Even before the Covid-19, Insolvency related disputes have always had a gritty taste in arbitration. However, the pandemic has led to skyrocketing insolvency disputes as more corporations and industries have found it extremely difficult to pay off their debts. As expected, these have triggered a rise in International commercial disputes, with parties expecting potential insolvent entities to pay to relieve their debts are not finding it forthcoming.
However, while insolvency is a dispute in which resolution can be pursued via the arbitral tribunal, the reality is that insolvency proceedings are extremely delicate and are guided by national laws that restrict and, in some cases, frustrates the effort of arbitration rulings.
Insolvency and arbitration: The tension Two Opposing Rulings
When it comes to laws and rulings in jurisdictions, insolvency and arbitration rulings cannot be further apart. In the euphemistic sense, both serve different purposes, and when they eventually intersect, there is a scathing and highly tempered conclusion, especially in the aspect of the tribunal.
For arbitrators, concerns on how insolvency negatively affects arbitral decisions are not a hidden discussion, neither is it new. So many times, the National courts following laid down insolvency state laws have set aside awards with conflicting resolutions, which in no small way undermine the power of arbitration as an international dispute resolution method.
In simple terms, Arbitration and Insolvency are extreme opposites, and this is outlined in their function
Arbitration: whether internationally or domestically, is a private, independent, and flexible procedural dispute resolution method and mechanism that is empowered by commercial disputing parties to issue an award that binds and obliges them to follow any resolution reached.
Insolvency: on the other hand, insolvency is a state, transparent and centralized court-regulated procedure that is empowered and guided by obligatory national laws whose effect on parties must be followed irrespective of the effect of the parties involved.
Insolvency naturally is upheld by the National court, and according to pretty much all jurisdictions, all matters relating to insolvency are concluded based on the state given insolvency laws. This, therefore, means that if arbitration, an international system that in reality should supersede local laws, is also bounded by insolvency rulings, such that an award if opposing to the latter can be overturned by the National court.
Usually, a clash occurs between insolvency and international arbitration when two commercial parties have agreed to settle insolvency-related disputes via the arbitral tribunal, but due to certain circumstances and constraints, one of the two is unable to offset its debts. If the party obligated to offset debts cannot meet up, the National court usually tends to step in and uses state laid down insolvency laws to settle the issue. A clash between the National court and arbitration in rulings occurs if the insolvency law undermines the ruling of the arbitration and turns aside the ruling of the tribunal.
The argument for full Autonomy of Arbitration from domestic Insolvency proceedings
There has been strong advocacy for full autonomy from state laws in the arbitration world, especially when it comes to disputes involving insolvency. There have been instances where arbitrators stay away from insolvency cases because of the apparent tendency of parties to challenge the award at the national courts.
There are many reasons while arbitration tribunals finding enforcing awards extremely difficult. Usually, arbitration cases may take years with resources and time being put into it, and if the ruling at the end is just going to be waved aside when a party refuses to stand with its obligation, most systems will not go into such cases.
Due to the possible conflicts with awards and rulings, certain National Courts refuse the use of arbitral tribunals for insolvency proceedings, which limits how much control the limit has as a dispute resolution method.
Arbitrators do not have tons of issues with Insolvency laws and their application in domestic cases where only one jurisdiction is involved. The disputing parties are from the same state and know that the existing insolvency laws will stand supreme. What seems to cause the majority of the conflicting interest is when there is a clash between insolvency and international arbitration proceedings.
The tribunal does not see a lot of sense in binding foreign parties to the law of the insolvent party. The use of local insolvency law will more likely than not frustrate the arbitration agreement reached. And the processes followed. The arbitration system believes that there should be clear distinctive laws between the state insolvency laws and arbitration rulings such that one cannot be used to frustrate the other.
Insolvency and international arbitration have continued to be at loggerheads. It can be frustrating for a party that has been issued an award to experience difficulty enforcing it at the national courts, despite the fact that both parties involved in the disputes agree to the arbitration process. Arbitration has a very strong argument, and given the fact that it is a decentralized system, Local laws should ideally not undermine its power to issue and enforce awards.
As it stands currently, there is a strong case on the relationship of insolvency and international arbitration Proceedings and why the tribunal should be able to enforce awards independently without the National courts undermining because of its own local laws.
However, almost all states still adhere to the power of insolvency laws, and it is important that you know if agreeing to an arbitration proceeding is worth the effort. In most cases, it is you could actually have a good case as it would depend on the position of the insolvency for the National courts to undermine an award.
To know if you have a case, it is important that you get the service of Professional expert arbitrators who have handled tons of insolvency dispute-related cases. Rattsakuten is one of those firms that you can contact to get a complete and honest orientation on whether pursuing a case and how you would fare in domestic law are applied is worth it at the end.
This firm has some of the best and most skillful arbitrators in the arbitration world that help clients ensure that they get the best out of every case.
Rattsakuten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuten handles dispute resolution and Arbitration matters before the SCC (Swedish Chamber of Commerce), ICC, HKIAC, and several other Arbitration tribunals.