Non-Core Insolvency Claims: Straddling the Line Between Arbitrability and Non-Arbitrability

Julia Dreosti and Patrick Leeson

It is trite to say that insolvency matters are non-arbitrable. However, an emerging line of authority suggests a nuanced and fact sensitive enquiry is nevertheless necessary to properly ascertain the essential character of the dispute. The mere fact that certain relief sought in a dispute invokes aspects of statutory insolvency regimes (e.g. a winding-up order), which relief cannot be granted by an arbitrator, does not in and of itself render the underlying dispute non-arbitrable. This is especially the case in a non-insolvency context.

The Relationship: Competing Public Policies

Insolvency and arbitration do not coexist easily. The two processes each have their own purpose, objectives and underlying policy which are not easily reconciled. In most common law jurisdictions insolvency proceedings are a creature of statute, administered centrally by the courts. This is in stark contrast to the de-centralisation and party focus which defines international arbitration. As was recognised by VK Rajah JA (as he then was) of the Singapore Court of Appeal (“SGCA”):

“Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors…”

It is important for practitioners to recognise these competing interests, both in drafting arbitration clauses as well as in contemplating how best to approach a dispute involving an insolvent or potentially insolvent company.

The General Approach

It is generally accepted that insolvency proceedings are non-arbitrable. Two justifications are usually given:

  1. Arbitral tribunals lack the jurisdiction to award certain statutory relief, such as the making of a winding-up order; and
  2. A genuine public interest exists in the centralised and efficient winding-up of insolvent companies, which takes account of the interests of all stakeholders.

Based on these justifications, arbitration agreements which have the effect of obviating the public policy of the underlying statutory regime are generally considered unenforceable in their entirety. While courts have been known to nonetheless stay winding-up proceedings in favour of arbitration in an exercise of discretion, this approach lacks certainty for litigants.

A Case by Case Approach for ‘Non-Core’ Claims?

An emerging body of authority decided in a non-insolvency context provides a more principled approach. That approach emphasises a fact-sensitive enquiry to be undertaken in each case by which the non-arbitrability of certain ‘core’ claims does not necessarily render incidental ‘non-core’ claims non-arbitrable. The distinction is as follows:

  • Core claims are central to the winding-up process which cannot be circumvented, e.g., those which vest in the liquidator or concern substantive rights created under the insolvency legislation.
  • Non-core claims are procedural in nature or incidental to the winding-up and may be arbitrable where they do not affect third parties.

The distinction was explored in the recent decisions of the SGCA in Tomolugen Holdings Ltd v Silica Investors Ltd [2016] 1 SLR 373 (“Tomolugen) and of the Australian Federal Court in WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] 245 FCR 452 (“Hydrox”). These decisions bring their respective jurisdictions in line with the UK approach, mooted by Patten LJ in Fulham Football Club (1987) Ltd v Richards [2012] Ch 333 (“Fulham FC”). Under that approach, the mere fact that the tribunal cannot grant statutory relief in core proceedings (such as a winding-up application) does not itself render certain incidental non-core proceedings non-arbitrable. Instead, a fact-sensitive enquiry is required to determine how the relevant dispute should be characterised, and whether any outcome is likely to affect the interests of third parties.

Fulham FC

Fulham FC concerned the question of whether a claim for relief for unfair prejudice under s 994 of the Companies Act 2006 was arbitrable. The decision of Patten LJ raised two issues which would be developed in the subsequent cases.

First, Patten LJ drew an important distinction between: (a) disputes in relation to the affairs of a solvent company, and (b) disputes which invoked the statutory insolvency regime and where relief may affect creditors and other third parties. His Lordship considered that while the latter were “immune from interference by members of the company whether by contract or otherwise”, non-core claims, e.g., a claim for unfair prejudice, did not enliven the same considerations.

Second, Patten LJ considered that it was no bar that statutory remedies were not available through arbitration, “jurisdictional limitations on what arbitration can achieve are not decisive of the question whether the subject matter of the dispute is arbitrable.” His Lordship took the view that a two-step approach was warranted, first the underlying dispute would be resolved by arbitration, only then would the parties be entitled to approach the court for the relief sought.

Tomolugen

Tomolugen also concerned the arbitrability of an unfair prejudice claim.

Menon CJ, giving judgment, expressly approved the approach of Patten LJ. Two types of ‘core’ insolvency claim, statutory avoidance and the winding-up of an insolvent company by the courts, were expressly distinguished from the claim at Bar. His Lordship characterised the unfair prejudice claim as one which “stands on a different footing from the liquidation of an insolvent company or avoidance claims that arise upon insolvency because the former generally does not engage the public policy considerations involved in the latter two situations.”

The Court of Appeal also affirmed that the unavailability of certain statutory relief did not in and of itself render the claim non-arbitrable. The two-stage approach was endorsed as “strik[ing] a balance between, on the one hand, upholding the agreement of the parties as to how their disputes are to be resolved and, on the other, recognising that there are jurisdictional limitations on the powers that are conferred to an arbitral tribunal.”

Hydrox

Hydrox concerned an application to wind up a joint venture vehicle pursuant to s 233 (oppression/unfair prejudice) or s 461 (just and equitable grounds) of the Corporations Act 2001. Although it was not contested that the making of a winding-up order itself was non-arbitrable, there was a dispute as to whether the substance of the underlying factual issues should nonetheless be referred to arbitration. It was contended that the winding-up application required the determination of incidental issues which fell within the relevant arbitration clause, namely breach of contract, corporate governance and issues of bad faith.

Applying the reasoning of Patten LJ in Fulham FC, Foster J held that the underlying issues were themselves arbitrable, even if the making of the actual winding-up order was not. His Honour considered that arbitrability turned upon characterisation of the underlying dispute, rather than the ultimate remedy sought. The instant case was properly characterised as a private dispute between shareholders in the joint venture vehicle, capable of resolution by arbitration. In reaching this conclusion, Foster J considered it relevant that the company was not insolvent, and that the determination of the underlying issues would have no impact upon any third party.

Following Patten LJ’s approach in Fulham FC, it was ordered that the incidental issues be referred to arbitration, with any relief to be subsequently granted by the court.

Conclusion

The above cases emphasise the emergence of a fact-sensitive approach to determining the nature of the underlying dispute in claims which seek statutory remedies often used in the insolvency context, in order to determine which side of the arbitrability line those disputes fall upon.

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