France: Ruling On The Impact Of Insolvency On Enforcing Arbitral Awards

The French Supreme Court has ruled that arbitration proceedings involving a French company will be suspended if that company becomes subject to insolvency proceedings. Although the arbitration may resume under certain circumstances, any arbitration award will be unenforceable in France for the duration of the insolvency proceedings.¹

Introduction

French insolvency law provides that the commencement of insolvency brings about a "suspension" of all ongoing legal proceedings.

The suspension of proceedings has two purposes: (1) to allow creditors who are party to a dispute with the company to register their claim to monies owed before the appointed magistrate; and (2) to allow the administrator, once appointed, to step into the shoes of the company and resume the proceedings on the company's behalf.

However, proceedings are only then resumed "for the sole purpose of verifying the claims and determining their amount"². In a decision earlier this year, the French Supreme Court considered whether this rule could be invoked to prevent the enforcement of an arbitral award.

Summary of facts

The case concerned a contract for the sale of crystallised sugar between Jean Lion (JL), a French registered company, and the International Company for Commercial Exchanges (INCOME), an Egyptian company. A dispute arose and in October 2001 arbitration proceedings were brought under the rules of the Refined Sugar Association.

On 20 May 2003, before the arbitration tribunal had rendered its decision, JL was put into administration, and all ongoing legal proceedings, including the arbitration, were suspended. INCOME proceeded to register its claim to monies owed before the competent tribunal as required under French insolvency rules, and the arbitration proceedings resumed.

On 9 February 2004, despite the advancing insolvency proceedings (JL having then entered into liquidation), the arbitration tribunal made an award in favour of INCOME, ordering JL to pay certain sums. INCOME sought to enforce this decision and successfully applied to the Paris Court of Appeal for exequatur - a judgment in which the court orders the enforcement of the arbitral award in France.

The liquidator acting for JL appealed against the decision to grant exequatur on the basis that, once suspended, ongoing legal proceedings could only resume "for the sole purpose of verifying the claims and determining their amount". The liquidator argued that this constituted a mandatory rule of domestic and international public policy (une règle d'ordre public international).

The Court of Appeal disagreed with the liquidator and the case eventually reached the French Supreme Court.

Judgment of the Supreme Court

The Supreme Court overturned the Court of Appeal decision's to grant exequatur and accepted the arguments raised by the liquidator, stating that "the principle of suspension of ongoing proceedings forms part of internal and international public policy"³.

The Supreme Court further confirmed that, once suspended, proceedings could resume only for the purposes of verifying claims and determining their amount. The Supreme Court held that the French Court of Appeal could not grant exequatur of an arbitral award for as long as one of the parties to the arbitration remained in administration or liquidation proceedings.

The rationale behind this decision was that insolvency rules are designed (1) to ensure equal standing between creditors; and (2) to allow the administrator or liquidator to design and implement a working plan to deal successfully with the company's assets. It should not be permissible for one creditor to obtain a preferential position over other creditors and therefore jeopardise the company's administration or liquidation by obtaining the enforcement of an arbitral award.

This decision confirms an earlier decision of the French Supreme Court dated 5 February 1991: "The principle of interruption of on-going litigation...applies even where the arbitration taking place in France is not submitted to French law".⁴

Comment

The institution of insolvency proceedings affecting a French registered company will cause the suspension of all litigation to which it is a party, including ongoing arbitration proceedings.

A creditor who is party to international arbitration proceedings should register its claim with the tribunal conducting the insolvency before continuing with the arbitration. However, the recent decision of the Supreme Court means that French law will prevent a successful party from seeking enforcement of the award while the French registered company remains in insolvency proceedings.

It is notable that the rule does not operate to prevent a successful party from seeking enforcement of an award in another jurisdiction against assets of the company held outside France.

As far as enforcement in France is concerned, there can only be two possible outcomes. Either: (1) the company will successfully recover following the administration and a judgment of exequatur can finally be sought; or (2) the company will go into liquidation and the party to the arbitration will have to join all other unsecured creditors in the queue to recover money from the company's assets.

Footnotes

^{1. Decision of the First civil chamber of the Supreme Court, 6 May 2009, no.08-10.281}

^{2. Article L.622-22 of the French code of commerce}

^{3 "Le principe de suspension des poursuites individuelles en matière de faillite est à la fois d'ordre public interne et international"}

^{4. Decision of the First civil chamber of the Supreme Court, 5 February 1991}

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