Understanding the Complexities of Insolvency in Arbitration Enforcement

Thinking Beyond the Quick Fix Solution

Threatening insolvency is an easy way to enforce an arbitration award. It's quick and effective leverage. Unfortunately, it has some serious downsides. These include:

(1) Loss of control: if the other side is made insolvent, a liquidator will take over control of the company. They will investigate the company's affairs to determine the money available to pay creditors.

(2) It takes money to collect money: Liquidators' work takes time, and they like to be paid. Typically, they are paid out of the company's funds, further reducing the amount available to pay you.

(3) Other creditors: Any other creditors will also make sure the liquidator considers their claims. You may be the one who triggered the insolvency, but at the end of the day, you may be a minor creditor. Often intra-group debts are the dominant debt in any insolvency.

(4) One of many: When the liquidator turns assets into cash, they will pay the secured creditors first. Award debtors are unsecured creditors and will be treated equally with other similar creditors. You will get an equal share that is pro-rata to the value of the debt (e.g. 10 cents on the dollar).

(5) Good money after bad? Liquidators may find that the company has a claim against a third party, but the company does not have the money to pursue the claim. They may ask the creditors to fund the cost. If you win, this increases the funds available to all creditors (e.g. everyone's take goes from 10 cents to 20 cents on the dollar). If you lose, the pot gets smaller.

One of the most critical decisions if you're going to enforce an arbitration award is deciding where the tipping point is to begin insolvency proceedings.

Until you are ready, you should ensure that any enforcement of an arbitral award does not tip off other creditors and trigger the insolvency of the paying side.