The question of which law is applicable to the insolvency of a party in an international commercial arbitration is a topical issue, particularly in the current financial crisis.Whether it be a desire to initiate arbitration; an arbitration that is already underway or where an award is to be enforced, the situation may arise where one party is, or will be, declared insolvent.
The declaration of insolvency implies the intervention of an authority, other than the governing body of a company, that may (or may not) decide to comply with an arbitration agreement or to seek a stay of arbitration proceedings in progress. It would also determine the enforcement of the Award against a party that has been declared insolvent.
The issue becomes more complicated when the laws governing the insolvency proceedings are those of the country where insolvency has been declared, which will not necessarily coincide with those of the arbitration or the place of arbitration. In that situation, we must determine which is the law that will help us to make the right decision to solve the issues above.
As regards to the validity of the arbitration clause, some countries such as Spain, provide that on insolvency, agreements to arbitrate will have no effect during the pending insolvency proceedings. This means that once insolvency is declared it will not be possible to initiate arbitration against a person declared insolvent under Spanish Law.
It is clear that in these cases the applicable law is the law of the country where the insolvency has been declared. It will be these laws that will determine whether the receiver/liquidator may or may not appear at the arbitration or be liable for the arbitration costs.
Where a party to arbitration has been declared insolvent, the question then arises as to whether the procedure can continue, or, conversely, must be stayed. For example, in the case of Spain, a declaration of bankruptcy does not suspend the arbitration proceedings, which will continue until the award is made. However, the U.S. Bankruptcy Code provides for the automatic suspension of the arbitration. Also, according to the 1997 UNCITRAL Model Law on Cross Border Insolvency, the arbitration procedure must be stopped.
In these cases the collision is clear between the law of the insolvency and the law of the arbitration. EC Regulation 1346/2000 on Insolvency Proceedings states that for pending arbitration proceedings the applicable law is that of the place of arbitration.
Finally, regarding enforcement of the Award, the principle of Equality of Creditors that governs all Insolvency proceedings must be taken into account. This principle could be considered as public policy, so that, according to the New York Convention, an award should not be enforced contrary to public policy, i.e. establishing a loan repayment that violates this principle.
The decision rendered in the Elektrim / Vivendi proceedings is a good example of the situations discussed above. In this case, two arbitration courts reached different decisions in London and Geneva. Elektrim was declared bankrupt in Poland. The decisions were appealed. The High Court ruled that the law of the place of arbitration should be applicable and therefore the procedure should be suspended, according to English law.
However, Polish law states that not only should the arbitration be suspended, but that the arbitration agreement must be considered as void.
By contrast, the Swiss Supreme Court ruled that the applicable law should be the law of the country where the insolvency was declared, thus deciding the termination of arbitration. The Swiss Supreme Court's decision has been strongly criticised in legal literature.