Increasing global pressures on businesses have and will for the foreseeable future lead to an increase in corporate restructurings, as businesses attempt to weather the current economic and commercial storm.
With corporations relying increasingly on arbitration to resolve their disputes, particularly those engaging in cross-border trade, it is only a matter of time before parties are faced with having to deal with the effects of restructuring and insolvency processes on arbitration proceedings and awards.
This blog examines, in two parts, the effect that restructuring and insolvency processes in England and Wales might have on the arbitration process. For the sake of brevity, we examine the impact in the English law context, presuming an arbitration seated in England. When we refer to an insolvency process, this is taken to include both restructuring and formal insolvency processes, including company voluntary arrangements (CVAs), schemes of arrangement, the new restructuring plan procedure, administrations and liquidations.
This topic is examined by reference to three distinct stages:
- Arbitrations commencing after an insolvency process (post insolvency).
- Insolvency processes occurring prior to an award but after the arbitration proceedings have commenced or where an arbitration and insolvency process run in tandem (mid-arbitration).
- Arbitrations which have commenced prior to an insolvency process but where the award has not been enforced nor satisfied (award enforcement).
This part 1 will examine the first two of these stages. Part 2 will consider the third stage, as well as the new standalone moratorium under the Corporate Insolvency and Governance Act 2020.
Post insolvency proceedings
If an insolvency process occurs prior to the commencement of an arbitration, either the company has completed an insolvency process prior to the arbitration proceedings (completed restructuring), or, at the time of the arbitration proceedings, it remains in the insolvency process.
Where there is a completed restructuring, there might be two further scenarios:
- Where the company or its assets survive the insolvency process.
- Where the insolvency process results in the winding up and, ultimately, dissolution of the company so that it no longer exists.
Completed restructuring: company or assets survives insolvency
Where the company survives and exits a completed restructuring in its current legal form, the impact on an arbitration process (as opposed to the effect upon the underlying claim, which is outside the scope of this note) will likely be minimal. Only where the insolvency process directly affects the arbitration agreement, will such an insolvency process prevent a counterparty from pursuing its claim. For example, a CVA affecting a lease agreement, which contains an arbitration agreement, may alter the claims available under the lease agreement if a dispute arises subsequent to the CVA. However, it should not affect the enforceability of the arbitration agreement itself, if the validity of the arbitration agreement remains unaffected.
Where the company survives but the completed restructuring involves a substantial or material transfer of assets to a third party (for example, transfer of assets to a senior creditor owned newco), then the utility of commencing arbitral proceedings is likely to be limited since the company will have few assets against which any subsequent award can be enforced.
Company ceases to exist
Where the company no longer exists, even where assets have been sold to a third party, the counterparty will be unable to enforce the arbitration agreement, as the contracting party has ceased to exist; unless the relevant contract containing the arbitration agreement has been validly assigned.
Ongoing insolvency process at time of arbitration
Where an insolvency process such as liquidation, administration or the new standalone moratorium (under the Corporate Insolvency and Governance Act 2020) remains ongoing at the time the arbitration is commenced, an automatic moratorium will prevent the arbitration from proceeding unless leave has been granted by the court. For liquidation, section 130(2) of the Insolvency Act 1986 (IA) restricts any “action or proceeding” from being “proceeded with or commenced against the company or its property, except by leave of the court and subject to such conditions as the court may impose”. This wording is substantially mirrored in a new section A21 of the IA in respect of the new standalone moratorium (with exceptions for certain employment proceedings), and in schedule B1, paragraphs 43 and 44 of the IA in respect of administration. Note, however, that in the case of administration, schedule B1, paragraph 43(6)(a) of the IA does permit the administrator to consent to the continuation of a legal process against the company or its property.
Leave will be granted by the court where it deems it necessary. The case of Re Atlantic Computer Systems Plc sets out the guidelines that the court will consider when determining an application for leave to bring or defend proceedings in the context of an administration. In summary, the court will weigh up the interests of the applicant against those of the creditors. Case law has illustrated that for both administration and liquidation, the court will consider matters relating to proprietary rights as a significant factor when contemplating whether leave will be granted, but in any event, it will only grant leave where it is just and fair to do so (in regard to liquidation, see Flightline Ltd v Edwards, and with regard to administration, see Magical Marking Ltd and another v Phillips and others).
Another factor that a court may deem relevant when considering whether to grant leave to bring or defend proceedings is whether a claim is likely to become time barred. As a limitation period will continue to run where a company is in administration, the court is likely to contemplate giving leave if a claim is likely to become time barred.
In addition, liquidators and administrators have the power to bring or defend legal proceedings on behalf of the company, including arbitration claims should they think it necessary (section 167(1) and paragraph 4, part II, schedule 4 of the IA (liquidation) and paragraphs 5 and 6, schedule 1 of the IA (administration)).
Whether an insolvency process which arises mid-arbitration will likely result in a stay of proceedings depends on the nature of the insolvency process.
Where the insolvency process is administration, liquidation, or utilises the new standalone moratorium under the Corporate Insolvency and Governance Act 2020, it is likely that the arbitration proceedings will be stayed. The rules referred to above, which preclude arbitration proceedings from being commenced where an insolvency process is ongoing, would also act to prohibit existing arbitration proceedings from continuing, without the leave of the court, where an insolvency process arises midway through such proceedings. The circumstances in which leave may be given are summarised above.
Replacing an insolvent party to an arbitration
In A v B, the High Court upheld the arbitral tribunal’s decision to substitute disputing parties with a third party. In that case, an overseas restructuring scheme merged two companies, creating a third, NewCo. The original disputing party ceased to exist entirely. The court held that NewCo could replace the disputing party since it assumed its obligations under the contract that contained the arbitration agreement. This case, however, concerned a corporate restructuring under the laws of India, rather than a corporate restructuring under English law. The question is likely to turn on whether there has been a valid assignment of the relevant contract or claim.
Thank you to Matteo Clarkson Maciel, trainee solicitor at Kirkland & Ellis for his contribution to this blog.