How can insolvency affect pending arbitration proceedings?

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Keith Tully, Partner at Real Business Rescue, shares his knowledge of the ripple effect of insolvency on active dispute resolution proceedings.

An arbitration agreement can be concluded on the condition that in case of failure of alternative dispute resolution methods (ADR) such as mediation or conciliation, this route is continued to facilitate a final outcome and conclude the chapter. Arbitration can neutralize the parties and order cooperation after the appointment of an impartial arbitrator.

A firm solution can be sought out of court through arbitration, and therefore every effort is made in the process to ensure fairness for all parties involved. The process is often faster, cheaper and takes place under a veil of confidentiality, which is different from formal court proceedings.

The timing of arbitration proceedings will be determined by the availability of all parties involved, including third party arbitrators or a panel of arbitrators. The financial situation of the parties involved will also dictate their ability to participate in the arbitration process and to commit financially to the arbitration award.

Arbitration and Insolvency – is it a viable combination?

The coronavirus pandemic has triggered unprecedented business conditions and economic uncertainty, which have plunged many healthy businesses in the UK into extreme financial distress. The ultimate struggle for survival unfolded as cash flow wiped out overnight and consumer spending declined.

Arbitration can neutralize the parties and order cooperation after the appointment of an impartial arbitrator.

To speed up business recovery and prevent major UK contributors to the labor market from disappearing, the UK government has introduced state guaranteed loans, COVID-19 grants and COVID-19 emergency funding.

A moratorium on the liquidation of petitions was also announced through the Insolvency and Corporate Governance Act of 2020 to protect businesses crippled by the economic disruption from COVID-19. As creditors wait on the sidelines for the moratorium to be lifted on September 30, 2021 to take legal action against debtors, a wave of corporate bankruptcies is now underway, as the industry predicts.

Insolvency statistics provided by Real Business Rescue for the second quarter of 2021 show that there has been 3,116 business bankruptcies in Q2 in total. This represents a 31% increase from Q1 figures (2,371 bankruptcies) and is also the highest quarterly insolvency figure since before COVID-19.

When a business is under severe financial pressure due to insufficient cash flow, tax debts and declining consumer demand, and can no longer afford to continue operating, it is the prerogative of the director to cease operations and seek professional support. All transactions must cease and a licensed insolvency practitioner must be appointed to review the business and decide whether to close the business or save the business if there is a possibility of a business turnaround.

The main objective of the insolvency practitioner will be to act in the best interests of creditors, to raise funds to repay creditors and to maximize value. Therefore, ongoing dispute resolution proceedings may be temporarily suspended or terminated while the Licensed Insolvency Practitioner takes control of the business.

Insolvency statistics provided by Real Business Rescue for the second quarter of 2021 show that there has been 3,116 business bankruptcies in Q2 in total.

The 1986 insolvency law

The interplay between insolvency and arbitration proceedings will ultimately be determined by national or international insolvency law, the jurisdiction in which the insolvent company operates, contract law and the seat of the arbitration. The type of insolvency proceeding pursued on a voluntary or compulsory basis will determine whether it is possible to continue the arbitration proceeding.

Company liquidation – If a company is placed in compulsory liquidation, a licensed insolvency practitioner will be appointed liquidator of the company. The liquidator will take control of the business of the business and raise funds to repay creditors to maximize value. The closure of the business will be subject to judicial review to ensure that all distributions are made in accordance with the Insolvency Law of 1986, which defines who is paid first on liquidation.

If the ongoing dispute involves a creditor, the circumstances will be judged to determine whether an agreement can be reached through arbitration, or whether a claim should be submitted through insolvency proceedings.

Business management – During the administration of the business, a licensed insolvency practitioner will be appointed as the business administrator to oversee the intensive turnaround and facilitate the rescue, such as a business sale. Upon entering into the administration of the business, the business will be protected against legal action from creditors to allow uninterrupted collection.

A moratorium on legal proceedings is automatically applied when a company initiates compulsory insolvency proceedings and appoints a licensed insolvency practitioner.

The Insolvency Act 1986 states that during a moratorium no legal proceedings (including court proceedings, enforcement, attachment or diligence) may be initiated, executed or sued against the company or its property, except :

(i) labor court proceedings or any legal proceedings arising from such proceedings,

(ii) a proceeding, not falling under subparagraph (i), involving a claim between an employer and a worker, or

(iii) legal proceedings instituted, carried out or continued with leave of the court

This generally applies to arbitration proceedings, for which express leave must be granted by the court or a licensed insolvency practitioner for the proceedings to continue. This is to ensure that a solution can be found in this way without interrupting the insolvency proceedings and without potential violation of creditors’ rights.

If a claim by a creditor can demonstrate that the administration or liquidation process will not be hampered by the continuation of the arbitration process, authorization can be obtained. In this case, the insolvent part will likely be replaced by the insolvency practitioner.

Alternative to arbitration procedure

If an arbitration proceeding is likely to hamper the insolvency proceeding and a solution can be better utilized through legal channels, the arbitration agreement can be concluded. The applicant must then proceed with their claim through the insolvency proceedings and submit proof of debt to the licensed insolvency practitioner. If the amount of debt is disputed, this can be disputed through insolvency proceedings.

If an arbitration proceeding is likely to hamper the insolvency proceeding and a solution can be better utilized through legal channels, the arbitration agreement can be concluded.

During insolvency proceedings, all pecuniary claims are centralized and processed in an orderly and transparent manner.

Increased risk of COVID-19 insolvency

With the moratorium on liquidation petitions now lifted, companies on the brink of collapse may be in the crosshairs of a liquidation petition from creditors or voluntarily engage in formal insolvency proceedings.

Steps should be taken to analyze the risk of insolvency of parties in financial difficulty in order to assess whether it is commercially possible for the party to commit to a favorable award, and whether they can cover their share of the costs incurred for the party. facilitate the arbitration procedure. This information is publicly available on Companies House, the Gazette and business intelligence platforms, such as Red Flag Alert.

Understanding the relationship between arbitration and insolvency, which a licensed insolvency practitioner can further advise you on, is paramount.

Keith Tully, partner

Real business rescue

340 Deansgate, Manchester, Greater Manchester, M3 4LY

Phone. : +44 0161 210 5109

Keith tully is a partner of Real Business Rescue (part of the Begbies Traynor group) and an Insolvency Professional with 30 years of experience in supporting business leaders in financial difficulty.

Real business rescue is part of the Begbies Traynor group, which has recently maintained its leading UK position in corporate turnaround with respect to total corporate appointments in insolvency. The company offers full support to directors through its network of offices nationwide, including representation in Scotland, Wales, Northern Ireland and across England.


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