The impact of insolvency proceedings on arbitral proceedings is becoming an increasingly important consideration for parties. Two scenarios can be generally envisioned: (i) a company files for insolvency while it is engaged in arbitral proceedings; or (ii) arbitral proceedings are initiated after insolvency proceedings have commenced. In both scenarios, the parties need to assess how the insolvency proceeding affects the arbitral proceedings. This article assesses the impact of insolvency proceedings initiated in Germany on foreign arbitral proceedings.
Initially, the arbitral tribunal has to determine whether the insolvency proceedings have any impact on the arbitration at all. The proceedings might not if the national laws applicable to the insolvency proceedings restrict their applicability to the territory of that jurisdiction (known as the principle of territoriality).
German insolvency law follows the principle of universality pursuant to Council Regulation (EC) No. 1346/2000 dated May 29, 2000, on insolvency proceedings as well as pursuant to Sec. 335 et seq. of the German Insolvency Code. In other words, German insolvency law demands recognition in any other jurisdiction. Therefore, the arbitral tribunal should recognize the German insolvency proceedings. If they do not, there is a risk that any arbitral award would violate German public policy and, therefore, would not be enforceable in Germany.