Once again, on arbitration and insolvency

Two recent rulings of the Italian Supreme Court analysed the relationship between arbitration and insolvency proceedings.

The first ruling (decision no. 13089 of 24 June 2015 of the of the I Civil Chamber of the Supreme Court, Italian text available here) established that “claims against a bankrupt party may not be brought before an Arbitral Tribunal.  Indeed, the jurisdiction of the arbitrators is in any case prevented due to the prevailing jurisdiction of the Insolvency Courts on such claims.” 

The second ruling is more interesting (decision no. 15200 of 21 July 2015 of the Supreme Court sitting en banc, Italian text available here). This judgment focused on the issue of the relationship between arbitration and insolvency when an arbitration procedure is pending abroad and therefore EC Regulation no. 1346 of 29 May 1999 concerning insolvency proceedings applies.

Pursuant to EC Regulation no. 1346/2000, the law of the Member State of the opening of insolvency proceedings  also determines, among other things, the effects of the insolvency proceedings on proceedings brought by individual creditors, except for pending lawsuits (Article 4(2)(f)).  The effects upon the pending lawsuits are determined by the law of the Member State in which they are pending, pursuant to Article 15 of the Regulation.

Some Member State’s Courts hold that the above mentioned provisions exclusively concern the individual enforcement proceedings that may continue if allowed by the legal system where the proceedings are pending, regardless of the debtor’s divestment. The High Court of Ireland ruled in this sense in Flightlease Ireland Ltd., Re [2005] IEHC 274 (available here, on the website of the British and Irish Legal Information Institute).

On the other hand, other rulings hold that Articles 4(2)(f) and 15 of the EC Regulation no. 1346/2000 also apply to proceedings on the merits, including arbitration proceedings (in this respect, see Syska v Vivendi Universal SA & Ors [2008] EWHC 2155 (Comm), available here, which was uphold by Syska & Anor v Vivendi Universal S.A. & Ors [2009] EWCA Civ 677, available here, on the website of the British and Irish Legal Information Institute).

EU Regulation no. 848 of 20 May 2015 should settle these doubts. Article 18 of this Regulation, which will apply starting from 26 June 2017, holds that “The effects of insolvency proceedings on a pending lawsuit or pending arbitral proceedings concerning an asset or a right which forms part of a debtor’s insolvency estate shall be governed solely by the law of the Member State in which that lawsuit is pending or in which the arbitral tribunal has its seat.” 

The ruling at hand of the Supreme Court sitting en banc reached a different conclusion.

The case concerned an Italian company (Valtur) and an Egyptian company (Nesco).  In August 2000, they entered into an agreement, whereby Nesco leased two hotels to Valtur.

In December 2010, a dispute arose between the parties with respect to an alleged breach on the part of Valtur. In Nesco’s opinion, such breach resulted in the termination of the agreement. Consequently, Nesco commenced the ICC arbitration provided for in the lease agreement.

During the arbitration proceedings, at the end of 2011, Valtur was declared bankrupt by the Court of first instance of Milan.

In February 2012, Nesco requested to be admitted to Valtur’s statement of liabilities. In its application Nesco noted the pending ICC arbitration proceedings (that is, arbitration proceedings governed by French law) and, referring to Article 15 of EC Regulation no. 1346/2000 and the French procedural rules, requested to be admitted to the statement of liabilities on a temporary basis, subject to the outcome of the arbitration proceedings. 

In June 2012, the Court of first instance of Milan ruled in favour of Nesco and admitted it to Valtur’s statement of liabilities on a temporary basis, pursuant to article 55(3) of the Italian Insolvency Law.

Nonetheless, in October 2012, Nesco opposed the ruling of the Court of first instance of Milan.  In fact, Nesco claimed that the Court’s decision was partially wrong, because it applied the pari passu principle to its credit. Valtur appeared in Court opposing Nesco’s claim and counterclaiming the exclusive jurisdiction of the Italian Courts (preventing the jurisdiction of ICC Arbitral Tribunal) on Nesco’s credit towards Valtur.

In February 2014, Nesco referred the case to the Supreme Court, so as to have a final decision on the issue of jurisdiction on its credit (under Italian law, until the case is decided on the merits in the first instance, each party may request to the Supreme Court to solve issues of jurisdiction).

First of all, in Nesco’s opinion the jurisdiction on the dispute was governed by EC Regulation no. 1346/2000. Pursuant to Articles 4(2)(f) and 15 of this Regulation, the opening of insolvency proceedings in a Member State (in this case, in Italy) would not prevent the jurisdiction of another Member State (in this case, France), where a lawsuit was already pending. Indeed, only French law might determine the effects of the opening of insolvency proceedings on French pending lawsuits. And according to French law, if the Arbitral Tribunal had already been appointed at the time of the opening of insolvency proceedings, arbitration proceedings may continue as long as the claimant requests to be admitted to the debtor’s statement of liabilities subject to the outcome of arbitration proceedings. All these requirements were fulfilled in the case at hand.

However, the Supreme Court held that Nesco’s request was inadmissible for several reasons. First, the referral to the Supreme Court of the issue of jurisdiction was inadmissible because it happened in February 2014, after the decision on the merits in first instance (that is, after the decree of the Court of first instance of Milan, issued in June 2012, whereby Valtur’s statement of liabilities was approved). Moreover, the Supreme Court ruled that the issue at hand did not amount to a proper issue of jurisdiction.  Indeed, it was rather an issue concerning the effects of the opening of insolvency proceedings on pending arbitration proceedings, or the enforceability of the arbitration clause.

Despite the declaration of inadmissibility of Nesco’s referral, in the last pages of the decision at hand the Supreme Court indicated its construction of Article 15 of EC Regulation no. 1346/2000. This construction reaffirms the exclusive and imperative jurisdiction of the Insolvency Courts.

The Supreme Court held that, in the case at hand, the above mentioned Regulation did not apply, because it only regulates “the relations arising from insolvency proceedings of parties having their residence or registered office within the European Union” (Nesco is an Egyptian company).

Even if EC Regulation no. 1346/2000 applied, it would govern “only the effects of the opening of insolvency proceedings on pending proceedings, not the effects of pending proceedings on the jurisdiction of Insolvency Courts. Articles 4 and 15 of the Regulation do not regulate the jurisdiction, although these provisions identify the law governing the effects of insolvency proceedings on pending proceedings.” 

The Supreme Court reached the conclusion that the case at hand (arbitration proceedings were commenced in France before the opening of insolvency proceedings in Italy) “is not governed by Articles 4(f) and 15 EC Regulation no. 1346/2000.” 

It seems that the Supreme Court considers that Article 15 of the Regulation in force only concerns the effects of the opening of insolvency proceedings on a lawsuit pending in another Member State. In other words, that lawsuit may continue if allowed by the law of the Member State where it is pending. Nonetheless, the effects on bankruptcy’s statement of liabilities of the decision issued in the pending proceedings are governed by the law of the Member State where the insolvency proceedings was opened. In fact, the Supreme Court ruled “it is settled case law of this Court, that the parties are not allowed to bring before an Arbitral Tribunal claims towards a bankrupt debtor. Indeed, the jurisdiction of the arbitrators is in any case prevented due to the prevailing jurisdiction of the Insolvency Courts on such claims.” 

At this point, a doubt arises on the rationale (and scope of application) of the above mentioned Regulations.