International Perspective: –

Generally, when an insolvency proceeding has been commenced in Singapore or Malaysia or Indonesia for that matter, all jurisdiction requires leave of court to be obtained before one can continue or commence any actions including arbitration proceedings. So, that obviously would have a direct effect on arbitration, either within the jurisdiction of the insolvency proceeding itself but the position is less clear on arbitrations that are seated outside the jurisdiction where the insolvency proceedings has been commenced. That being said, there are other practical considerations that parties should bear in mind while in arbitration, like take into account if the counterparty undergoes some form of restructuring arrangement or insolvency.

In the case of Nori Holdings Ltd v Bank Otkritie Financial Corp[1],  the bench referred to Justice V.K Rajas’s decision in Larsen Oil & Gas Pte Ltd v Petroprod Ltd[2], where two parts of that judgement indicated that there is a presumption as a matter of construction that insolvency related claims do not fall within the arbitration agreement, notwithstanding that language might seem to extend to it. But the bench in England in Nori Holding case held that to the extent that there is this presumption, it doesn’t form part of the English law and the subject matter of the case which concerned an avoidance claim that arose under Russian law, was allowed to go to arbitration.

Other things to also consider are, assignment of rights whether right or burden to arbitrate can be assigned, it has been made clear by the Singapore Court that an arbitration agreement is assigned together with the entire contract at initial. So, there are different issues that arises for example as to whether there is sale on purchase of debts in insolvency case and whether the arbitration or duty to arbitrate then flows with that. But in practical, it has been seen that it all depends upon when the arbitration was commenced, prior to liquidation or prior to the insolvency proceeding.

If the bankruptcy proceedings take place before or during the arbitration, the review is similar. Local laws governing bankruptcy proceedings may require the suspension of other dispute resolution proceedings so that the bankruptcy administrator can consolidate the debts and assets of the insolvent business. At the same time, the court that oversees the arbitration proceedings not only decides the law of the land governing whether to recognize insolvency proceedings in arbitration, but also its legal effect. Thus, interactions and conflicts become apparent: the existence of bankruptcy proceedings can undermine the arbitration agreement itself (for example, by nullifying it or reducing its scope) and different courts, guided by a different substantive law, may deal with the issue differently.

A prime example of this tension is reflected in the story between Elektrim SA, a Polish company, and Vivendi Universal SA, a French company. The companies had two investment agreements between them and a dispute arose over ownership of shares in Poland’s largest telecommunications network. Disputes arising from the two agreements have been submitted to arbitration under their respective terms. An agreement is provided to arbitration in London under the rules of the London Court of International Arbitration (LCIA). The other is provided for arbitration in Switzerland according to the rules of the International Chamber of Commerce (ICC).

Before either dispute could be fully resolved by arbitration, in 2007 Elektrim filed for bankruptcy in Poland. Under Polish bankruptcy law, arbitration agreements are considered void and arbitration must be terminated. In addition, the Warsaw court overseeing the bankruptcy proceedings revoked Elektrim’s right to self-administration. Elektrim therefore argued before the two arbitral tribunals that they had no jurisdiction and that the arbitration proceedings should be terminated. However, the arbitral tribunal retains the discretion to determine its own jurisdiction under the comptenz-competenz principle.

The LCIA arbitral panel determined that English law governed whether the arbitration should carry on and decided that it would resolve the dispute, despite the guidance of Polish bankruptcy law. Meanwhile, the ICC tribunal determined that Polish law governed, it lacked jurisdiction, and the arbitration would be suspended. These conflicting arbitral decisions were reviewed by the U.K. and Swiss courts, respectively, and were upheld as valid.[3] These dramatically different results, endorsed by sophisticated local courts, demonstrate the complex competing legal and policy implications of parallel insolvency and arbitration proceedings.

Example like this highlight the complex ways competing legal and policy considerations may lead to different results, depending on the applicable law and the objectives of the decision maker (Whether you are a trustee trying to resolve all claims against the debtor, or an arbitral tribunal trying to resolve a particular dispute under the agreed arbitration clause).

In the event that a party initiates bankruptcy proceedings after the conclusion of the arbitration (but before the final court decision, reflected in the award, is enforced or paid), various considerations appear. Although statistics generally show that parties owed to an arbitral award often voluntarily comply with an arbitral award and pay their debts, the voluntary incentive to comply for an insolvent party math will be weaker. When an insolvent party is liquidated, ongoing business relationships or reputation in the market are no longer a primary concern.

It may also be found that if the bankruptcy proceedings suspend the initiation or continuation of the arbitration proceedings, there may be a reason to seek an appeal in the bankruptcy court. The bankruptcy court mainly wants to regulate claims and protect assets. For example, a bankruptcy court may only allow a proceeding against a debtor’s insurance company without relying on the debtor’s assets. The bankruptcy court may allow the commencement or continuation of arbitration, but only for determining the amount of the claim so that the claim can be asserted in the insolvency proceeding.[4] This shows the law of liquidation catching up with the world of arbitration.