Panorama of Sydney harbour and bridge in Sydney city, New south wales, Australia

In brief

Even with the fiscal stimulus and other measures taken by the Federal and State governments in Australia, corporate insolvencies are likely to increase in coming months.

Under Australia’s insolvency regimes, a distressed company may be subject to voluntary administration, creditor’s voluntary winding up or court ordered winding up (collectively, an external administration).  Each of these processes raises different issues for the commencement and continuation of court and arbitration proceedings.

In this alert, we consider the potential impact of an external administration of an Australian company on arbitration proceedings brought against that company.  We also consider the options available to the respondent if a claimant in arbitration proceedings becomes subject to an external administration and whether or not an arbitral award can be enforced.

Insolvent respondent – stay of proceedings

The Corporations Act 2001 (Cth) (Corporations Act) provides for a stay of proceedings if a company enters into an external administration.

A summary of the relevant provisions and exceptions and the impact on arbitration proceedings is set out in the table below.

Insolvency process Stay of proceedings Exceptions Arbitration proceedings
Voluntary administration A proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with Written consent of the administrator or leave of the court. No automatic stay of arbitration proceedings
Deed of Company Arrangement A person bound by the deed of company arrangement cannot begin or proceed with a proceeding against the company or in relation to any of its property Leave of the Court and in accordance with such terms (if any) as the Court imposes May be a stay of arbitration proceedings
Court ordered winding up A person cannot bring or proceed with a proceeding in a court against the company or in relation to property of the company Leave of the Court and in accordance with such terms (if any) as the Court imposes May not be a stay of arbitration proceedings
Creditors’ voluntary winding up No action or other civil proceeding is to be proceeded with or commenced against the company Leave of the court and subject to such terms as the court imposes Stay of arbitration proceedings unless leave of court granted

The potential impact of each of these processes on arbitration proceedings is different, as explained below.  In summary, if a company is subject to a voluntary administration or a court ordered winding up, the stay of proceedings will not apply to arbitration proceedings commenced against the company but it will apply if the company is subject to a deed of company arrangement in certain circumstances and if the company is subject to a creditors’ voluntary winding up.

For completeness, a company that has had receivers or receivers and managers appointed over its property is not subject to any stay of proceedings by reason of that appointment.

  1. Voluntary administration and DOCA

If a company goes into voluntary administration, no court proceedings can be progressed or commenced against the company or in relation to any of its property during the administration period (section 440D). Proceedings subject to the stay can only be commenced or continued with the written consent of the administrator or with leave of the Court.

However, the stay only applies to “a proceeding in court”.  There is no express reference to arbitration proceedings. The courts have held that the reference to “a proceeding in a court” does not extend to arbitration proceedings.  This means that a stay in respect of an arbitration is not automatic. Arbitration proceedings against a company may be continued or even commenced after the company goes into voluntary administration.

However, an administrator can apply under section 447A of the Corporations Act to extend the operation of the stay to arbitration proceedings commenced against the company.

If the company in administration enters into a deed of company arrangement (DOCA) immediately after the voluntary administration a person bound by the DOCA (such as an unsecured creditor with a claim arising prior to the appointment date of the administrators) may not begin or proceed with a proceeding against the company or in relation to its property by operation of section 444E of the Corporations Act without leave of the Court.  This stay is not limited on its face to a “proceeding in a court” and it may be that this stay (referring only to “a proceeding”) extends to arbitration proceedings.

  1.  Court-ordered winding up

If a company is being wound up in insolvency or by the Court, “a proceeding in a court” cannot be commenced or continued against the company or in relation to its property without the leave of the Court (section 471B). No exception applies if the liquidator consents, although the liquidator’s consent will be a relevant consideration on any application for leave pursuant to section 471B.

The wording used in section 471B is similar to section 440D (both refer to “proceeding in a court”) and it is expected that courts would hold that this section, likewise, does not extend to arbitration proceedings.  However, that issue has not been decided by the courts.

Although section 447A does not apply to a liquidation, it may be possible for a liquidator to apply under section 90-15 of the Insolvency Practice Schedule to extend the operation of the stay to arbitration proceedings.  Although we are not aware of this having occurred, section 90-15 gives a Court wide powers to make such orders as it sees fit in relation to an external administration and this may extend to making orders of this kind.

  1. Creditors’ voluntary winding up

On the other hand, if a company enters voluntary winding up or liquidation, such as it would if it proceeded to liquidation immediately following voluntary administration, an “action or other civil proceeding” against the company cannot be commenced or continued without the leave of the Court (section 500(2)).  This stay (not expressly referring to a court) has been held to extend to arbitration proceedings. Any arbitration proceedings that have been commenced or may be commenced against the company would be stayed.

Where the stay applies, the right to claim against the company is instead converted into a right to lodge a formal proof of debt in the winding up of the company (to be adjudicated on by the liquidator) unless leave of the Court to commence or continue the arbitration proceeding can be obtained.

Insolvent claimant

There are different factors to take into account if the claimant to an arbitration becomes subject to an external administration or receivership.

In deciding what steps to take, a receiver, administrator or liquidator will consider the merits of the claim, ability to fund the costs of the proceeding (either out of the assets of the company or from third party funding), the likely recoverability and return to creditors (or in the case of the receiver, to the secured creditor).

If an arbitration is commenced or continued, then the respondent should consider applying for security for costs.  An arbitral tribunal has the power to award security for costs in circumstances similar to court proceedings.  A court may also order security in support of an arbitration.

Enforcement of an arbitral award

Recognition and enforcement of an arbitral award by a court in Australia requires the commencement of proceedings in an Australian Court. Hence, if an award was made against a company in voluntary administration or liquidation, then the enforcing party must apply for leave of the Court (or alternatively obtain the written consent of the administrator in a voluntary administration) before commencing proceedings to recognise and enforce the arbitral award.

However, from a practical point of view, if the claim is unsecured and only monetary in nature, the claimant will not be able to commence or continue any court enforcement processes seeking to enforce or recover the judgment sum without leave of the Court, and instead will be required to prove under any DOCA or in any liquidation as an unsecured creditor.  There may therefore be limited utility in seeking to have the arbitral award recognised and enforced by a court.

Finally, unless a costs order was made by the arbitral tribunal prior to the appointment of the administrator or the day the winding up is deemed to have commenced, a costs order will not be admissible to proof against the company in external administration.

Key takeaways

If you commence or continue arbitration proceedings against an Australian company in external administration or that enters into external administration after commencement consider whether the proceedings may continue or whether leave of the Court is required to do so.  There are of course commercial and strategic considerations that also need to be taken into account when considering whether to commence or continue arbitration proceedings.

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