In a rare finding of denial of justice, an arbitral tribunal acting under the auspices of the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”) has upheld a claim brought by Dan Cake, a Portuguese cake and biscuit supplier, in relation to the liquidation of its Hungarian subsidiary. The tribunal found that the Hungarian Bankruptcy Court’s conduct of the liquidation proceedings constituted a breach of Hungary’s obligations under the Portugal – Hungary bilateral investment treaty (“BIT”) to accord fair and equitable treatment (“FET”) to Dan Cake’s investment and not to impair by unfair measures the liquidation of such investment.
The tribunal described the Bankruptcy Court’s conduct as “shocking” and in “flagrant violation” of Hungarian law, amounting to a clear denial of justice for Dan Cake in breach of the BIT. As the proceedings have been bifurcated, the consequences of Hungary’s breach are reserved for subsequent determination during the quantum stage. The decision on liability confirms existing jurisprudence concerning the types of claim involved in this case and serves as a reminder of the high threshold claimants must meet to satisfy the denial of justice test, including in relation to manifestly unjust decisions rendered by the domestic courts as State organs.
Background – denial of justice claims
Claimants commonly raise denial of justice claims as violations of the FET standard. However, the test for establishing denial of justice is notoriously difficult to satisfy, particularly in relation to a substantive review of a manifestly unjust domestic judgment, as it is universally accepted that international tribunals cannot act as appeal tribunals. The leading case is Elettronica Sicula S.p.A. (United States of America v Italy), 1989 ICJ 15, where the International Court of Justice defined denial of justice as “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.”
Dan Cake acquired a majority shareholding in Danesita, a Hungary company which supplied biscuits and cookies to several European countries. Several of Danesita’s creditors had initiated liquidation procedures against it, leading the Bankruptcy Court to declare the company insolvent and appoint a liquidator.
Under the Hungarian Bankruptcy Act (the “Act”), the liquidator is obliged to proceed with the public sale of a company’s assets within 120 days of the date of the liquidation order, unless the creditors agree to postpone the sale process. Danesita exercised its right to request the court to convene a composition hearing, where creditors may approve an agreement with the company. The Bankruptcy Court denied Danesita’s request and ordered it to make several supplementary filings, listing seven requirements to be fulfilled before a composition hearing could be convened. The decision also reminded the liquidator of his statutory duty to sell the company’s assets within 120 days of the liquidation order. Shortly after the Bankruptcy Court’s decision (which could not be appealed) the liquidator announced and executed the public sale of Danesita’s assets.
The arbitration proceedings
The ICSID tribunal noted that time had been of the essence for convening a composition hearing in respect of Danesita, particularly in light of the liquidator’s duty to commence the sale process within 120 days of the liquidation order. It was observed that the prompt convening of a composition hearing was the only way for Danesita and Dan Cake to avoid the sale of Danesita’s assets and the disappearance of Danesita’s legal personality.
The tribunal found it “surprising” that the decision concerning the convening of a composition hearing contained a paragraph “strongly insisting on the liquidator’s duty to sell the debtor’s assets within 120 days of the date of publication of the liquidation proceedings.” As regards the supplementary filings requested by the Bankruptcy Court, the tribunal found that the Court did have the power to make such requests if the documents were “necessary”, taking into account the specific nature of the requested measure. The tribunal emphasised that it was not a court of appeal and could not substitute its own view for that of the Bankruptcy Court as to whether the items were “necessary”. However, the tribunal considered that it was open to it to find that the Bankruptcy Court decision was unfair or inequitable if some of the requirements were “obviously unnecessary or impossible to satisfy” or “in breach of a fundamental right”. The tribunal found that the requirements imposed by the Bankruptcy Court for convening a composition meeting were unnecessary, two were in violation of Dan Cake’s rights as creditor and at least one was impossible to satisfy within a reasonable time. The Court’s decision was also therefore rendered in “flagrant violation” of the Act. Although a composition hearing may not have been successful, the exercise of Dan Cake’s rights was frustrated by the imposition of the seven requirements and the reminder of the liquidator’s obligation. The Bankruptcy Court, acting as an organ of the Hungarian State, made the sale of Danesita’s assets inevitable, its conduct was attributable to Hungary under international law and Hungary thereby violated its obligation to treat Dan Cake in a fair and equitable manner.
The tribunal also considered Dan Cake’s claim that Hungary had failed to ensure that its investment was not impaired “by unfair or discriminatory measures”. Having already established that the Bankruptcy Court’s decision was “tainted by unfairness”, the tribunal found that Hungary had also breached the non-impairment standard.
This decision serves as a reminder that, although States are afforded a wide “margin of appreciation” in the application of their own law, they must also provide a judicial system that applies such law in a manner that meets international standards in the treatment of foreign investors. The imposition of seven “unjustified obstacles” on Dan Cake against which there was no “reasonably available further recourse” was thus treated as a “systemic” “breakdown” in the administration of justice. The ICSID tribunal considered the various tests of denial of justice developed by international courts and tribunals in other cases and found that they all “perfectly fit” the decision of the Hungarian Bankruptcy Court. The Court had administered justice in a “seriously inadequate way”, the decision was “clearly improper and discreditable” and there was “manifest injustice in the sense of a lack of due process”.
The language of the tribunal’s decision reveals its bewilderment at the Bankruptcy Court’s conduct, which is described as “puzzling”, “surprising” and “shocking”. However, it was not necessary for the tribunal to consider why the Court had acted as it did, and it resisted the temptation to do so: “For whatever reason, the Court did not want to do what was mandatory”. Regardless of motive, it was clear that the Bankruptcy Court’s “flagrant violation” of Hungarian law had removed any possibility for Dan Cake to have a fair chance at saving its investment, amounting to a rare finding of denial of justice which shocked “a sense of juridical propriety”. Investors considering bringing investment law claims based on denial of justice should closely scrutinise the factual circumstances of this case and the tribunal’s related reasoning.