Using International Arbitration For Cross-Border Insolvency Disputes And Restructurings

Those involved in cross-border insolvencies have been trying to find ways to rationalise them, yet solutions developed so far may not be adequately achieving the objectives for such proceedings.

US Bankruptcy Judge Gropper’s Proposal

In his 2012 article in the American Bankruptcy Journal, “The Arbitration of Cross-Border Business Insolvencies”, the Honorable Judge Allan L. Gropper, at the time United States Bankruptcy Judge, Southern District of New York, began by articulating the goal of the United Nations Commission on International Trade Law’s (UNCITRAL’s) Model Law on Cross-Border Insolvency (Insolvency Model Law):

The goal of the drafters has generally been to realize the universalist ideal of a single proceeding that will coordinate the insolvency of a multinational enterprise, providing for centralized control over its worldwide assets, the possibility of a reorganization, and a single, uniform distribution to creditors of the same priority.

Judge Gropper outlined four aspects of the Insolvency Model Law, as follows:

1. The role that the identification of an enterprise’s “center of main interest” (COMI) serves in promoting coordination and centralisation;
2. The difficulty in locating the COMI;
3. The fact that the COMI may be in a jurisdiction lacking a functioning insolvency law or court system in which creditors have confidence; and
4. That the COMI principle “founders on the fact that multinational companies ordinarily form distinct legal entities in the jurisdiction in which they operate, each of which is considered a separate unit for insolvency purposes, leading to the likelihood that multiple courts will administer the assets of an enterprise based on their location, with little regard for the fact that they may be essential parts of an integrated enterprise”.

Judge Gropper proposed international arbitration “as a new approach to achieve the goals espoused by the [Insolvency] Model Law in a world without an international court or another means to exercise authority over disparate national proceedings”.

“International arbitration” in this context refers to the process in modern international arbitration statutes, typified by the UNICTRAL Model Law on International Commercial Arbitration, and outlined in commonly accepted arbitral rules (UNICTRAL Arbitration Rules and rules of leading international arbitral institutions).

In certain insolvency contexts, Judge Gropper argued, arbitration offers distinct advantages over “traditional” litigation under the Insolvency Model Law approach such that rational parties should be willing to agree to arbitrate the issues among them.

He noted that, of course, arbitration can only bind parties that agree to arbitrate. His focus was on the main parties agreeing, with non-participating minor parties ultimately being treated more favourably in the outcome.

Judge Gropper submitted that international arbitration would be particularly useful, first in disputes among estates of affiliated debtors in insolvency cases in different jurisdictions; and second, in the reorganisation of insolvent or financially distressed enterprises, particularly those that do not have access to an effective reorganisation law, as the fall-back in the traditional workout process, fostering and effectuating that workout process, and providing by agreement of the parties the applicable law which would form the basis for negotiations or the arbitral tribunal’s decision.

Advantages of arbitration to which Judge Gropper pointed – beyond “transcending jurisdictional boundaries to consolidate and centralize disputes in a single proceeding, the outcome of which would be prima facie enforceable globally pursuant to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award” – are the ability of the parties to designate the applicable law, the forum (“seat”, or “place”, of the arbitration), and the decision-makers (or the process to select them).

The seat – the legal location of the arbitration but not necessarily the location of hearings –designates the arbitration’s procedural law and the court from which a party may seek assistance or turn to seek to set aside an award (on limited specified grounds).

Judge Gropper contemplated that “since the choice of law to govern a dispute can be outcome determinative”, the parties may not agree once a dispute arises. However, it could be determined by the tribunal, as could the seat, after hearing the parties’ submission.

He pointed to other traditionally cited benefits of arbitration, namely that if carried out correctly, it should be speedier and less expensive than court proceedings.

The parties could agree on the scope of the tribunal’s authority and discretion regarding relief and remedies, widening or narrowing them, including providing for some not available in national courts. This may be an advantage of arbitration, particularly in complex multi-jurisdictional disputes.

Because arbitration could bring all relevant subsidiaries and affiliates into the same proceeding, Judge Gropper argued that there would be the potential to save significant going-concern value and avoid the costs and uncertainties of duplicative parallel proceedings and extended litigation in multiple courts.

Regarding enforcement, Judge Gropper noted that while in theory insolvency disputes might be non-arbitrable in some jurisdictions, none had been located.

Yet, despite these benefits, there has not been a rush to use international arbitration in insolvencies and restructurings.

There appear to be reasons why cross-border insolvency parties are not using arbitration. To overcome those reasons, creativity is needed. We need to develop an arbitration regime suitable for cross-border insolvency disputes and restructurings that retains certain key benefits of arbitration, including producing an award that is enforceable under the New York Convention.

Additional Issues

Privacy and Confidentiality: “Privacy” and “confidentiality”, while often discussed together as features of arbitration, are different concepts.

“Privacy” is generally accepted as applicable: arbitration hearings are almost always held in private.

“Confidentiality”, which considered by many as an advantage of arbitration, varies considerably among jurisdictions, with the parties’ ability to provide contractually for confidentiality they desire.

Privacy and confidentiality do not fit comfortably with insolvency and restructuring proceedings, being collective proceedings affecting all creditors and sometimes public interests. So, privacy and confidentiality generally would not be features of these arbitrations.

Merits Appeals: The general absence of merits appeals and the limited rights to review of arbitral awards are classic attributes of arbitration.

The absence of those court oversight processes may be an advantage of arbitration, or it may be its disadvantage, depending on a party’s perception and interest.

However, there are ways of providing for merits appeals and review of arbitral awards in insolvency disputes and restructurings, including for appeals to the courts (presumably at the seat) or to a second arbitral tribunal.

Obtaining Post-Dispute Agreement to Arbitrate: The difficulties of obtaining post-dispute agreement are a challenge to using arbitration for cross-border insolvencies and restructuring and may be the reason the concept ultimately may not prove workable.

Most arbitrations occur because the parties agreed to arbitration in their business agreement. Often, when the dispute has arisen, one party will see advantages to pursuing a court resolution.

Pre-insolvency arbitration agreements – getting parties committed to arbitration well before an insolvency – should be possible. We need to find a form of pre-dispute / pre-insolvency consent to arbitration. This may be achievable by putting a deemed consent into the key regimes – bankruptcy and insolvency laws, and corporate statutes.

There may be ways to obtain the consent of future related companies such as by statutorily requiring, as part of incorporation, that the subsidiary consents. Of course, there will be other ways in which the companies in an enterprise become part of the enterprise, so broader means of obtaining consent may be needed.

A fundamental question is whether those kinds of statutory amendments could be achieved, and achieved consistently, in the necessary jurisdictions.

What to Call It: Considering the public nature of insolvency proceedings and the public interest in them, it may be preferable to use terminology specific to these proceedings, so long as legally the decision is an award to which the New York Convention applies. Calling it Insolvency Arbitration or Insolvency Adjudication would suffice, as it would become known as a form of non-private, non-confidential arbitration with other special features. Each insolvency adjudication could be by a tribunal known in each instance as an “international insolvency and restructuring court” or “tribunal”.

Procedural Rules: There could be basic rules for these arbitrations in a manner similar to what is done by the UNCITRAL Arbitration Rules and rules of international arbitral institutions, covering the same kinds of topics but in ways suited to international insolvency disputes and restructurings.

Areas requiring innovation include how proceedings are commenced; eligibility and qualification for appointment to a tribunal (perhaps former insolvency/bankruptcy judges or other with requisite experience); and appointment of tribunal members (perhaps by judges from key jurisdictions involved, following parties’ submissions).

Conclusion

The question is whether the benefits of one arbitration proceeding to determine international insolvency disputes and restructurings are worth pursuing.

While there are a host of challenges to overcome in developing a workable and acceptable arbitration scheme for cross-border insolvency and restructuring matters, the challenges appear to be surmountable with creativity and perseverance.

As Judge Gropper pointed out, it is well worth pursuing, through the mechanism of international arbitration, the goal of having a single proceeding to coordinate the insolvency of a multinational enterprise and provide centralised control over its worldwide assets, the possibility of a reorganisation, and a single, uniform distribution to creditors of the same priority.