Insolvency and Arbitration in Russia

01.01.2013 The continuing financial instability worldwide has its impact on all areas law, including arbitration. The number of cases where insolvent parties are involved in arbitration or have entered into agreements containing arbitration clauses is rising and has over the past year generated significant jurisprudence of the Russian courts.

Notably, the Supreme Commercial Court in a recent resolution apparently upheld a principle that all disputes involving a company that has been declared insolvent and put into liquidation should be resolved by the court supervising the insolvency. It follows that even if a dispute arises out of an agreement that contains an arbitration clause it ceases to be arbitrable from the date the company is declared insolvent.

In a separate development several recent decisions of the Ninth Appellate Commercial Court (the intermediate appellate court in Moscow) have addressed the question of whether insolvency managers appointed by creditors to manage the insolvency process are bound by arbitration clauses included in debtors’ contracts.

Russian law entitles insolvency managers to challenge certain debtors’ transactions and the court has held that in mounting these challenges they are acting on behalf of the creditors and not the company and therefore are not bound by arbitration clauses.

Are disputes against insolvent companies arbitrable?

The latest Supreme Commercial Court case (А45-15248/2011) concerns a domestic arbitration in which the company was apparently declared insolvent while the arbitration was ongoing. The lower courts granted the claimant’s application to enforce the resulting award. However, a panel of the Supreme Commercial Court disagreed.

It held that as a matter of Russian law any claims against an insolvent company should be submitted to the commercial court supervising the insolvency. For this reason from the date the company is declared insolvent claims against it cease to be arbitrable and the arbitral tribunal is required to discontinue the proceedings.

The Presidium of the Supreme Commercial Court heard the case on 13 November 2012 and reversed the decisions of the lower courts. While it is likely that the Presidium endorsed the panel’s position, this remains to be seen when the full reasoning is released (the panel identified several potential grounds for the reversal of the lower courts’ decisions).

Are insolvency managers bound by arbitration clauses?

The Ninth Appellate Commercial Court heard two cases dealing with the validity of transactions entered into by the debtor prior to the commencement of insolvency proceedings.

In the first case (А40-31270/07-36-79Б) JSC Volgatanker entered into a charterparty with Sampratrans Shipping Limited, which provided that disputes between the parties shall be resolved by ad hoc arbitration in London. Volgatanker was declared insolvent and its insolvency manager submitted a claim seeking invalidation of the charterparty. Sampatrans sought a stay of this claim arguing that it should be resolved by arbitration because the insolvency manager had submitted the claim on behalf of Volgatanker.

The courts disagreed. In particular, the Ninth Appellate court reasoned that an insolvency manager when challenging transactions the insolvent company entered into may act in two capacities: (i) on behalf of the company and (ii) in a separate autonomous capacity as the representative of the company’s creditors. Since in this case the insolvency manager was acting in this latter capacity, the court held it was not bound by the arbitration clause in the agreement.

In the second case (А40-41119/11-70-196Б) CJSC Glitnir Securities entered into a lease termination agreement with the lessor (Enka Insaat ve Sanayi) by which Glitnir agreed to pay c. USD 77,000 for early termination of the lease. Glitnir was declared insolvent and its insolvency manager submitted a claim to the Moscow Commercial Court seeking invalidation of the termination agreement and recovery of the release payment.

The first instance court stayed this claim in favour of RF ICAC arbitration contemplated by the agreement. However, the appellate court reversed this finding holding both that (i) any claims concerning the validity of transactions the insolvent company had entered into should be resolved by the supervising commercial court and (ii) the insolvency manager was not bound by the arbitration clause contained in a contract the insolvent company had entered into.

The rationale of these decisions can indeed be expanded beyond insolvency liquidation. Russian insolvency laws envisage the appointment of managers at various stages of a company’s insolvency and grant them standing to challenge the validity of certain transactions the company has entered into. If indeed an insolvency manager exercising these powers is not acting on behalf of the company and is not bound by the arbitration clause, all such challenges may properly be brought before the supervising court.

Sergey Usoskin

CIS Arbitration Forum

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