1/3LY: Insolvency Law v Arbitration

Insolvency law contains summary processes for dealing with claims and protections against certain proceedings commencing or continuing. There has been some debate, and recent case law, concerning the primacy of these rules over agreements to arbitrate. In the following article, we look at what the current position is under English law and beyond.

General position under English law

Arbitration agreements, or the authority of validly appointed arbitrators, are not discharged by insolvency. However, when arbitrating with an insolvent entity, there may be issues of capacity or practical problems with enforcing an award, as well as issues with proceedings being stayed by statute.

Office-holders acting in the various forms of insolvency proceeding can generally bring arbitration proceedings under their statutory powers.

Issues arise when:

the office-holder wishes to commence summary Insolvency Act proceedings contrary to an arbitration clause, or; a creditor attempts to bring or continue arbitration proceedings. In these instances, what happens may be determined by the insolvency process that has been instigated. Administration

An administrator (or administrative receiver) has the powers set out in schedule 1 of the Insolvency Act 1986 (IA86) which include a general power to bring or defend "any action or legal proceedings" and a specific power to refer to arbitration any question affecting the company (IA86 schedule 1, paragraph 5 and 6).

In administration scenarios, the moratorium granted under para 43(6) of schedule B1 IA86 means that arbitration proceedings, like conventional court proceedings, cannot be brought or continued against the insolvent company without either permission from the court or the administrator. The court is only likely to grant permission if:

the claimant has a proprietary right to an asset held by the company, or; an arbitral award is needed for the creditor to recover from elsewhere, e.g. pursuant to insurance or a letter of indemnity (LOI). Liquidation (compulsory and voluntary)

For the court to make an order placing a company into compulsory liquidation, a creditor needs to make an application to the courts, showing that debts are unpaid. An issue, therefore, arises if a creditor seeks to assert that a debt is owed and unpaid when the underlying contract contains an arbitration agreement. The Court of Appeal held in Salford Estates (no 2) Ltd v Altomart Ltd [2014] EWCA 1575 Civ that the Arbitration Act 1996 does not...