The effect of English insolvency law on arbitration

By James Hayton

Posted: 5th December 2017 08:24

Pursuing arbitration against a company which has entered formal insolvency is rarely an enticing prospect. The company may not have sufficient assets to satisfy an award and, even if it does, there are legal rules in most advanced jurisdictions designed to prevent the pursuit of individual claims against such a company outside collective insolvency proceedings. In practice, nevertheless, resorting to or continuing arbitration may be desirable because – where it is possible – it may still result in a quicker, more favourable or more readily enforceable decision for the claimant, e.g.: the arbitration may already be in progress and nearing its end; the claimant may be required to pursue arbitration against the company in order to enable the claimant to defend claims by, or establish claims against, a third party; or it may in practice present a means for the claimant to circumvent the insolvency proceedings (notwithstanding that the court seised of the insolvency proceedings may regard this as ‘sharp practice’).
 
Under English law an arbitration agreement is not void by reason of the company entering insolvency. However, there are statutory moratoria under UK insolvency law intended to prevent arbitral proceedings being commenced or continued against the company. This article focuses, given those moratoria, on whether, and in what circumstances, English law permits arbitration in this context.[1] We focus on the example of a company in liquidation or administration in England under the Insolvency Act 1986 (‘the Act’) or in respect of which foreign insolvency proceedings in another jurisdiction have been recognised by the courts in England under the Cross Border Insolvency Regulations 2006 (the ‘CBIR’).
 
The Statutory Moratoria
 
If the company is in compulsory liquidation under the Act then ‘no action or proceeding may be proceeded with or commenced against the company or its property, except with the leave of the court and subject to such conditions as it may impose’ (s.130(2)). The position is, in substance, the same for a company in administration (and even once an application for administration has been made but before an administration order has been made) (Sch.B1, paras.43-44) save that permission may be granted not only by the court but, alternatively, by the administrator. A similar moratorium also applies where the English court recognises foreign insolvency proceedings as ‘foreign main proceedings’ under the CBIR (art.20(1)). By contrast, in voluntary liquidation (whether solvent or insolvent) there is no automatic moratorium but an application may be made to the court for a stay under s.112 or s.126. There is, similarly, no automatic moratorium imposed where the foreign insolvency proceedings recognised under the CBIR are ‘foreign non-main proceedings’, but a discretionary stay may be applied for under art.21. Although none of these statutory provisions imposing moratoria, or conferring discretion to stay or permit proceedings, refers expressly to arbitration, it is very likely that each of them encompasses arbitration. There is persuasive authority (albeit obiter) to this effect in respect of moratoria under the Act and this much is usually common ground between parties to cases involving the moratorium under the CBIR.
 
Applying the Moratoria to Arbitration
 
How do the moratoria apply in practice to arbitral proceedings? If the seat of the arbitration is in the UK, then the tribunal would be obliged, if asked, to stay the proceedings pursuant to the relevant moratorium (and if the court has ordered a stay, then the parties would have to comply with their duties under that order, which should ultimately be to the same effect). A tribunal which fails to order a stay in such circumstances risks its decision being overturned by the English court in its supervisory capacity.
 
The moratoria do not, however, have extra-territorial effect. If the arbitration is seated abroad, it will (subject to the law of the seat) be for the tribunal, subject to the supervision of the courts of the seat, to decide which law governs the effects of the insolvency proceedings on the arbitration and to decide whether those effects require a stay.
 
Within the EU (probably even after ‘Brexit’), under the recast Insolvency Regulation (2015/848), if the main insolvency proceedings are in the UK then, in arbitrations already pending, the law of the seat will govern (art.18). Where the arbitration is commenced after the main insolvency proceedings have been opened, then English law will usually apply so that a stay should be ordered (art.7) (but there may be complications arising if there are also ‘secondary’ insolvency proceedings elsewhere and the arbitration relates to assets within the jurisdiction where those secondary insolvency proceedings have been opened: arts.3(2) & 34).
 
If the decision of the tribunal in an arbitration seated abroad is to let the arbitration proceed, then the court in the UK will only be able to prevent the arbitration proceeding if it issues an effective anti-arbitration injunction. The court probably has the jurisdiction to make such an order, particularly if the arbitration would tend to interfere with the assets in the insolvency estate. There is, however, no reported case in which such an order has been made or even requested. Whether a UK court would grant such an injunction would probably depend on much the same considerations as are relevant when deciding an application to lift one of the moratoria, to which we now turn.
 
Lifting the Moratoria
 
Where a moratorium applies, it is open to a party to apply to the English court (or, in administration, the administrator) for permission to commence or to continue arbitral proceedings against the company (and permission may even be granted retrospectively because proceedings commenced or continued without permission are not a nullity). Upon such an application the court has a very broad discretion to do what is right and fair according to the circumstances of each case (and much the same is true if the application is to lift a discretionary stay which the court has previously ordered). The court’s starting point will be that such proceedings are not generally permitted. The court will, subject to its overriding objective of dealing with cases justly, adopt the primary goal of achieving an orderly resolution of all matters arising in the insolvency for the benefit of the creditors as a whole. The prevailing official view of English judges is that the resolution of disputes within the insolvency procedure is likely to be cheaper and quicker than if left to ordinary proceedings. The court will be cautious before exposing the insolvency officer-holder to the burden of coping with difficult and time-consuming legal proceedings. Where permission is sought to lift a stay, it will probably be on terms (or subject to an undertaking from the claimant) that no award may be enforced without the permission of the court or insolvency office-holder (or, perhaps, that the claimant will transfer into the insolvency estate any cash or other asset received through such enforcement).
 
Conclusion
 
Arbitration against a company in insolvency in the UK is sometimes desirable and should not always be ruled out. Whether it is possible will depend on a number of factors including whether there is an applicable moratorium or stay, where the arbitration has its seat, the conflict of laws rules in the jurisdiction of the seat and whether the court seized of the insolvency proceedings can be persuaded to lift any applicable moratorium or stay.
 
James Hayton
www.lipmankaras.com
jhayton@lipmankaras.com
+44 (0)20 7400 3574
 
James Hayton is a Senior Associate in the London office of Lipman Karas LLP. He graduated from Cambridge University with a degree in Philosophy before studying law. He began his career as a pupil barrister in commercial and insolvency law before later transferring to become a solicitor. Before joining Lipman Karas, James worked at the US firm Kirkland & Ellis (2006 – 2013) practising in commercial and investment treaty arbitration and international commercial litigation, and in-house at an investment bank (2013 – 2015). Lipman Karas is a specialist disputes firm with offices in London, Australia and Hong Kong, which represents clients in complex international commercial litigation and arbitration before courts and tribunals all over the world.


[1]Interesting questions can arise in jurisdictions in the European Union under the recast European Regulation on Insolvency (2015/848) about which law should apply to the effect of insolvency proceedings on arbitration agreements and arbitral proceedings. We do not examine these here, except in passing, due to restrictions of space. Furthermore, and for similar reasons, although insolvency law in the United Kingdom as a whole is largely similar, we confine our remarks to English law.

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