Issues of Compatibility Between Insolvency Proceedings and Commercial Arbitration

Abstract

Arbitration and insolvency proceedings are legal instruments governed by different objectives and different legal principles. While in arbitration the autonomy of the parties plays a major role, all insolvency proceedings are collective proceedings where autonomy of the parties is strictly limited, the majority of issues are regulated by binding legal provisions and strong controlling powers are vested into insolvency court. Therefore, in this article the authors analyse the issues of compatibility between insolvency proceedings and arbitration.
The Lithuanian legal framework which was in force until 30 June 2012 was ambiguous. According to the wording of Article 11 of the previous Law on Commercial Arbitration, disputes connected with bankruptcy shall not be submitted to arbitration. It was not entirely clear whether this provision was restricted to ‘core’ insolvency issues such as opening and conduct of the proceedings, appointment of the office holder, administration of the estate, liquidation etc. or it also included all other questions related with insolvency. The jurisprudence of the Lithuanian courts gave a broad meaning to the restriction expressed in the Law on Commercial Arbitration. Accordingly, such questions as verification of claims and disputes with the creditors were also excluded from arbitration after announcement of bankruptcy of the debtor.
The authors argue that distinction should be drawn between cases in which an insolvent enterprise is a claimant and where it is a defendant. It is also important to draw a line between arbitration agreements entered into before announcement of bankruptcy and arbitration agreements concluded by the bankruptcy trustee with the consent of the majority of creditors.
In this article, the new Law on Commercial Arbitration which has entered into force on 30 June 2012 is analysed and according to which an insolvent enterprise remains bound by arbitration agreement in both cases where it is a claimant and where it is a defendant. Several contentious issues of the new law are identified and analysed in the article, such as the position of other creditors in the proceedings, relation between arbitration and restructuring procedure, enforceability of arbitration agreement in cases where an insolvent enterprise lacks funding to pay arbitration costs etc.