Navigating the Interplay Between Arbitration and Insolvency in International Disputes
Submitted by Anand Kr. Maurya, 5th year BBA-LLB(Hons.) student, Chandigarh University & NALSAR University of Law, Hyderabad.
Introduction:
Globally, the pace of intricate corporate deals, commercial transactions, and economic expansion has quickened recently. As a result, the efficiency of conflict resolution procedures is even more crucial. However, where the two legal frameworks of insolvency and arbitration laws intersect, it becomes challenging to proceed with such efficiency. A fairly centralized legal framework governs insolvency law, which necessitates the aggregation of all debtor-related claims and conflicts. On the other hand, arbitration involves little to no court control, it encourages decentralization. In light of this, arbitration might be seen as a body of law that respects party autonomy, upholds privacy and secrecy. However, given the complexity of the approaches, understanding the impact of arbitration on insolvency is critical to the effectiveness of dispute resolution.
The Notion of Conflict between Arbitration and Insolvency:
The contradiction between arbitration and insolvency was characterized as “a conflict of almost polar extremes.” In Re United States Lines Inc., it was held that wherein arbitration policy favours a decentralized approach to dispute resolution but bankruptcy legislation trends unavoidably towards centralization. The Insolvency law “is structured to support the domestic economy, even though both systems aim to resolve claims.” Insolvency ensures the best potential return for each shareholder by raising the value of the corporate debtor assets and maximizing stakeholder returns. Hence, by offering a variety of bankruptcy resolution options, insolvency benefits the greatest number of stakeholders. By default, stakeholders are more likely to put off taking individual enforcement actions (like arbitration) in order to increase revenue. It is noticeable that there are regional variations in the relative importance of different debts during insolvency procedures and the likelihood of continuing through arbitration. A transnational component of international commercial arbitration is its ability to settle disagreements arising from cross-border business transactions in which the parties use arbitration as a personal remedy for their claims and disagreements. The arbitration principles mandate that the court’s jurisdiction be replaced by arbitration for all disputes covered by an arbitration agreement. Cross-border insolvency also provides for an arbitrary stay at the onset of insolvency, so that, firstly, all creditors are treated in the same way as in rem proceedings and secondly, the relevant courts are allowed to exercise exclusive jurisdiction to ensure uniform compliance proceedings. Therefore, there is a “selection of forum” conflict where the parties have chosen to submit to the jurisdiction of the arbitrator.
The US Court’s ruling in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc. drastically broadened the range of bankruptcy cases that can be arbitrated. Additionally, Sec. 157(b)(2) of the US Bankruptcy Code lists a non-exhaustive list of “core” processes. Arbitration must be required in non-core concerns as US Bankruptcy Courts lack jurisdiction over them. Even if the courts should decide on the fundamental questions of insolvency, not all of these essential issues would necessarily conflict with or jeopardize the fundamental goals of the Bankruptcy Code and may be resolved by arbitration & the well-known cross-border European case Syska v. Vivendi serves as an example of the parties risks if simultaneous arbitration and bankruptcy proceedings collide. The English Court of Appeal has affirmed the LCIA Court’s ruling that ongoing arbitration proceedings should not be impacted by international insolvency proceedings. It was observed that these procedures are determined by the laws of the nation in which the procedure is carried out and that to preserve the reasonable expectations of debtors so that disagreements must be adequately settled.
Arbitrability of Insolvency Disputes:
Arbitration of insolvency disputes is not new and has been addressed in various jurisdictions globally. It is clear that core insolvency disputes involve matters such as issuing liquidation orders or administration orders and the appointment of receivers that cannot be resolved by arbitration.
The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, states that member state courts have the right to refuse to enforce foreign awards if this would be contrary to their disclosure politics. Because enforcement proceedings are essentially domestic proceedings where courts are likely to refuse to enforce arbitral awards against the insolvent party, even non-fundamental issues may not be resolved because courts may rely on public policy. One of the cornerstones of the country’s economic and legal system is insolvency legislation, which promotes market stability and economic stability and growth. Therefore, insolvency legislation can be seen as part of the country’s public policy. It’s interesting to note that the Indian court in Cruz City 1 Mauritius Holdings v. Unitech held that enforcement of an arbitral decision can only be refused if doing so would be against the natural justice, morality, and general policy of Indian law.
In Parsons and Whittemore case US court stated that there is a difference between government policy and public policy, such that government policy cannot override international accord obligations. In this specific case, the arbitral award was upheld, and eventually the decision stated that enforcement of the award should not conflict with the overriding laws of morality and justice of a country. Moratoriums in bankruptcy law consider violations of automatic stay as violators of public order, which means no further proceedings can be taken against non-existent companies and their assets with stringent penalties imposed on defaulters. Therefore, an arbitration award that violates the Bankruptcy Code is void and unenforceable; however, an arbitration decision settling other contractual disputes between debtors would be valid.
Insolvency laws grant stay orders on arbitration proceedings upon the commencement of insolvency proceedings to ensure just and equitable treatment for creditors. Core matters, such as initiation of insolvency proceedings, verification of creditor’s claims, and winding up of companies, are considered non-arbitrable under insolvency jurisprudence. Arbitrators are not competent to settle these core matters.
Different Nations’ Perspectives on Insolvency & Arbitration:
Australia has no defined bifurcation between core and non-core insolvency matters, with adjudicating authorities denying stay if the rights of parties stem from the contract rather than the statute. Swiss law does not affect arbitrability, but core matters like repayment of preferential transactions, identification or repudiation of debt, asset decisions, and credit committee determination are arbitrable. In the case of Mansfield, the Federal Court of Australia held that when arbitration claims “have been vested in or are exercisable” by the party to the arbitration agreement, a liquidator can pursue them. However, disputes concerning undervalued transactions and transfers to defeat creditors were not arbitrable.
The UK courts interpret public policy doctrine narrowly, with parties involved in insolvency disputes not restrained from settling through arbitration. However, it is crucial to consider if the matter infringes third-party rights or is against public policy. The liquidator’s power to intervene and set aside preferential transactions stems from the statute, which benefits all creditors.
The US approach is more definite, with the Bankruptcy Code of the US containing a non-exhaustive list of “core’ proceedings. US Bankruptcy Courts have no jurisdiction in non-core matters, and arbitration must be compelled in such cases. While core insolvency issues should be adjudicated by courts, not all core matters could conflict with or jeopardize the underlying objectives of the Bankruptcy Code and could be settled through arbitration.
Consolidation of Insolvency and Arbitration Laws:
Uncertainty and unpredictability result from the absence of a uniform, well-defined legal framework in both laws related to arbitration and bankruptcy in a complex dispute where both laws are applicable, resulting in a conflict. The International Bar Association (IBA) has published an Insolvency and Arbitration Toolkit to assist parties, counsel, and arbitrators in identifying subjects that prevent legal risks arising from simultaneous actions against debtors in domestic and international arbitration. This toolkit helps reduce future risks and delays associated with counterparty bankruptcy, especially from a socio-economic perspective following the COVID-19 pandemic. Insolvency proceedings can represent a public interest and are often considered necessary in many jurisdictions, but can cause problems in the enforcement stage. The toolkit covers issues related to the initiation of arbitration against the insolvent party, the effect of insolvency on judgment, compliance with the same requirements, third-party financing, and payment arrangements.
The UK Companies Insolvency and Administration Act 2020 stipulates that arbitration cannot begin without the liquidator’s approval. In particular cases, the claimant’s and other creditors’ legal interests are weighed equally by the courts. As to the latest Corporate Insolvency and Governance Act (2020), The receivers are permitted to continue with arbitration that takes place either during the pendency, termination, or initiation of insolvency proceedings. This does not impact the contractual arbitration agreements resulting from the overlap with the insolvency procedures.
Conclusion:
A glimmer of hope was the creation of the UNITRAL Model Law on Cross-Border Insolvency and Arbitration.However, it did not succeed in recalibrating the coherence of the relationships of the legislation. The presence of different approaches in different countries even on the same subject highlights the lack of consistency and uniformity in both legal systems. An innovative approach should be followed for deciding whether or not insolvency conflicts may be arbitrated, which seeks to create a win-win situation by advocating for a way to separate non-arbitrable matters from insolvency. This concept aims to achieve a careful equilibrium by taking into account a viewpoint that tries to reduce the inconsistency of laws while maintaining a feeling of equal power to both parties.