Reed Smith Client Alerts

The increasing number of high-profile bankruptcies across a number of commercial hubs has brought renewed focus on important questions of jurisdiction arising out of the tension between local insolvency regimes on the one hand, and parties’ arbitration agreements on the other.

Where a counterparty is subject to an insolvency procedure (whether the procedure is aimed at ensuring that the insolvent company survives, such as administration, or is for the purposes of winding up the insolvent company, such as liquidation) issues can arise as to the arbitrability of claims brought by or against the insolvent counterparty. These issues of jurisdiction can be especially challenging in situations where the remedies sought in relation to a party in an insolvency process derive from applicable bankruptcy laws.

Thus, tension may arise between:

  • On the one hand, an insolvency process, which is an inherently ‘collective’ process whereby each of the creditors forfeits its individual rights and must depend on the result of a collective procedure; and
  • On the other hand, the parties’ autonomous choice of arbitration as the agreed forum for resolving all disputes arising out of their agreements.

This alert highlights apparent differences in the approach taken in England and in Singapore in relation to this tension. The courts in each of these jurisdictions have, so far, taken a rather different approach with respect to enforcing arbitration agreements and ‘compelling’ arbitration as a process for the determination of issues of fact and law, including with respect to remedies and claims under local insolvency laws.

作者: Paul Skeet Kyri Evagora Kohe Hasan Johnny Lim

Coins stack up

A. The position under English law

The arbitrability of claims and remedies based in local company or insolvency laws was one of the key points to emerge from the English court’s decisions in Fulham Football Club (1987) Ltd v. Richards1 and in Nori Holding Limited v. Public Joint Stock Co Bank Otkritie Financial Corporation2. These decisions are illustrative of the approach that the English courts have taken as to the arbitrability of insolvency related issues.

The decision in Fulham Football Club

In Fulham Football Club a petition was raised under the Companies Act 2006 to restrain conduct by the Premier League alleged to be unfairly prejudicial to Fulham Football Club. At first instance the judge held that the dispute was arbitrable and stayed the petition.

In dismissing an appeal, Pattern LJ in the Court of Appeal concluded that it was a case where there was no express provision in either the Arbitration Act 1996 or the Companies Act 2006 which excluded arbitration as a means of resolving this type of shareholder dispute. The relief sought was for an order which the arbitrators had the power to make and the dispute was essentially contractual. Therefore, there was no reason why the dispute should not be arbitrated. As regards the question of interpretation, Pattern LJ held that in the absence of any statutory restriction or rule of public policy preventing the parties from agreeing to submit certain types of claim to arbitration, it was impossible to read into the wide language of the arbitration clause any limitation excluding claims for unfair prejudice from its scope. Longmore LJ similarly held that the wide expressions “all disputes” and “all differences” should be given their natural meaning.

The decision in Nori Holding

Nori Holding concerned an application for an anti-suit injunction to restrain Russian and Cypriot court proceedings alleged to be in breach of an arbitration clause. For the purposes of this alert, the key question determined by the English court3 was whether such an injunction can or should be granted to restrain proceedings brought in accordance with the insolvency law of a foreign state to set aside a transaction at an undervalue.

Bank Otkritie (the Bank) had advanced substantial loans which were secured by pledges of shares in a company forming part of the Claimant’s group of companies. Changes were made to these financing and security arrangements which were agreed between the parties during August 2017 (the August Transactions). While the Claimant alleged that these arrangements were a commercial restructuring requested by the Bank, the Bank alleged that it was the victim of fraud, which resulted in US$500 million worth of secured loans being replaced by worthless bonds.

Shortly after the August Transactions, the Central Bank of Russia (the CBR) appointed a temporary administrator to manage the Bank under Russian bankruptcy laws. On 31 October 2017, the Bank commenced proceedings in the Moscow Arbitrazh Court, seeking the invalidation and reversal of the August Transactions on two legal grounds: (a) that the August Transactions were concluded with “unequal consideration”, a claim which could only be brought by the temporary administrator appointed by the CBR; and (b) that the August Transactions constituted “an abuse of rights” contrary to Articles 10 and 168 of the Russian Federation Civil Code, an ordinary civil claim (the Russian Proceedings).

The Claimant commenced a number of LCIA arbitrations, seeking declaratory relief in relation to the terminations of the pledges in dispute. The Claimant also commenced the English court proceedings seeking an anti-suit injunction to restrain the Russian Proceedings4.

The pledge agreements contained an arbitration clause providing that “[i]n the event of any dispute or disagreement arising under, or in connection with, this Agreement, such dispute or disagreement shall be resolved by binding arbitration held in London under the rules of the London Court of International Arbitration (which rules are deemed incorporated herein; hereinafter – the ‘Rules’)…”.

Among other arguments raised, the Bank asserted that the Russian Proceedings were not in breach of the arbitration agreements because: (a) the arbitration clauses should be construed as not extending to an insolvency claim to set aside a transaction at an undervalue which is within the exclusive jurisdiction of the Moscow court; and (b) such claims were in principle not arbitrable.

In assessing the Bank’s arguments, Males J (as he then was) undertook a detailed examination of the authorities under both English law and Singapore law.

The judge noted the wide and general terms of the arbitration clause (“any dispute or disagreement arising under, or in connection with…”). He noted that there was no express exclusion of disputes of any kind from the terms of the arbitration clause. Following the approach of the English Court of Appeal in Fulham Football Club he considered that the words used in the parties’ arbitration agreement should be understood to “mean what they say”. He did not consider that there was any good reason to imply a limitation to the effect that the arbitration clause did not extend to a claim in insolvency proceedings to avoid a transaction as being a transaction at undervalue. The judge also held that the presumption which applies to the construction of arbitration clauses in Singapore law, as established by Larsen Oil & Gas, does not form part of English law.

The judge therefore held that that the parties’ dispute was arbitrable and that it was a straightforward factual dispute whether the August Transactions constitute fraud carried out on the Bank. The judge looked at the substance rather than the form of the Bank’s claim and held that it was irrelevant whether the claim was properly characterised as an “insolvency claim under Russian law”. He decided that the arbitrators could determine whether the Claimant had defrauded the Bank. This was not a case where the remedy claimed was a winding-up order which would affect the status of the Bank or which would affect the position of third parties in such a manner to take the case beyond the consensually derived jurisdiction of the arbitrators.