In November 2018, the Austrian Supreme Court handed down a landmark decision (18 ONc 2/18s), clarifying that an arbitral tribunal may verify the accuracy of a claim that is subject to insolvency proceedings despite the otherwise exclusive jurisdiction of the insolvency court, provided that the arbitration commenced prior to the insolvency.
Contributor: Ivan Prandzhev
In November 2018, the Austrian Supreme Court handed down a landmark decision (18 ONc 2/18s), clarifying that an arbitral tribunal may verify the accuracy of a claim that is subject to insolvency proceedings despite the otherwise exclusive jurisdiction of the insolvency court, provided that the arbitration commenced prior to the insolvency. It also clarified that the tribunal’s decision is binding on the insolvency administrator as well as all insolvency creditors.
The Opening of Insolvency Proceedings Against an Uncooperative Respondent
In this particular case, the respondent was in default in nominating an arbitrator. Therefore, the claimant requested the Austrian Supreme Court to step in and appoint an arbitrator. However, before the court could decide on this application, insolvency proceedings were initiated against the respondent. The Austrian Supreme Court therefore stayed the appointment procedure and stated that the claimant was now required to register its arbitration claim in the insolvency proceedings. However, when the claimant tried to do so, the insolvency administrator refused to recognize the claim as established.
Verification Proceedings Under Austrian Insolvency Law
In such a case, the accuracy and priority of the claim rejected by the insolvency administrator must be determined in verification proceedings, a special type of litigation. Importantly, the law provides that the competent court in the insolvency matter shall have exclusive jurisdiction over the verification proceedings.
The claimant nevertheless requested the Austrian Supreme Court to continue the proceedings and appoint an arbitrator. It asserted that the arbitral tribunal, and not the insolvency court, is the competent body to conduct the verification proceedings. Hence, the Austrian Supreme Court had to assess whether an already pending arbitration qualifies for an exception from the otherwise exclusive jurisdiction of the insolvency court.
Moreover, the binding effect of the declaratory relief granted in verification proceedings is not restricted merely to the insolvency creditor asserting the claim and the party disputing it. It extends to all insolvency creditors as well as the insolvency administrator. By contrast, under Austrian arbitration law, an award has binding effect only “between the parties” to the arbitration. This means that for verification proceedings to be decided in the form of an arbitral award that is enforceable against all parties affected by it, they all, including the insolvency administrator and the insolvency creditors, must have had an opportunity to participate in the arbitral proceedings.
Thus, the Austrian Supreme Court had to assess whether such parties fall within the scope of an arbitration clause concluded between the insolvency creditor asserting the relevant claim and the insolvency debtor.
The Court’s Ruling: Verification Proceedings to be Conducted by the Arbitral Tribunal
The Austrian Supreme Court agreed with the claimant and concluded that the verification proceedings are to be conducted as arbitral proceedings.
It first relied on provisions of the Austrian Insolvency Code which stipulate that while the insolvency court has, in general, exclusive jurisdiction, the verification proceedings shall nevertheless be conducted by another court, if the relevant claim has become pending before that court prior to the commencement of the insolvency proceedings. The Austrian Supreme Court explained that the legislative intent was to preserve the value of the proceedings conducted before the opening of the insolvency proceedings rather than starting a new litigation from scratch before the insolvency court.
Furthermore, the court noted that the insolvency administrator and insolvency creditors disputing the claim are all bound by the jurisdiction of the court invoked by the insolvency creditor asserting the claim. This is also true where the jurisdiction is based on a forum selection clause.
The court then went on to apply these general principles from the domain of court litigation to the circumstances of the case in front of it. Firstly, it explained that the same exception from the exclusive jurisdiction of the insolvency court applies also to arbitral proceedings which became pending before the initiation of insolvency proceedings. Based on its previous jurisprudence, the court clarified that an arbitration is considered “pending” under the applicable insolvency law as soon as the claimant has made its very first procedural step to assert its claim. Secondly, the court stated that the insolvency administrator is bound by a pre-insolvency arbitration clause in the same way as he or she would have been by a pre-insolvency forum selection clause.
It based this equal treatment of state court proceeding with arbitration and forum-selection clauses with arbitration agreements on Section 607 of the Austrian Code of Civil Procedure which expressly provides that arbitral awards have “the effect of a final and binding court judgment.”
As an important limitation of the above conclusion, the Austrian Supreme Court ruled in that, “in any case”, it applies where the relevant claim was only disputed by the insolvency administrator, and not by any creditors. The court explained that all other parties which would be affected by the arbitral tribunal’s finding in the verification proceedings had been given an opportunity to dispute the relevant claim but had not made use of it. Therefore, they had no legal interest to participate in the verification proceedings and there was no need for them to join the arbitration as intervening parties. Thus, the court did not have assess whether such intervention would have been admissible without the consent of the parties to the arbitration.
Obiter Dictum: Insolvency Creditors are Bound by the Arbitration Agreement
However, the Austrian Supreme Court went on to hold in obiter that the outcome would have been the same if the claim was disputed also by an insolvency creditor. Insolvency creditors disputing the relevant claim would fall within the subjective scope of the arbitration agreement as the same would be true of forum selection clause agreements. Furthermore, the court explained that insolvency creditors disputing the relevant claim are not exercising their own rights based on insolvency law; rather, their procedural status depends on the status of the insolvency debtor who, until the opening of the insolvency proceedings, was entitled to conclude arbitration agreements. It follows, the court concluded, that insolvency creditors are bound by such pre-insolvency arbitral agreements concluded by the insolvency debtor.
In light of the above, insolvency creditors disputing the relevant claim are entitled to participate in the verification proceedings conducted before an arbitral tribunal. The effects of the arbitral tribunal’s findings in such verification proceedings extend to the insolvency creditors and the insolvency administrator.
Reception of the Decision
The Austrian Supreme Court’s decision addressed a long-lasting dispute in scholarly doctrine inviting mixed reactions from Austrian legal scholars. Some have wholeheartedly welcomed the court’s conclusions, pointing out that it is not necessary to discuss the exclusivity of the insolvency court’s jurisdiction to arrive at the same conclusion; based on relevant jurisprudence, exclusivity is only relevant among state courts and does not apply to arbitral proceedings [see Oberhammer, in ecolex, 2019, 232(234)]. Others, however, have voiced disagreement with the court’s obiter dictum, observing that the procedural status of insolvency creditors does not always depend on the status of the insolvency debtor [see Schumacher, RdW 2019/233(233 et seq)].
Significance of the Decision
The decision was rendered by the 18th division of the Austrian Supreme Court, which is competent to hear all arbitration matters assigned to the court in first and last instance in accordance with the Austrian Code of Civil Procedure, including challenges against arbitral awards. Thus, the court is likely to apply its obiter dictum in future jurisprudence.
The fact that the Austrian Supreme Court did not have to address the scope of the arbitration agreement with respect to insolvency creditors, its obiter dictum nevertheless provides a sophisticated discussion of this issue, highlights its acute awareness of the current debates within the Austrian dispute resolution community, their practical significance, and of its own role in clarifying such debates. For parties and practitioners alike, the decision eliminates a significant source of legal uncertainty and provides useful guidance in navigating through the intersection between arbitration and insolvency law.