ADR in Insolvency Proceedings

By Kenneth Lim Tao Chung and Chew Jing Wei (Allen & Gledhill LLP)

Introduction

In this post, we discuss some of the key points with respect to the application of ADR techniques (specifically, mediation, arbitration and expert determination) in the insolvency context.

Mediation

In 2016, the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (“Restructuring Committee”) published a report observing the mediation could be used effectively in restructuring proceedings in a number of situations.

First, mediation could be used to resolve individual creditor disputes with the debtor (in the context of a multi-creditor restructuring), or to manage multiple creditor disputes of the same nature (“Similar Claims Mediation”).  In Similar Claims Mediation, a mediator is typically appointed to facilitate the resolution of multiple claims with a common nexus of law or fact. In the US insolvency proceedings for Lehman Brothers Inc., a structured mediation protocol led to the expedient resolution of the majority of derivatives- related claims, involving derivatives contract-related termination disputes and claims involving over 6,000 derivative contracts with 900,000 underlying transactions. 

Second, mediation may be helpful in obtaining consensus in the restructuring plan between the debtor and its creditors (“Plan Mediation”).  In a Plan Mediation, a mediator is appointed to help stakeholders achieve consensus in a restructuring plan or in cases where debtors are subject to dual insolvency proceedings in competing jurisdictions. During the insolvency of MF Global Holdings Ltd, mediation was utilised to resolve potential issues arising from concurrent insolvency proceedings in the US and the UK, and contributed to substantial assets of the bankruptcy estate (which would have been used to pay fees and expenses that would have arisen from a court-based litigation) being distributed to the creditors. 

The advantages of Plan Mediation haves been judicially recognised by the Singapore High Court in Re IM Skaugen SE [2019] 3 SLR 979, where the Honourable Justice Kannan Ramesh observed: “Another aspect, which surprisingly has not been resorted to by debtors and creditors, is to enlist the help of an experienced and skilled insolvency mediator to develop the restructuring plan, whether it be an individual or group restructuring plan. Frequently, the discussions on the plan are partisan, and the positions adopted are therefore reflective of that. I see tremendous utility in deploying the services of a neutral third party skilled in mediation techniques, and with the relevant domain knowledge. Such a party can play the invaluable role of building consensus between the debtor and the creditors in the development of the restructuring plan, and build trust in the process. In this way, the mediator can assist to iron out many of the wrinkles and creases that frequently erupt in a restructuring and which perhaps are not best resolved in the adversarial cauldron of the court. It is important that this be explored with vigour, as it seems to me to be self-evident that bridging differences and the trust divide is fundamental to a successful restructuring outcome. While there is always a place for the jousting that is typical of an adversarial process, a more considered, constructive and measured approach in restructuring can often lead to better outcomes for all parties involved. One must not lose sight of the fact that the end objective of the process, after all, is to make a considered assessment of whether a feasible and acceptable economic solution to the financial problems of the debtor is possible, and if so, how that can be facilitated with the interests of the relevant stakeholders in mind. To this end, facilitating discussions between the debtor and creditors, secured and unsecured, and promoting a more cooperative, collaborative and transparent environment wherein all parties involved work towards a common objective of attaining an effective and sustainable restructuring, seems to be quite clearly the correct approach.”

Arbitration

In relation to arbitration, it should be noted at the outset that there are certain aspects of insolvency law which are non-arbitrable. The reason for this, as recognised by the Singapore courts, is that arbitration and insolvency processes embody, to an extent, contrasting policies. In Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 (“Larsen Oil”), the Singapore Court of Appeal held: “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.”

In Larsen Oil, the Court of Appeal was concerned with the non-arbitrability of certain types of disputes involving an insolvent company that was in liquidation. The Court of Appeal held that a distinction ought to be drawn between a dispute arising only upon insolvency and by reason only of the insolvency regime (in other words, an insolvency law dispute) and a dispute arising from the insolvent company’s pre-insolvency rights and obligations (in other words, a private law dispute). The Court of Appeal held that an insolvency law dispute is not arbitrable, whereas a private law dispute is arbitrable, at least where it does not affect the substantive rights of the creditors.

In relation to arbitrable disputes, the Restructuring Committee identified certain types of disputes between the debtor and creditors where arbitration may be particularly helpful. These disputes include:

1. Disputes involving cross-border issues, as arbitration would prevent issues from being re-litigated across various jurisdictions.
2. Complex cases (e.g. disputes involving highly complex financial instruments) where there may be a need for specialist knowledge in the subject area and where it is likely that there will be inconsistent court decisions.

The Restructuring Committee also noted that arbitration could also be used to effectively resolve issues that arise post-insolvency, including:

1. Resolving intercompany claims between affiliates across multiple jurisdictions within a large enterprise group.  
2. Resolving issues across multiple concurrent insolvency proceedings. For example, where the business of a large multinational enterprise is sold as a going concern, proceeds of the sale may have to be allocated across various insolvency proceedings. Arbitration can be used to resolve disputes as to how the distribution of the proceeds of the sale should be done.
3. Determining a debtor’s centre of main interests, to avoid the situation where different jurisdictions claim that the primary administration of a restructuring proceeding should be based in the local forum.

The advantage that arbitration proceedings have over traditional court-based insolvency proceedings is greater enforceability. An arbitral award benefits from the New York Convention which allows enforcement of the arbitral award in over 150 countries. Using arbitration to resolve common issues in different jurisdictions and other transnational issues may also prevent inconsistent court decisions across jurisdictions.

There are, however, several challenges to using arbitration to resolve disputes that arise in insolvency proceedings. It has been observed in the Singapore context that:

1. One challenge to using arbitration stems from the general acknowledgment across jurisdictions that certain “core” aspects of insolvency law are non-arbitrable, as discussed above. Insolvency issues that are not considered to be a “core” aspect of insolvency law (i.e. “non-core” issues) can be arbitrated. However, there is no consistent approach to the treatment of “non-core” issues across jurisdictions and an issue that is arbitrable in one jurisdiction may not be arbitrable in another. Courts may potentially reach inconsistent decisions on whether certain disputes referred to arbitration involve “core” insolvency issues. This in turn creates a lack of clarity and uncertainty over whether the arbitration of an insolvency issue would be recognised as validly commenced in other countries. 
2. The insolvency law regime provides certain insolvency officeholders with powers to disclaim / set-aside contracts, and this may effectively destroy the agreement to arbitrate.
3. Insolvency proceedings commonly involve a stay of legal proceedings between stakeholders in the insolvency, and this includes arbitration. Therefore, it is possible that there may be inconsistent application of the stay of proceedings such that some arbitration proceedings are permitted to continue under one set of laws, while another set of arbitration proceedings under a different set of law is stayed.

Expert Determination

Expert determination is a means by which parties to a contract instruct a third party to decide an issue. The third party may typically be an expert chosen for his expertise in relation to the issue between the parties. The Singapore courts have held that where the expert’s determination has been agreed between the parties as final, that expert’s determination will be binding on them.

Specifically in the context of a scheme of arrangement, there is a statutory mechanism for the appointment of an independent assessor for disputes in relation to the rejection of proofs of debt. The Insolvency, Restructuring and Dissolution Act 2018 provides that such disputes may be adjudicated by an independent assessor appointed: (a) by the agreement of all parties to the dispute; or (b) if there is no such agreement, by the Court on the application of any party to the dispute; or the company (whether or not a party to the dispute). Where a creditor, the company or the chairperson disagrees with any decision of an independent assessor on an adjudication in relation to the inspection, admission or rejection of a proof of debt, the creditor, company or chairperson (as the case may be) may file a notice of disagreement regarding that decision for consideration by the Court, to be heard when the Court hears an application for the Court’s approval of the compromise or arrangement in question.

(*) This article is a summary of an article by the authors titled “ADR Techniques in Resolution Process”, published in 2022 in the book Insolvency: Now & Beyond.