (Cth), Sections 420(2)(k) and (2)(w), 437A(1)(d) and 477(2)(a); Corporations Regulations 2001 (Cth), sch. 8A, cl. 2(j)).
Similarly, a trustee in bankruptcy has the power to commence proceedings, including arbitration, on behalf of the bankrupt, as the right to commence proceedings constitutes property of the bankrupt that vests in the trustee (Bankruptcy Act 1966 (Cth), Section 58(1)). As with an arbitration commenced against an insolvent entity, an arbitration commenced by an insolvent entity must be within the scope of the arbitration agreement and arbitrable under domestic law.
As with the decision of an insolvency administrator to continue an arbitration which has already been initiated by an insolvent claimant, the insolvency administrator will consider the merits of the claim and the utility of commencing the arbitration in the context of the claimant's insolvency. These include the likely costs of the arbitration, the likely recovery from the proceedings, and the likely return to creditors.
A respondent to an arbitration initiated by or on behalf of an insolvent party should consider the risk that the claimant may be unable to meet its obligation to pay the costs of the proceedings, should its claim be unsuccessful. To protect against this risk, the respondent party may wish to apply for security for costs.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
Generally, a valid arbitration agreement is enforceable in Australia unless the parties waive their right to arbitrate, including where a dispute involves an insolvent party. This means that an Australian court cannot hear a claim concerning the application of an arbitration agreement and must dismiss or stay any proceedings brought in respect of the underlying dispute (e.g. International Arbitration Act 1974 (Cth) section 7).
However, the arbitration agreement can only be raised as an objection to court proceedings if the matter in dispute is arbitrable. Disputes that affect the rights of third parties or which have public policy implications are likely to be held by an Australian court not to be arbitrable (ACD Tridon Inc v Tridon Australia Pty Ltd  NSWSC 896 at -, citing A Best Floor Sanding Pty Ltd v Skyer Australia Pty Ltd  VSC 170, where an application for a winding up order was determined not to be arbitrable).
It should be noted that, in Australia, it is often insolvency administrators (rather than courts) who will be making decisions about how the assets of an insolvent party are to be realised and distributed, including decisions as to the existence or quantum of a claim. The onus may lie on a claimant wishing to rely on an arbitration clause to bring court proceedings to compel the matter to be referred to arbitration, where the claimant is not content with the claim being addressed in the context of the proof of debt process.
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
Arbitral awards, both domestic and foreign, are recognised in Australia as being binding on the parties and are formally enforced by way of application to a court for judgment (e.g. International Arbitration Act 1974 (Cth) section 8).
Where an arbitral award is rendered against an Australian party that is or has become insolvent, new and pending proceedings, including any application to a court for enforcement, are automatically stayed, regardless of the form of insolvency administration. Similar restrictions apply to the commencement of any enforcement proceedings in relation to the property of an insolvent company without the leave of a court.
In order to overcome the automatic stay and enforcement restrictions, the party seeking to enforce an award against an insolvent party must apply to a court for leave to proceed with the enforcement application. Or, if the insolvent party is in voluntary administration, the claimant may commence a proceeding if the written consent of the voluntary administrator is obtained.
In determining whether leave should be granted, the court will consider whether the balance of convenience lies in allowing the claimant to proceed with the application to enforce the award or in pursuing the claim by lodging a proof of debt in the respondent's insolvency administration or bankruptcy (where it will be adjudicated on by the insolvency administrator). The nature and complexity of the arbitral award will likely impact the decision on whether leave is granted.
In the course of a proceeding to enforce an arbitral award, the award may be challenged by the parties in an insolvency context in the same way as if all of the parties were solvent. For example, the court may refuse to enforce an award in certain circumstances, such as if (International Arbitration Act 1974 (Cth) section 7):
- the dispute is outside the scope of the arbitration agreement;
- the arbitration agreement is invalid;
- the subject matter of the dispute was not properly arbitrable; or
- enforcement of the award would be contrary to public policy, e.g. the award was affected by fraud, corruption or breached the rules of natural justice.
However, the stay on various types of legal and enforcement proceedings against insolvent companies and bankrupt individuals discussed above may restrict the ability of the solvent party to make such a challenge against an insolvent party.
Awards of monetary amounts which are unsecured will generally rank pari passu with the claims of other unsecured creditors. The claims of some unsecured creditors, e.g. employees, enjoy priority over other unsecured claims under the Corporations Act 2001 (Cth). Awards of ownership or security interests in the property of an insolvent party or which compel an insolvent party to take some action present more complex issues and may require determination by a court (either in an application for leave or otherwise).
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
In March 2020, the Australian government introduced temporary measures providing relief for companies and individuals facing distress as a result of Covid-19. In particular:
- the insolvent trading provisions of the Corporations Act 2001 (which in Australia exposes directors to personal liability for debts incurred by a company at a time when the company was, or was likely to become, insolvent) were amended to exclude from their operation any debts incurred since 24 March 2020 in the ordinary course of its business; and
- the rules relating to creditors' statutory demands and bankruptcy notices (which are precursors to action by creditors to wind up companies or bankrupt individuals) were modified to increase (from A$2,000 for creditors' statutory demands and A$5,000 for bankruptcy notices, to A$20,000) the monetary threshold for issuing a creditors' statutory demand or bankruptcy notice and to increase (from 21 days to six months) the time period for responding to a creditors' statutory demand or bankruptcy notice.
Those temporary relief measures that were in effect during 2020 expired on 31 December 2020, although from 1 January 2021, the monetary threshold for issuing a bankruptcy notice was increased permanently to A$10,000. The new debt restructuring process for small businesses (with debts of less than A$1 million) also commenced on 1 January 2021.