19 July 2010
Arbitration proceedings in England are creatures of contract, arising out of the agreement between the parties to refer their disputes to arbitration. However, except in limited circumstances, when one of the parties to an arbitration agreement becomes insolvent, England’s statutory insolvency regime takes precedence over the rules of the arbitration.
The Insolvency Regime in England and Wales
The formal insolvency regime in England and Wales is primarily governed by the provisions of the Insolvency Act 1986, and related legislation. Where the insolvent party is a foreign entity that either has a presence in the United Kingdom or is involved in proceedings there, the EC Regulation on Insolvency Proceedings (EC Regulation)1 or the UNCITRAL Model Law on Cross-Border Insolvency (Model Law)2 may also come into play. This article focuses on the interplay between the two primary forms of formal insolvency procedure available (compulsory liquidation and administration) and arbitration proceedings where the seat is in London.
The Impact of Insolvency on Arbitration Proceedings
When an entity enters either compulsory liquidation or administration, proceedings against that entity are automatically stayed. In the case of compulsory liquidation, the stay applies from the making of the winding up order and prevents both the commencement and the continuation of proceedings against the company or its property unless done with the permission of the court.3
Where a company has entered administration, the stay applies from the earlier of (i) the making of an application for an administration order; (ii) the filing of a notice of intention to appoint an administrator; and (iii) the appointment of the administrator. The stay restricts the commencement or continuation of any legal process against the company or its property except with the consent of the administrator (if already appointed) or the permission of the court.4
It is commonly accepted that the stay of "proceedings" or "legal process" in compulsory liquidation and administration extends to arbitration proceedings. Accordingly, when an entity enters either form of formal insolvency procedure, any pending or contemplated arbitration proceedings situated in London are automatically stayed.
Alternatively if the entity is subject to insolvency proceedings in a foreign jurisdiction there will not be an automatic stay on the commencement or continuation of arbitration proceedings against that entity in London. However, a foreign insolvency appointee can seek assistance from the courts in England and Wales pursuant to the Cross-Border Insolvency Regulations 2006 (CBIR).5 Under the CBIR, insolvency appointees of foreign entities can apply for recognition of their insolvency proceedings as foreign main proceedings (if they are taking place in the state where the debtor has the centre of its main interests) or foreign non-main proceedings (if they are taking place in a state where the debtor has an establishment). If proceedings are recognised as foreign main proceedings, an automatic stay applies to the continuation of individual actions (including arbitration) concerning the debtor in the place where recognition is granted. If proceedings are recognised as foreign non-main proceedings, the foreign representative can also ask the court to impose a stay on the continuation of individual actions, including arbitration.
The position is not quite as straightforward when the insolvent entity is subject to insolvency proceedings that have been opened in another EU Member State. If that is the case, and if arbitration proceedings have been commenced in London prior to the opening of the insolvency proceedings, it is the law of England, rather than the law of the other EU Member State, that determines the effect of those insolvency proceedings on the pending arbitration.6
This position was recently confirmed by the Court of Appeal in the case of Syska (as administrator of Elektrim SA (in bankruptcy)) and another v Vivendi Universal SA and others.7 In that case, the court confirmed that where an entity was subject to Polish insolvency proceedings but was involved in an arbitration in London prior to those insolvency proceedings being commenced, it was the law of England that was to determine the effect of the insolvency proceedings on the pending arbitration. The court further held that there was nothing in English domestic law that would prevent the arbitration from continuing, notwithstanding the Polish insolvency proceedings. If, however, the arbitration had not been commenced prior to the insolvency proceedings being initiated, Polish insolvency law would determine the effect of the insolvency proceedings on whether any future arbitration could be commenced8 and any stay of proceedings under Polish law would have effect in England.
The Availability of Security for Costs in Arbitration Proceedings in London
Both liquidators and administrators have the power to bring legal proceedings, including arbitration, in order to take possession of, collect and get access to the property of the company to which they are appointed.9 Accordingly, a respondent in arbitration proceedings in such circumstances should consider applying for security for its costs of the arbitration. This consideration also will be a relevant where the claimant is suspected to be, or to become, insolvent, but has not yet entered a formal insolvency procedure.
In principle, security for costs is available to a respondent in an arbitration that has been commenced by an insolvent party (whether or not formal insolvency proceedings have been commenced in relation to that party) but, in practice, this will depend on the rules applicable to the arbitration in question and any exclusion of those rules agreed between the parties.
The provisions of the Arbitration Act 1996 (Act) apply when the seat of the arbitration is in England and Wales or Northern Ireland (regardless of whether the parties have agreed that another set of arbitration rules are also to apply). Section 38(3) of the Act provides that the tribunal may order a claimant to provide security for the costs of the arbitration, but it does not specify the grounds on which such an order may be made (other than to provide that the fact that a party is foreign to the United Kingdom is not a sufficient basis on which to make a security for costs order). In addition, all of the powers of the tribunal must be exercised by the tribunal acting fairly and impartially as between the parties. Section 38 of the Act is not a mandatory provision and, accordingly, the parties may exclude its operation by agreement, although it seems unlikely that parties would want to do this.
In addition to the provisions of the Act, the power for the tribunal to award security for costs may also be contained in the rules the parties have selected to apply to any arbitration proceedings. For example, Article 25 of the London Court of International Arbitration Rules gives the tribunal the power, unless otherwise agreed by the parties, to order the claiming party or the counterclaiming party to provide security for legal or other costs of the respondent to the claim or counterclaim. Conversely, the tribunal also has power to order a respondent to provide security for all or part of the amount in dispute.
Factors that may be taken into account by a tribunal considering a security-for-costs application, and that are relevant to issue of insolvency, include whether the claimant is able to satisfy any costs order made in the respondent’s favour, whether the security-for-costs order would force the claimant to abandon its claim and whether the claimant's impecuniosity is a result of the respondent's alleged conduct.
A security-for-costs order generally provides for a time within which security must be given, stays all further proceedings until security is given and provides for the action to be dismissed without further order if security is not given within the specified time. Section 41(5) of the Arbitration Act also specifically empowers the tribunal to dismiss proceedings if a claimant fails to comply with a security for costs order.
Where an English insolvency process intervenes where arbitration proceedings are pending or on foot, consideration should be given not only to whether the solvent party should seek protection in relation to its costs, but also to what impact the insolvency regime may have on the arbitration proceedings themselves.
1. Council Regulation (EC) No 1346/2000 on Insolvency Proceedings.
2. The Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law in 1997.
3. Section 130(2) of the Insolvency Act 1986.
4. Section 43(6), Schedule B1 of the Insolvency Act 1986.
5. Which enacts the Model Law in the UK.
6. Articles 4 and 15 of the EC Regulation.
7.  All ER (D) 91 (Jul).
8. Article 4 of the EC Regulation.
9. A liquidator in a compulsory liquidation will require the sanction of the court before commencing any proceedings.