Using International Arbitration To Efficiently Resolve Cross-Border Insolvency Disputes

For more than a decade, consideration has been given to the benefits of using arbitration in innovative ways to resolve some international insolvency disputes, and to overcome issues that may arise in pursing that option. So far, despite discussion of the subject, there has been little use of arbitration for these disputes.

On the other hand, while courts have been trying to find ways to rationalise cross-border insolvency proceedings, the solutions developed so far have been seen by some as not sufficiently achieving the common objectives for such proceedings. The ‘Model Law on Cross-Border Insolvency’ of the United Nations Commission on International Trade Law (UNCITRAL) was intended to rationalise cross-border insolvencies, however, there can be difficulty determining where the proceedings should take place based on the concept of identifying an enterprise’s “centre of main interest” (COMI). Also, the COMI may turn out to be in a jurisdiction that lacks a functioning insolvency law or court system in which creditors have confidence.

A further difficulty is that the COMI principle “flounders on the fact that multinational companies ordinarily form distinct legal entities in the jurisdictions 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.”

2012 Proposal For Using Arbitration

In 2012, Judge Allan L Gropper, at the time United States Bankruptcy Judge in the Southern District of New York, proposed using international arbitration for cross-border insolvency disputes given that there is no ‘international court’ or another means to exercise authority over disparate national proceedings. In certain insolvency contexts, Judge Gropper argued, arbitration would offer distinct advantages over traditional litigation so that rational parties should be willing to agree to arbitrate the issues among them. He proposed international arbitration “as a new approach to achieve the goals espoused by the Model Law on Cross-Border Insolvency in a world without an international court or another means to exercise authority over disparate national proceedings.”

He noted that, of course, arbitration can only bind parties that have agreed to arbitrate. His focus was on the main parties agreeing, with minor parties that would not participate in the arbitration ultimately being treated relatively more favourably in the outcome to bring them into the resolution.

Judge Gropper submitted that international arbitration would be particularly useful in two types of situations: first, 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.

One of the benefits of arbitration is that, if done right, it can be speedier and less expensive than court proceedings.

Judge Gropper pointed to advantages of arbitration beyond “transcending jurisdictional boundaries to consolidate and centralise 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. He also pointed out the ability of the parties to the dispute to designate three significant things: (1) which jurisdiction’s law would apply to the dispute; (2) the legal location of the arbitration (known as the “seat” or “place” of the arbitration) where any necessary court proceedings supporting the arbitration would take place, and to which a party that is not content with the arbitral award could turn to seek to set aside the award based on a serious defect in the arbitration; and (3) their neutral decision-maker(s), the arbitral tribunal.

Issues With Using Arbitration For Cross-Border Insolvency Disputes

There are several issues with using arbitration for cross-border insolvency disputes.

Despite the New York Convention, there could be enforcement issues in any jurisdiction in which insolvency disputes are not arbitrable, although non-arbitrability does not appear to be a problem in the jurisdictions where many insolvencies take place.

For insolvency disputes, the choice of which jurisdiction’s law governs can be outcome determinative, so the parties may not be able to agree once a dispute arises. However, the question of the governing law could be submitted for the arbitral tribunal to determine.

The parties could also agree on the scope of the arbitral tribunal’s authority and discretion in relation to relief and remedies, widening or narrowing them as they see fit (if permissible in their chosen arbitral seat). Having wider authority and discretion in relation to relief and remedies may be an important advantage of arbitration for insolvency disputes, particularly in complex multi-jurisdictional disputes.

Because arbitration could bring all the relevant subsidiaries and affiliates into the same proceeding, Judge Gropper had argued that, with the use of arbitration, there would be the potential to save significant going concern value of the entity or entities being liquidated or restructured, and the ability to avoid the costs and uncertainties of duplicative parallel proceedings and extended litigation in multiple courts in different jurisdictions.

Two of the classic aspects of arbitration also need to be considered for insolvency disputes: first, privacy and confidentiality, and second, appeals.

From a public interest perspective, privacy and confidentiality do not fit comfortably with an insolvency proceeding in which there are many stakeholders and interested parties, sometimes including national, subnational, and local governments. An insolvency proceeding is a collective proceeding that affects all creditors and sometimes public interests. The public interest aspects cannot be ignored if the use of arbitration is to be considered for insolvency disputes.

Most likely, the parties to insolvency disputes would need to forego the privacy and confidentiality that often apply in commercial arbitration, and now less so in investor-state arbitration. Usually, the arbitration proceedings would need to be transparent, in the sense that the public would have a right to be informed, and quite likely a right to observe the arbitration proceedings, except for anything that might not be public if the dispute were proceeding in public courts. But given that such openness exists in court, using arbitration without privacy or confidentiality would not result in any disadvantage as compared to courts.

The general absence of 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 perceptions and interests, and possibly depending on the point in the process when the party is asked the question. It may not be strange that parties’ views may shift or firm up when the arbitration award comes out.

If parties want appeals, there are ways of providing for appeals and/or broader court review of arbitral awards in insolvency disputes, each of which would require some thought and discussion.

Surmountable Challenges

Despite the advantages of arbitration for cross-border insolvency disputes, there has not been a rush to use arbitration for those disputes. For whatever reasons, parties have not taken up the concept.

If the fundamental concept and the reasons supporting the use of arbitration for insolvency disputes are logical, it may be that more work is needed to attempt to deal with the reasons that parties are not taking up the concept.

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

It is well worth pursuing the use of arbitration for cross-border insolvency disputes. Arbitration could go a long way to accomplishing 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.

The Honourable Barry Leon
Independent Arbitrator and Mediator. Independent Consultant and Professional Services Provider (independent corporate director; independent corporate meeting chairman; consulting to professional services firms in senior supporting roles and providing strategic and tactical advice and assistance). Commercial disputes experience as arbitrator, judge (Presiding Judge, BVI Commercial Court, 2015 - 2018), mediator and counsel includes corporate and commercial, contract, shareholder and business breakup, joint venture, insurance, IP, technology, expropriation, natural resources, construction, and executive employment disputes.