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

According to Portuguese law, insolvency must be declared by the insolvency court and be published on the Ministry of Justice website, in order to ensure that creditors are informed of the insolvency proceedings. In its decision, the insolvency court appoints an insolvency administrator, although, in some cases, despite the appointment of the insolvency administrator, the insolvent party may still be allowed by the court to manage the insolvency estate (debtor in possession).

A party’s insolvency during an arbitration has no effect on pending proceedings, which will be allowed to continue. Nevertheless, the fact that the arbitration proceedings will continue does not excuse the claimant from also having to file a proof of claim in the insolvency proceedings in order to get paid in said proceedings.

Once appointed, the insolvency administrator will automatically replace the insolvent party in any pending arbitration, to the extent that such proceedings might have a positive or negative impact on the insolvency estate.

However, due to conflicting case law, it is not entirely clear whether such automatic replacement would occur when the debtor manages its own insolvency estate. Considering that the replacement is an automatic effect from the law, if the insolvency administrator does not actively intervene in the proceedings, this will not necessarily prevent the arbitration from continuing (and a decision being issued against or in favour of the insolvency estate). Ultimately, this will depend upon several factors, such as the insolvency estate’s role in the arbitration (claimant or defendant) and the stage of the proceedings when the replacement takes place.

When the insolvency administrator acts on behalf of the insolvent party, he/she must accept the arbitral proceedings in their current state. The insolvency of one of the parties as such does not enable the counterparty or the insolvency administrator to amend the respective claims in the arbitration. Any amendment to the initial claims or the introduction of new claims would continue to be assessed under the rules applicable to the arbitration.

The insolvency administrator may set aside some acts, omissions and/or agreements entered into by the insolvent entity that are considered detrimental to the insolvency estate (i.e. acts that reduce, prevent, jeopardise or delay the payment of the creditors). The set aside takes effect by means of a registered letter in the context of the insolvency proceedings.

Any affected party may challenge the set aside by means of in court proceedings filed against the insolvency estate. These proceedings are conducted as joined cases of the insolvency proceedings. In the event that the acts or agreements to be set aside are also relevant in the context of a pending arbitration, the arbitration may be stayed by the arbitral tribunal until a final decision is rendered with regards to the court proceedings.

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

Can one initiate arbitration against an insolvent entity?

In Portugal, unless otherwise established in international treaties, once a party becomes insolvent, arbitration agreements entered into prior to the insolvency are suspended if they relate to disputes that have an effect on the insolvency estate. Such disputes would then be settled in domestic courts.

The law does not determine the exact duration of the suspension of the arbitration agreement. While some scholars consider that the suspension should last as long as the insolvency procedure is pending, others allege that, subject to the Creditors Commission’s prior approval, the insolvency administrator may decide to comply with the arbitration agreement in the interest of the insolvency estate. This issue has not yet been resolved and no relevant case law exists to date.

Another question that has raised considerable debate among commentators is whether an insolvent party may seize domestic courts, despite the existence of an arbitration agreement, if it is incapable of funding the arbitration. The issue is not expressly addressed by the law. Although some scholars consider that lack of funding does not entitle a party to resort to domestic courts instead of complying with the arbitration agreement, Portuguese courts have generally decided otherwise.

Both the Supreme Court and the Constitutional Court hold that a party cannot be precluded from accessing justice because of an inability to pay for the arbitration costs. In those cases, parties may alternatively resort to domestic courts. The Supreme Court has also clarified that the mere fact that a party is in insolvency proceedings does not necessarily mean that it is unable to pay for the arbitration costs. The insolvent party bears the burden of proving its inability to fund the arbitration in order to have its dispute decided by domestic courts.

Can an insolvent entity commence arbitration?

As a rule the commencement of insolvency proceedings leads to an automatic stay of arbitration agreements entered into by the insolvent party regarding claims affecting the insolvency estate. Therefore, the insolvency administrator is not entitled to commence new arbitration proceedings after the insolvency has been declared.

Given the limited number of cases involving arbitration and insolvency proceedings, there is no relevant case law resolving this issue. Although some scholars consider that an insolvency administrator could comply with an arbitration agreement and initiate an arbitration, it should be noted that this possibility has not been tested in Portuguese courts.

Finally, as the law suspends arbitration agreements only if they relate to disputes which can impact the insolvency estate, it is arguable whether the insolvent party may still file for an arbitration regarding other types of matters (unrelated with the insolvency estate, such as the assessment of a non-transferable lease).

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

As soon as insolvency proceedings are formally instituted, all claims against the insolvent party become immediately due, except for credits which are dependent upon a condition precedent. As a consequence, all credits over the insolvent party must be claimed in the insolvency proceedings.

This concentration of all claims in the insolvency proceedings is also applicable to creditors with whom the insolvent party has entered into an arbitration agreement, irrespective whether arbitration is pending or whether the claim has already been recognised in an arbitral award.

Hence, there are no processes available to raise the objection of pending arbitration proceedings against insolvency proceedings. Both the insolvency proceedings and pending arbitration may proceed in parallel and once the arbitral tribunal issues an award, parties are required to inform the insolvency court.

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

Creditors who have had their claims recognised in an arbitral award are required to report their claim in the insolvency proceedings.

The existence of an arbitral award will be an important element to support the existence of the claim or to clarify any questions raised by other creditors before the insolvency court.

Foreign awards must be recognised by the Court of Appeal of the place of residence of the person against whom the award will be enforced, before the creditor registers the award in the insolvency proceedings.

The existence of an arbitral award does not affect the ranking of a claim, which is determined by the nature of the claim.

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

Special legislation was introduced in response to the SARS-CoV-2 / Covid-19 pandemic with impact on the Portuguese insolvency regime. Among others, the following measures should be highlighted:

  • the suspension of the 30 day time-limit for a debtor to file for insolvency, as of the date on which the debtor (or, in case of a company, its directors) becomes aware (or should have become aware) of its insolvency from a cash-flow perspective;
  • enactment of a new and more expedited type of recovery proceedings for companies in financial difficulty due to the pandemic;
  • enactment of temporary amendments to insolvency provisions (e.g., introducing more flexibility to adapt insolvency plan proposals to companies affected by the emergency measures and imposing the distribution to creditors of proceeds exceeding EUR10,000 emerging from the sale of the assets in insolvency proceedings);
  • approval of a moratorium on tax obligations; and
  • approval of a moratorium on bank loans until 30 September 2021, provided that the moratorium was requested until 31 March 2021. This entails restriction on lenders’ acceleration or termination rights, an extension of financings with bullet repayments and deferral of all payment obligations.