First published in the International Arbitration 1/3LY, Issue 7
Insolvency law contains summary processes for dealing with claims and protections against certain proceedings commencing or continuing. There has been some debate, and recent case law, concerning the primacy of these rules over agreements to arbitrate. In the following article, we look at what the current position is under English law and beyond.
General position under English law
Arbitration agreements, or the authority of validly appointed arbitrators, are not discharged by insolvency. However, when arbitrating with an insolvent entity, there may be issues of capacity or practical problems with enforcing an award, as well as issues with proceedings being stayed by statute.
Office-holders acting in the various forms of insolvency proceeding can generally bring arbitration proceedings under their statutory powers.
Issues arise when:
- the office-holder wishes to commence summary Insolvency Act proceedings contrary to an arbitration clause, or;
- a creditor attempts to bring or continue arbitration proceedings. In these instances, what happens may be determined by the insolvency process that has been instigated.
An administrator (or administrative receiver) has the powers set out in schedule 1 of the Insolvency Act 1986 (IA86) which include a general power to bring or defend "any action or legal proceedings" and a specific power to refer to arbitration any question affecting the company (IA86 schedule 1, paragraph 5 and 6).
In administration scenarios, the moratorium granted under para 43(6) of schedule B1 IA86 means that arbitration proceedings, like conventional court proceedings, cannot be brought or continued against the insolvent company without either permission from the court or the administrator. The court is only likely to grant permission if:
- the claimant has a proprietary right to an asset held by the company, or;
- an arbitral award is needed for the creditor to recover from elsewhere, e.g. pursuant to insurance or a letter of indemnity (LOI).
Liquidation (compulsory and voluntary)
For the court to make an order placing a company into compulsory liquidation, a creditor needs to make an application to the courts, showing that debts are unpaid. An issue, therefore, arises if a creditor seeks to assert that a debt is owed and unpaid when the underlying contract contains an arbitration agreement. The Court of Appeal held in Salford Estates (no 2) Ltd v Altomart Ltd  EWCA 1575 Civ that the Arbitration Act 1996 does not prevent a creditor, whose claim is subject to an arbitration agreement, from presenting a petition. However, it went on to determine that if that creditor seeks to found the petition on a debt that is subject to an arbitration agreement, it would stay or dismiss a winding-up proceeding unless the debt was admitted. Put simply, this means (save for in exceptional circumstances) a spurious defence of a petition debt, where the underlying contract contained an arbitration agreement, would be sufficient to prevent the creditor petitioning.
Once the company is in liquidation, the liquidators can bring or defend "legal proceedings" (including arbitration) in the name of or on behalf of the company ((s161(1)(a) and para 4, part II, schedule 4 IA86)).
Case law (Syska (Elektrim) v Vivendi Universal SA  EWCA Civ 677 and more recently Philpott v Lycee Francais Charles de Gaulle School  EWHC 1065) has confirmed that the appointment of a liquidator does not terminate an existing arbitration agreement.
Arguably, a liquidator could disclaim an arbitration agreement as an onerous contract under s178(3) IA86, but if the counterparty has performed its obligations under the contract, it seems unlikely the courts would permit this.
In Philpott, both the Company and the creditor had claims against each other pursuant to a construction contract containing an arbitration agreement. The High Court determined that the liquidators should not use the summary IA86 process for determining the value of the net claim, but should go through the arbitration procedure. However, to the extent there is only a claim being made against the Company, it is thought likely that the Court would not require an arbitration, but in most instances would favour the summary methods set out in IA86.
There is no automatic stay of arbitration or other proceedings when a winding-up petition is presented, but an automatic stay arises on an order being made (s126 & 130 IA86). In the case of a voluntary liquidation, there is no automatic stay, but the court can (and usually does) stay matters on the application of the liquidators. Again, even though the test is slightly different, the court would be more likely to allow proceedings to continue if the creditor had a proprietary claim or can then claim against a third party.
Cross border issues
There are numerous ways foreign insolvency proceedings can be recognised in England & Wales. In recent years, these have been predominantly governed by the EU regulation 1346/2000 (as amended) (EU Regulation) (which relate between EU member states, save for Denmark), and the UK’s enactment of the UNCITRAL model law on cross border insolvency recognition, being the Cross Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR).
Both recognition measures seek to allow foreign "main proceedings" office-holders to be allowed their local law powers and apply their local law to the insolvency in the UK. "Main proceedings" are those undertaken in the place where the company has its "centre of main interests", which is usually where its registered office or management function is located.
As most insolvency processes include an automatic stay on arbitration proceedings, this is reflected in the CBIR (Sch.1 Ch.III Art.20(1) and (2)), though the court has discretion to lift this or modify this.
Scenarios where the court may lift a stay include:
- Where it benefits the interests of creditors, for example in United Drug (UK) Holdings Ltd v Bilcare Singapore PTE  EWHC 4335 (Ch), where a stay of proceedings was lifted against a Singaporean company because the arbitration would allow the creditor to determine its rights and obligations and to launch proceedings against a solvent company within the group;
- Where the court considered it better to allow a tribunal to determine the issue, for example in American Energy Group Ltd v Hycarbex Asia Pte Ltd (In Liquidation)  EWHC 1091, where the stay was lifted because the arbitration claim was ready for immediate hearing, and the liquidators had left making their application for recognition very late.
A further complication is added where arbitral proceedings are afoot. Both the CBIR and EU Regulation state that the local law of the existing proceedings applies to determine whether or not they should be stayed, not the law of the insolvency. For example, in Syska (Elektrim) v Vivendi Universal SA  EWCA Civ 677 at first instance the court considered whether or not to lift a stay under the EU Regulations where there were jurisdictional issues at play. In this case there were ongoing arbitration proceedings in England and a later insolvency in Poland. Under Polish law the arbitration agreement would have been annulled by the insolvency, but the arbitration agreement itself was governed by English law. The key issue was, therefore: which law governed the effect of Polish insolvency proceedings on the arbitration agreement? If proceedings have not yet been commenced at the time of insolvency then this, the court held, is determined according to Polish law. Here, however, they were pending at the date of insolvency, so "the law of the Member State in which the lawsuit is pending" applied, i.e. English law, so the arbitral agreement stood. This in itself can be a good reason to commence arbitral proceedings swiftly, if you discover that the counterparty may be about to enter an insolvency process.