19 July 2010
The impact of insolvency proceedings on arbitral proceedings is becoming an increasingly important consideration for parties. Two scenarios can be generally envisioned: (i) a company files for insolvency while it is engaged in arbitral proceedings; or (ii) arbitral proceedings are initiated after insolvency proceedings have commenced. In both scenarios, the parties need to assess how the insolvency proceeding affects the arbitral proceedings. This article assesses the impact of insolvency proceedings initiated in Germany on foreign arbitral proceedings.
Initially, the arbitral tribunal has to determine whether the insolvency proceedings have any impact on the arbitration at all. The proceedings might not if the national laws applicable to the insolvency proceedings restrict their applicability to the territory of that jurisdiction (known as the principle of territoriality).
German insolvency law follows the principle of universality pursuant to Council Regulation (EC) No. 1346/2000 dated May 29, 2000, on insolvency proceedings as well as pursuant to Sec. 335 et seq. of the German Insolvency Code. In other words, German insolvency law demands recognition in any other jurisdiction. Therefore, the arbitral tribunal should recognize the German insolvency proceedings. If they do not, there is a risk that any arbitral award would violate German public policy and, therefore, would not be enforceable in Germany.1
In order to ensure the enforceability of a future arbitral award in Germany, the arbitral tribunal should consider the following issues.
The Insolvency Administrator’s Role
Under German insolvency law the insolvency administrator is the only authority entitled to manage and dispose of the debtor’s assets, regardless of whether these assets are located in Germany or abroad. Consequently, the debtor’s management loses the ability to represent the insolvent debtor. Insolvency administrators act in their own names just as if they2 were the debtor’s legal successor, so any claim a creditor has against the insolvent debtor has to be directed against the insolvency administrator in person.3
German insolvency law does not affect the validity of arbitration clauses the insolvent debtor entered into with creditors. Moreover, the insolvency administrator is bound by such agreements and cannot set them aside.4 Therefore, in principle, any creditor can file arbitral proceedings while insolvency proceedings are pending. However, such proceedings should be filed against the insolvency administrator in person, not against the debtor. This should also be reflected in the caption of the creditor’s statement of claim, as well as in the future arbitral award.
Further, to observe the principles of due process, the arbitral tribunal is required to give the insolvency administrator sufficient time to become acquainted with the facts of the case and the status of the arbitral proceedings. The administrator also must be given the opportunity to state a position on any question of fact or law relevant for the case.5 Submissions and statements by the insolvent debtor’s management are not taken into consideration as the debtor can no longer dispose of the assets. If the insolvency administrator is not given opportunity to defend the case, the award cannot be recognized pursuant to Art. V para. 1 b of the New York Convention. Therefore, upon learning that insolvency proceedings have been initiated, the creditor should ask the arbitral tribunal to stay the arbitration for a reasonable period of time.
Observing the Competing Creditors’ Rights
German insolvency law aims to satisfy creditors on equal terms. As a result, “insolvency creditors” may only enforce their claims within the framework of the insolvency proceedings. Insolvency creditors are creditors who neither have a right in rem in the asset they are claiming (e.g. ownership) nor a right to a legal charge over the asset. These limitations form part of the German public policy and an arbitral award not honoring them would in effect purport to discriminate against other competing insolvency creditors and will not be enforceable in Germany.6 Hence, the following acts should be observed in order not to discriminate against the competing insolvency creditors.
- Each insolvency creditor’s claims must be filed with the insolvency administrator in writing. The insolvency administrator collects all (alleged) claims and adds them to a list of claims, the so-called insolvency schedule (Insolvenztabelle). Thereafter, an oral hearing takes place to discuss and review these claims; the insolvency administrator, the debtor and all insolvency creditors may participate in the hearing and object to any claim. If the insolvency administrator or other insolvency creditors do not object to a certain claim, the respective claim is deemed to be acknowledged.7 In this situation, the creditor does not need to initiate arbitral proceedings because the acknowledgement of the claim has the same effect as a final and binding judgment. If arbitral proceedings are pending by the time the respective claim is acknowledged, the insolvency creditor should withdraw the claim in order to terminate the arbitral proceedings.
- If the insolvency administrator or other insolvency creditors object to a claim, the insolvency creditor has to initiate legal proceedings to overcome the objections. If the dispute is subject to a valid arbitration clause, and the insolvency administrator has objected to the claim, the creditor may commence arbitral proceedings against the insolvency administrator in person. If a competing insolvency creditor has objected to the claim, the usual position is that the creditor cannot commence arbitral proceedings, as other insolvency creditors are not bound by the arbitration agreements. Instead, the creditor has to file a lawsuit against the objecting creditor(s) with the national courts at the debtor’s seat. In case both the insolvency administrator and other insolvency creditors object to the respective claim, the insolvency creditor has to initiate arbitral proceedings against the insolvency administrator and, at the same time, litigate against the other creditors. This situation is very unsatisfactory as it doubles legal expenses and bears the risk of conflicting decisions.8
- If the arbitral proceedings were initiated prior to the insolvency proceedings, the same rules basically apply. Therefore, the creditor should request the arbitral tribunal to stay the proceedings until the insolvency administrator has reviewed the claim and decided whether to object. If the arbitral tribunal fails to do this and renders an award against the insolvency administrator prior to the hearing in the insolvency proceedings, such an award would not be enforceable under German law.
The Correct Motion of the Insolvency Creditor in the Arbitral Proceedings
A motion requesting the insolvency administrator to pay a certain amount of money or to release a certain asset would discriminate against the competing insolvency creditors. Therefore, an insolvency creditor can only ask the arbitral tribunal to determine that the creditor’s claim is valid. An arbitral award forcing the insolvency administrator to fulfil an insolvency creditor’s claim would not be enforceable under German law. If insolvency proceedings have been initiated after the arbitration has commenced, the insolvency creditor should amend the claim and request the arbitral tribunal to declare the claim to be valid.9 The creditor can present such an award to the insolvency court which will include the claim in the insolvency schedule.10 This acknowledgement by the insolvency court overturns the insolvency administrator’s prior objection.
1. A conflict can arise if the jurisdiction applicable at the seat of arbitration follows the principle of territoriality and therefore does not recognize the German insolvency proceedings.
2. Exceptions to this general rule are provided in Art. 3 para. 2, 3 and 4 Council Regulation (EC) No. 1346/2000.
3. Kreft, Insolvenzordnung, 5th edition, 2008, sec. 80 note 37.
4. BGH, decision dated 20 November 2003, ref. no. III ZB 24/03; BGHZ 24, 18.
5. Ehricke, ZIP 2006, 1847 (1850); Heidbrink / von der Groeben, ZIP 2006, 265 (269).
6. See, e.g. BGH, decision dated January 29, 2009, ref. no. III ZB 88/07; Ehricke, ZIP 2006, 1847 (1848); Heidbrink / von der Groeben, ZIP 2006, 265 (268).
7. An objection by the debtor does not interfere with the acknowledgement of the claim.
8. Ehricke, ZIP 2006, 1847 (1852 et seq.).
9. BGH ZIP 1988, 324.
10. According to the prevailing opinion in German literature, the award would not have to be rendered enforceable beforehand.