To use the well-worn quote, insolvency and arbitration can present “a conflict of near polar extremes”. Arbitration concerns a private dispute governed by contract based within a flexible framework with few mandatory rules. Insolvency proceedings seek to centralise competing claims of creditors within a strict statutory framework.

The interplay between arbitration and insolvency – some considerations

Effect of insolvency on arbitration. In the UK, the insolvency of a party to an ongoing arbitration results in the automatic stay of proceedings against that party. It is well established that ‘proceeding’ includes arbitration proceedings for the purpose of either compulsory liquidation or administration. This is a common, but not universal, stance. For intra-EU cross-border cases, insolvency proceedings in one member state “will be recognised in all other member states” from the time the judgment opening the insolvency proceedings becomes effective.

Such recognition, while not an automatic stay of proceedings per se, nevertheless affects the seat of arbitration. A key question here is whether an arbitration has already commenced (e.g., whether it would be considered as a ‘lawsuit pending’). If arbitration proceedings are ongoing, such proceedings will continue under the laws of the jurisdiction in which it is pending. However, any future arbitrations (e.g., brought after the judgment opening insolvency proceedings became effective) will be subject to the laws of the seat of the insolvency.

Oct-Dec 2017 issue

Kirkland & Ellis International LLP