REUTERS | David Mdzinarishvili

Limits of the automatic stay in arbitration under Article 20.1 of the Model Law on Cross-Border Insolvency

Article 20.1(a) of the UNCITRAL Model Law on Cross-Border Insolvency (the Insolvency Model Law) provides for an automatic stay of proceedings in England where a foreign proceeding is recognised as a foreign main proceeding for the purposes of the Model Law. In practical terms, this means that an arbitration seated in England will be automatically stayed where one of the parties (usually, the respondent) obtains recognition in England of a foreign insolvency process. An automatic stay is a powerful weapon because it immediately stays an arbitration, potentially on an indefinite basis. This can be particularly frustrating where the final hearing is only days or weeks away and the claimant has already incurred significant costs and efforts in pursuing the arbitration. What then can a party do when faced with an automatic stay, if it wants to proceed with the arbitration?

Limits of automatic stay

In approaching this question, it is worth bearing in mind the inherent limits of the automatic stay under Article 20.1 of the Insolvency Model Law. In this regard, a recent High Court decision of Snowden J in Re OGX Petroleo E Gas S.A. provides a helpful reminder of the purpose and scope of the automatic stay. In that case, a Brazilian respondent company in an LCIA arbitration in London sought and obtained from the High Court an order for recognition in England of a reorganisation plan approved by the Brazilian court. The express purpose and intended effect of the English recognition order was to stay the arbitration proceedings in England. However, in making the application the company failed to disclose to the judge that the claims in the arbitration fell outside the scope of the Brazilian reorganisation plan because the charter under which the claims were brought had been specifically excluded from the scope of the reorganisation plan. The court granted a recognition order, and the arbitration claimants subsequently applied to lift the stay.

In delivering his judgment, Snowden J clarified that the purpose and scope of the automatic stay under Article 20.1 of the Insolvency Model Law was the same as that under section 130(2) of the Insolvency Act 1986, namely to prevent unsecured creditors from obtaining an advantage over other unsecured creditors in the collective process of winding up. Accordingly, where the creditor is standing outside the collective process, for example, because he is a secured creditor, the automatic stay “will invariably be lifted to enable him to enforce his security”. Snowden J also referred to paragraphs 37-38 of the Guide to Enactment and Interpretation to the Insolvency Model Law, which noted exceptions and limitations to the scope of the stay, such as “exceptions for secured claims, payments by the debtor made in the ordinary course of business, set-off, execution of rights in rem”. Snowden J therefore concluded that the stay was not intended to prevent parties whose claims are not subject to collective proceedings from pursuing their claims against the insolvent company.

In this case, the parties had agreed a modification of the recognition order by the time of the hearing, which the judge approved. However, he noted that had the parties not agreed a consent order, he would have lifted the stay. He also stated that it was strongly arguable that on the facts of the case, the judge who heard the recognition application would have been able to refuse it as an abuse of process.

Lessons

One of the lessons of OGX is that when faced with an automatic stay under Article 20.1 of the Insolvency Model Law, it is necessary to determine the precise nature of the claims in the arbitration and whether they fall within the scope of the underlying collective process. Of course, at this late stage, little can be done if the claimant is an unsecured creditor who has participated in the collective process (for example, by submitting a proof of debt to the liquidator). In those circumstances, the party might nevertheless persuade the court to lift the stay using the court’s wide discretion under Article 20.6 of the Insolvency Model Law (see, for example, guidance to the exercise of that discretion in Cosco Bulk Carrier Co Ltd v Armada Shipping SA and another).

More might be done, however, earlier in the process. Where there is some doubt as to the correct characterisation of the relevant claims, the creditor would want to demonstrate that his claims are not subject to the collective process. For consistency, the creditor would also likely want to refrain from participating in the collective process. At the contracting stage, it might make sense to structure the transaction so as to secure the creditor’s claims, which in the case of dealing with a financially weak counterparty would be a natural consideration in any event. Where it is not possible to obtain security, there might be other ways to ensure that the creditor remains outside the collective process in case of insolvency. The OGX case provides another example of where a claim would not fall within the collective process.

The overall point is that an automatic stay upon recognition of a foreign insolvency process is not always an insuperable obstacle to a party wishing to continue with an arbitration. Nor is it a failsafe method for halting all proceedings, for a party resisting an arbitration.

King & Spalding Grigori Lazarev

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