Where the impact of restructuring and insolvency on arbitration is concerned, we have identified 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).
Part 1 of this blog examined the first two of these stages. This part 2 will consider the third stage, as well as the new standalone moratorium under the Corporate Insolvency and Governance Act 2020.
Enforcement of award
Until a party has satisfied an award, there remains the risk that full payment of an award may not occur. Even once an award has been satisfied, where there is close proximity to administration or liquidation, a party will need to contemplate the preference transaction provisions under section 239 of the Insolvency Act 1986 (IA) and consider whether payment of the award in proximity to an insolvency might constitute a preference.
One of the key concerns for parties seeking to enforce an award will be the effect of an insolvency process on the award. While no mechanism will affect the award creditor’s right to recover a sum of money, an insolvency process may affect the amount actually recovered as an unsecured creditor.
The enforceability of an award will be limited against the legal entity and it is trite law to say that the English court will not pierce the corporate veil, save for situations of fraud. In asset sales to third parties, the obligation to satisfy an award will not transfer to the third party.
An unenforced or unrecognised award operates equivalent to a domestic judgment. In most circumstances, where a company has not paid an award and enters into an insolvency process, the payment of the award will be resolved through the insolvency rules relating to distributions to creditors, unless the company survives. The award will be treated as a proven but unsecured debt (unless the award falls into certain categories where the assets do not form part of the insolvent estate).
An award following the debtor entering into liquidation will therefore become part of the general class of unsecured creditors pari passu, behind secured and preferential creditors. Where an award is not recognised/enforced at the time of an insolvency process involving a moratorium, an application for recognition and enforcement cannot be brought separately from the insolvency process.
New standalone moratorium under the Corporate Insolvency and Governance Act 2020
The new standalone moratorium under the Corporate Insolvency and Governance Act 2020 prevents certain enforcement actions and the commencement/continuation of legal proceedings against the company, in order to give it breathing space to put together a plan to rescue the company as a going concern.
The moratorium is available to companies that are, or are likely to become, unable to pay their debts. Notably, companies that are party to capital markets arrangements (in excess of £10 million, among other conditions) are ineligible for the moratorium.
A licensed insolvency practitioner is required to serve as “monitor” for the moratorium. As a condition to entry, the proposed monitor must state, among other things, that:
- The company is eligible for the moratorium.
- In their view, it is likely that the moratorium would result in the rescue of the company as a going concern.
The moratorium is initially for a period of 20 business days, but can be extended provided certain conditions are met, including, in most cases, the requirement to pay those moratorium debts that are not subject to a payment holiday. The length of the extension depends on the circumstances in which the extension is obtained. For example, the company’s directors are able to extend the moratorium without creditor consent for a further 20 business days. However, an extension with creditor consent can be for a maximum of one year, with the possibility of the directors and the creditors agreeing to multiple such extensions. By contrast, there is no maximum period for an extension granted by the court.
Among other things, the moratorium creates a payment holiday for certain pre-moratorium debts and moratorium debts. A pre-moratorium debt is defined, in a new section A51 of the IA, as any debt or liability to which the company becomes subject before the moratorium comes into force; or any debt or liability to which the company has or may become subject during the moratorium due to any obligation incurred before the moratorium comes into force.
A moratorium debt is defined, in a new section A51 of the IA, as any debt or liability to which the company becomes subject during the moratorium, other than in respect of an obligation incurred before the moratorium came into force; or any debt or liability to which the company has or may become subject after the end of the moratorium due to an obligation incurred during the moratorium.
During a moratorium, any ongoing arbitration proceedings would be stayed, unless the court grants permission for such proceedings to continue.
As mentioned above, an unenforced or unrecognised award will be treated as a proven but unsecured debt (unless the award falls into certain categories where the assets do not form part of the insolvent estate). Where such an award is issued prior to the moratorium, it will be defined as a pre-moratorium debt under a new section A51 of the IA. The award will be subject to a payment holiday, which means that, during the moratorium:
- The award debtor may not pay the award (above a certain threshold, namely the greater of £5,000 and 1% of the value of the debtor’s unsecured liabilities) unless the monitor consents or the payment is in pursuance of a court order.
- The award creditor will be unable to initiate legal proceedings to enforce the award during the period of the moratorium.
The stage at which arbitration proceedings commence or an award is issued vis-à-vis an insolvency process will determine whether the arbitration process will be materially affected. In most instances, the arbitral proceedings will be stayed, unless leave is granted by the court in limited circumstances. In any event, where a dispute arises upon the horizon of the counterparty entering into an insolvency process, parties should contemplate the risks to that party’s ability to bring its claims should its counterparty fall into insolvency proceedings.
Thank you to Matteo Clarkson Maciel, trainee solicitor at Kirkland & Ellis for his contribution to this blog.