Arbitration and Insolvency or Arbitration v Insolvency

Arbitration and Insolvency or Arbitration v Insolvency? Presented by: V. Lazić, T.M.C. Asser Institute (The Hague); Utrecht University Date: 14th May 2021 Relevance/Applicability Of Provisions Of Insolvency Law In Arbitration - From The Point Of View Of Insolvency Law - Do they tend to be applied/have impact on arbitral, proceedings? commencement, or continuation of legal proceedings', legal representation- no reason to treat arbitration differently - e.g., Art. 18 EU Insol Reg - Effectiveness when arbitration has its a seat in the country where insolvency proceedings are opened - yes - Effectiveness when arbitration has a seat 'abroad'/in the country other than country in which insolvency proceedings are opened: • Relevance of effects of foreign insolvency proceedings in the country of the seat? • Enforceability of the award a) Within insolvency proceedings (if still on time); b) In other jurisdictions Approaches Adopted By Courts At Place Of Insolvency When Other Party Invokes Arbitral Agreement - Exception: insolvency law invalidates arbitration clauses - Majority approach: As a matter of principle, the commencement of insolvency proceeding does not render pre-petition arbitration agreements invalid, but there may be exceptions and limitations to it. - Thereby, the following provisions of the insolvency law may be relevant: a. Executory contracts b. Avoidance powers of the trustee, in respect of the preferential legal acts of the debtor c. Nature of claims arising in bankruptcy liquidation in determining jurisdiction competence of the courts in bankruptcy and competence of arbitrators d. Pending legal proceedings and those to be initiated Approaches Adopted By Courts At Place Of Insolvency When Other Party Invokes Arbitration Agreement - Majority approach: Yes, as a matter of principle, the commencement of insolvency proceeding does not render pre-petition arbitration agreements' invalid, but there may be exceptions and limitations to it: - (Non) Binding Nature with respect to the Avoidance Powers of the Trustee • May the arbitration clause successfully be invoked by or against the trustee when he exercises powers conferred by insolvency laws to invalidate prior fraudulent transactions and preferential transfers of the debtor? • "...the trustee's section 544(b) claims are not arbitrable under the arbitration clause, because they are not derivative of the debtor and the trustee is accordingly not bound by the Customer Agreement with respect to them". (Hays & Co. V. Merill Lynch..., 885 F.2d 1149 (3d Cir. 1989), 1153); Cf. case law in Germany (BGH 17.10.1856, NJW 1956) and in the Netherlands (Rechtbank Utrecht, 11 August 1993, excerpt in TvA 1 (1995), p. 37-37); Germany BGH 17.10.1956 NJW 1956, 1920 • 11 May 2011 Larsen Oil and Gas Pte Ltd v Pteropod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore), [2011] SGCA 21 • Contra: England - genuine 'avoidance actions'?  06 June 2018 - Nori Holdings Ltd v Bank Otkritie Financial Corporation, [2018] EWHC 1343 (Comm); - avoidance action under both Bankruptcy Law and general Civil Code, such abuse of rights and conspiracy to defraud  Even when there are insolvency 'avoidance actions'!  23 September 2020 - Riverrock Securities Ltd v International Bank of St Petersburg (Joint Stock Company), [2020] EWHC 2483 (Comm) Tactical/Practical Considerations For Insolvency Administrator Of Bringing Action In Courts - Tactical/practical considerations in case of commencing proceedings on behalf of the estate when bringing actions in courts: • LOUIS DREYFUS COMPANY SUISSE S.A. (A Company incorporated in Switzerland) v INTERNATIONAL BANK OF ST. PETERSBURG (JOINTSTOCK COMPANY) (A Company in liquidation in The Russian Federation) [2021] EWHC 1039 (Comm) • Para 40. LDCS did not object to the jurisdiction of the Russian Court insofar as it arose from a dispute relating to the invalidation of a debtor's transaction in connection with a bankruptcy case before the Russian Court. However, LDCS raised timely objections to the jurisdiction of the Russian Court upon the amendment by the DIA of IBSP's claim against LDCS to the New Debt Claim, being a claim for payment arising from underlying and distinct commercial transactions governed by English law and containing the mandatory LCIA arbitration agreement. Point Of View Of Arbitration - In general, arbitrators should take into consideration provisions of insolvency law: • In order to comply with the requirement of due process • To validly establish jurisdiction – certain provisions may affect arbitrator's jurisdiction - Pending proceedings • Representation of the estate by the trustee - should be taken into consideration by arbitrators for reasons of due process, since:  Powers and duties are determined/dependent on insolvency law  Necessary approvals - in some legal systems for all actions on behalf and against the estate,  Trustee's authority certain actions may be taken over by the trustee only after the claims have been dealt with in insolvency proceedings first (e.g., claims contested in verification) • Continuation depends on the leave of insolvency court/discretion consequences if arbitration is continued regardless of the insolvency court's order to stay proceedings - Non-pending proceedings • Representation of the estate by the trustee arbitrators for the same reasons of due process should be taken into consideration by • Legal consequence affecting arbitrators' jurisdiction:  (Non)biding nature of the arbitration clause against the trustee in principle, should be taken into consideration only if they are of such a nature that truly affect jurisdiction (i.e., if arbitrators may not validly establish jurisdiction)  Insolvency of a party invalidates pre-insolvency arbitration clauses even if a trustee would have interest in commencing/continuation (exceptional in comparative insolvency law) no reason for arbitrators to take them into considerations (no obvious 'basic principles of insolvency law' are herewith protected; may be even contra productive.  Executory contracts binding nature if the trustee accepts the underlying contract contrary decision PETROWEST Corporation v. Peace River Hydro Partners, 2020 BССА 339 (Can LII) Court of Appeal for British Columbia 30 November 2020; rejection of the underlying contract - a claim of an 'ordinary', non-secured non-preferred creditor consequences for arbitration: in principle, does not exclude arbitration see objective arbitrability • Objective arbitrability - pure or 'core insolvency' matters are not arbitrable; possibly to be implicated when there are claims against the estate, in particular with respect to a claim of an 'ordinary', non-secured non-preferred creditor • Public policy considerations - basic principles of insolvency laws, such as preclusion of individual actions of creditors - - Enforceability of the award • Influence on the decision on jurisdiction • Influence on the conduct of arbitration and the content of the award If a trustee is considered to be bound by an arbitration agreement in a particular kind of situation, which provisions of insolvency law should be respected by arbitrators in order not to jeopardize "enforceability" of the award? (Possible influence of insolvency procedure on the conduct of arbitration and on the content of the award - Representation - Nature of the arbitral award (e.g., France: declaratory - statement of the amount, but not of a condemnatory nature) Approaches Adopted By Courts At Place Of Insolvency When Other Party Invokes Arbitration Agreement - Executory Contracts • If accepted, arbitration clause should be accepted, as well. Taking into consideration the principle of separability of an arbitration clause, the rejection of the executory contract by the trustee should not influence the effectiveness of an arbitration clause contained therein. (e.g., US: Société Nationale Algérienne v. Distrigas, 80 B.R. 606 (D.Mass. 1987); In re Monge Oil Corp., 83 B.R. 305, 308 (Bankr.E.D. Penn 1988); Hays & Co. V. Merill Lynch..., 885 F.2d 1149 (3rd Cir. 1989); Legal theory in Germany) • England, yes if the trustee accepts the contract in bankruptcy of an individual (former Sect. 3 AA of 1950, taken over in Consequential amendments (Section 107(1), under the 1996 Arbitration Act, NO. 46 "46. In the Insolvency Act 1986, after section 349 insert - ..."); also court decisions in France: Cour de cassation 19 July 1982, Rev. arb., 1983, pp. 321-323; Cour d'appel Grenoble • BUT unclear if the contract has been rejected: the commentators suggesting the applicability of the provisions on a disclaimer of unprofitable contracts by the liquidator with the leave of the court (Mustill/Boyd, p. 153 and Bailey/Groves/Smith, p. 483); Cf. French literature - not clear, different possibilities Arbitral Tribunal Where Action Is Pending /To Be Initiated Concluding Remarks - Provisions of insolvency law that should be respected/taken into consideration often no genuine LIMITATIONS - Trustee - possibility to take over the proceedings/obtain necessary approvals (stay of proceedings) • Reasons of fair trial and due process may be implicated should arbitral proceedings be instituted or continued in violation of the relevant insolvency laws. This is particularly so considering that the decisions on the commencement or continuation of legal actions may be subject to approval by the courts having jurisdiction in insolvency and may require the involvement of other creditors - The effects of insolvency proceedings should be recognized outside the jurisdiction where such proceedings are opened and respected by arbitrators, when they are of such a nature that serve the purposes and objectives of the insolvency laws which are generally accepted (e.g., principles of the preclusion of individual actions and of the equal treatment of non-secured creditors, other principles intended to maximize assets and to distribute the estate in an orderly fashion or to reorganize a business) - Conflict of law rules generally applied outside of the context of insolvency proceedings - may not be helpful (e.g., of Viviendi; Riverrock) and should be adjusted