There are three types of insolvency proceedings under Japanese insolvency law:
- Bankruptcy - equivalent to liquidation; results in the company ceasing to trade. A bankruptcy administrator will be appointed to administer, realise and distribute the assets (or the proceeds of those assets) to the company’s creditors so as to satisfy, as far as possible, the company’s liabilities;
- Corporate Reorganisation - aim is to rescue the company and allow it to operate as a going concern. Only available for a stock company (kabushiki kaisha) and provides for a restructuring plan to be administered by a bankruptcy administrator appointed by the court; and
- Civil Rehabilitation - similar to corporate reorganisation but may be used for all corporations and provides for a rescue plan to be implemented by the company, in most cases debtor management remain in possession supervised by a court appointed supervisor.
In the following, we refer to the above three proceedings collectively as “insolvency proceedings”.
How does a party’s insolvency impact pending arbitration proceedings?
There are diverging views on the applicable procedures with respect to a pending arbitration in the event of a party’s insolvency because they are not expressly codified in the Japanese Arbitration Act (“JAA”). By way of comparison, in the context of litigation, proceedings will be suspended and may be taken over by an insolvency administrator (or, if applicable, creditors of the insolvent party) under the statutory insolvency proceedings. However, the JAA does not include any corresponding provisions and there is some uncertainty in terms of which procedures should be followed.
The dominant view is that the procedures in place in respect of litigation should be applied by way of analogy. The arbitration proceedings would be suspended and the insolvency administrator (and the creditors of the insolvent party if relevant) may choose to resume the arbitration on behalf of the insolvent party. The arbitration would not restrict the insolvency administrator’s ability to avoid the insolvent party’s transactions with the opposing party and the insolvency administrator may file a separate process if appropriate.
Also, the claim in the pending arbitration is not affected by the commencement of insolvency proceeding per se. If the insolvency administrator does not request the lifting of the stay, the opposing party in the arbitration may also apply to resume the pending arbitration.
If the insolvency administrator refuses to resume the existing arbitration, the claims concerned would be handled as a disputed claim under the insolvency proceedings by the insolvency court. The costs incurred by the opposing party in connection with the arbitration would be treated as unsecured claim. The insolvency administrator is bound by the previous procedural acts conducted by the insolvent party.
The insolvent party’s creditors must file their claims within a certain period to the competent insolvency court and identify the claims and their amount under the insolvency proceedings. Creditors are no longer able to exercise their claims once insolvency proceedings have commenced and all claims including those in the arbitration would be subject to the insolvency proceedings. If the arbitral tribunal refuses to suspend the arbitration and continues the proceedings with the insolvent party, the arbitral award would not be enforceable in Japan as it would not comply with the JAA.
Some take the view that arbitration proceedings would not be affected by a party’s insolvency. However, in this situation it is unclear how such an ongoing arbitration would be treated in connection with the pending insolvency proceedings.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
The JAA does not expressly address this point. There are different views as follows:
- The insolvency administrator is in principle bound by the arbitration agreement, and an arbitration can be commenced against the insolvency administrator. However, the insolvency administrator has reasonable discretion to not respond to any notice of claim if it imposes excessive burdens on the insolvent party or if such an arbitration would not be in the interest of the insolvency estate (e.g. inconvenient venue or arbitrator fees). The counterparty would lose its claim if it fails to file the existence and the amount of the claims in the insolvency proceedings.
- The insolvency administrator has discretion to terminate an arbitration agreement as an executory contract (contract where there remain outstanding obligations on both parties). If the arbitration agreement is terminated, the counterparties will only be entitled to unsecured claims for losses or damages in connection therewith.
- Arbitration agreements will be terminated automatically and will not bind the insolvency administrator. This opinion emphasises the importance of the special procedures for determination of claims under the insolvency proceedings. However, in these circumstances, the insolvency administrator may enter into a new arbitration agreement with the counterparty with the competent insolvency court’s permission.
We note that, even if the arbitration agreement is binding on the insolvency administrator, the extent to which the arbitration agreement applies in respect of a dispute is determined separately. This will depend on the wording of the agreement and is determined upon case-specific analysis by reference to the applicable circumstances.
Can an insolvent entity commence arbitration?
While majority opinions allow an insolvency administrator to commence arbitration with permission from the supervising insolvency court, arbitration commenced by insolvency administrators is not commonly observed in Japan.
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
The JAA provides that an arbitral award has the same effect as a final and binding judgment. Its recognition and enforcement are not affected by one of the parties’ insolvency or an ongoing insolvency procedure. The award may only be challenged on the limited grounds set out in Article 44.1 of the JAA. The JAA does not differentiate between domestic and international arbitral awards.
The enforcement action of an arbitral award is suspended upon commencement of an insolvency proceeding, and the holder of the award is required to file evidence with the relevant insolvency court.
The ranking and priority of an arbitral award is determined by reference to the nature of the award. For example, if the award relates to a labour contract, it could be treated as a preferential claim. Otherwise an arbitral award is generally considered as an unsecured claim.