As a result of the globalised nature of commercial business, the effects of insolvencies are felt across multiple jurisdictions. Further, the interaction between arbitration and insolvency law has been increasing constantly since the last decade, where a considerable number of companies have faced the wind chill of recession. It is against that background that we have tried to put together a list of what you need to know when insolvency meets arbitration in Switzerland.
Arbitrability is governed by Article 177(1) of the Swiss Private International Law Act (PILA), which provides that any dispute involving an economic interest is arbitrable. That being said, the arbitrability of claims articulated in the context of insolvency proceedings is not an entirely settled matter. While it is common ground that purely substantive actions are arbitrable whereas pure insolvency matters are not, the arbitrability of actions of a mixed nature (combining elements of bankruptcy and private law) is highly controversial. Swiss legal commentators are very much divided on the issue.
Impact of insolvency on the validity of the arbitration agreement
The substantive validity of an arbitration agreement under Swiss law is governed by Article 178(2) PILA, which provides that an arbitration agreement is valid in terms of substance if it conforms to either the law chosen by the parties to govern the arbitration agreement, the law governing the subject matter of the dispute, or Swiss law. Under Swiss law, insolvency would not affect the validity of an arbitration agreement; therefore, arbitral tribunals seated in Switzerland will generally uphold the validity of arbitration agreements in case of a party’s insolvency, without the need to consider the alternative systems of law found in Article 178(2) PILA.
Impact of insolvency on the subjective scope of the arbitration agreement
Under Swiss law, the trustee and the assignees of rights of the estate (that is, individual creditors who have been assigned claims of the debtor by the estate) are bound by an arbitration agreement concluded by the insolvent party. But what if the contract contains a non-assignment clause? It is our opinion that, unless a contrary intention of the parties appears, the limitation should not cover the “transfer” of the arbitration clause to the trustee.
Can the trustee enter into an arbitration agreement?
Pursuant to Article 187 PILA, the capacity of a party to enter into an arbitration agreement is governed by the law with which the case has the closest connection, that is, the lex concursus in the context of insolvency. If Swiss law is applicable, the trustee has the power to enter into an arbitration agreement. This is subject to the prior approval of the insolvent party’s creditors.
Impact of insolvency on the capacity of an insolvent party to be a party to arbitration proceedings
Under Swiss law, an insolvent entity is not deprived of the capacity to be a party to arbitration proceedings; neither does it lose the capacity to act as a party in proceedings. Another question is: what heed must an arbitral tribunal give to foreign insolvency proceedings affecting a party to arbitration proceedings in Switzerland? According to the Swiss Supreme Court’s latest decision on the matter (ATF 138 III 714), the law governing the issue of legal capacity of insolvent parties is that under which those are organised. If the foreign insolvent party continues to enjoy legal capacity under the applicable law at the place of its incorporation, then it would also have capacity to be a party to an arbitration in Switzerland.
Stay of the arbitration
Swiss insolvency law provides for an automatic stay (ex lege) of all court proceedings upon the declaration of insolvency until the second meeting of creditors, yet the vast majority of authors deny the direct applicability of insolvency law provisions to arbitral tribunals with their seat in Switzerland. This has the effect of making the stay of the arbitration merely optional. However, in practice, a stay of the arbitration is likely to be ordered if the procedural rules adopted by the parties so provide. This is so if it is requested or based on considerations of practicality or due process.
Security for costs
Arbitral tribunals seated in Switzerland have the power to order security for costs. However, in the specific context of insolvency, the availability of security for costs is limited. For instance, in a decision of 25 September 1997, an arbitral tribunal with its seat in Switzerland held that the fact that a party had entered into voluntary liquidation during the arbitration did not go beyond the commercial risks inherent in international trade. As such, it had to be borne by the other party (Decision of 25 September 1997 cited in ASA Bull, 2001, page 745). Similarly, if the impecunious situation already existed when the parties concluded the arbitration agreement, or if the financial situation of the claimant was presumably known to the respondent (if, for example, the insolvent party is a shell company domiciled in a tax haven), the request for an order for security for costs is likely to be denied.