In the current economic climate, insolvent defendants are more and more common. Cross-border insolvency raises some particularly tricky conflict of law issues. These are likely to become even more complex when (if?) Brexit is implemented, at least to the extent that the UK is no longer bound by the EC Insolvency Regulation. Disclaimer: I’m not an insolvency lawyer (far from it), but I was interested to see the recent revival of the idea that international arbitration might provide a solution to some of the tricky procedural and substantive issues that cross-border insolvencies can pose. Is arbitration really the solution?
At first glance, arbitration might not seem the most promising option for determining insolvency disputes. Arbitration is essentially consensual: it depends on the existence of an agreement to arbitrate. Following on from that, it is also generally confidential and non-transparent. Crucially, as an agreement-based dispute resolution mechanism, it lacks any reliable means of binding third parties: indeed, lack of a third party mechanism was identified as a significant drawback of arbitration generally in the most recent QMUL International Arbitration Survey. By contrast, most developed systems of insolvency law presume that the creditors of an insolvent debtor must be treated equally and transparently, regardless of any individual agreements they may have concluded with the debtor, and therefore contemplate collective proceedings to bind all. The difference of focus was well described in Re United States Lines Inc as a:
“… conflict of near polar extremes: bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution”.
As a matter of English law and practice, the conflict between the arbitration and insolvency spheres manifests itself in rules providing for the stay of legal proceedings (including arbitration proceedings) in favour of insolvency proceedings. It is only in the context of the insolvency proceedings that the interests of all creditors can properly and appropriately be reflected: consensual arbitration between one creditor and the insolvent debtor cannot possibly achieve this. In crude terms, the English courts may permit arbitration to be used as a means of quantifying debts, but obligations to arbitrate will not be allowed to usurp the courts’s overall supervision of insolvency procedures and the treatment of creditors more generally.
Nevertheless, arbitration has some attractive features that would be a distinct advantage in the context of cross border insolvency, most notably, the ease with which awards can be enforced worldwide via the New York Convention. The flexibility and speed of arbitral proceedings might also be seen as relatively advantageous. It is against this background that the most recent proponent of arbitration as a mechanism for determining insolvency disputes, Judge Leon of the BVI, has suggested that procedures could be tailored to the particular needs of cross border insolvency disputes. Some of the suggested tweaks include the provision of an appeal mechanism and rules for determining the applicable law.
But there still remains the difficult issue of the consensual, private nature of arbitration. Perhaps we shouldn’t get too hung up on labels. After all, recent developments in the investment treaty context suggest that arbitration can certainly be adapted to provide for greater transparency: see, for example, the UNCITRAL Rules on Transparency in Treaty-based investor-State Arbitration, and the admission of the amicus curiae in investment treaty arbitration. Arbitration was adopted as the dispute resolution mechanism of choice in the recently negotiated (but, post-Trump, probably never to be ratified by the US) Trans-Pacific Partnership TTP. This growing acceptance of arbitration in the context of disputes which may engage the public interest suggests that it is sufficiently flexible to develop the necessary features of transparency.
But that still leaves the thorny issue of consent. Isn’t this rather fundamental to what we understand by “arbitration”? Suggested mechanisms have included provision for “deemed consent” in national insolvency laws, whereby incorporation within a particular jurisdiction would entail deemed consent to arbitration of any insolvency issues. Alternatively, referral of disputes to arbitration could be enacted as a mandatory rule of the forum. That all starts to look a bit more like statutory arbitration than consensual arbitration, and it would still leave open the question of which arbitral seat should take precedence, and the extent to which related companies could be brought into proceedings.
Other tricky issues would need to be addressed. Monetary awards are easily enforceable under the New York Convention, but what about pre-emptive or interim remedies to hold the ring pending any final determination? How would these be enforced? Traditionally, only final awards attract the beneficial provisions of the New York Convention. And the very difficult questions surrounding the characterisation of legal issues would remain, whether arbitration or litigation were adopted as the underlying dispute resolution mechanism.
Most fundamentally, in the current climate, is there the political will to harmonise and co-operate to the extent necessary to make this work? Time will tell… this could be a case of good idea, bad timing.