Protecting arbitration: Proposed amendments to Polish bankruptcy law
March 2013
International arbitrations involving Polish parties and Polish arbitrations have sometimes suffered from provisions in the Polish Bankruptcy Law which invalidate an arbitration agreement on bankruptcy and prohibit the arbitration proceedings from continuing. This article examines the difficulties faced by finance parties as a result of these bankruptcy provisions and highlights proposals for reform.
Poland has witnessed a growth in arbitration as a means of resolving business disputes. This began with the fundamental reform of Polish arbitration law in 2005, which is now based on the 1985 UNCITRAL Model Law on International Commercial Arbitration.
Articles 142 and 147 of the Polish Bankruptcy Law provide that “Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued.” Article 142 applies to bankruptcy proceedings leading to the winding up of a company, while Article 147 applies where the ultimate aim of the bankruptcy is a reorganisation. Although every jurisdiction places limits on how court or arbitration proceedings involving a bankrupt can be conducted, the Polish Bankruptcy Law is unique in providing for the automatic invalidity of an arbitration agreement and any ongoing proceedings. This can have serious practical implications for both international and domestic arbitrations with a Polish debtor.
Effect on international arbitration
Foreign arbitral tribunals have different opinions about how a Polish party’s bankruptcy affects arbitration proceedings. In Vivendi v Syska the respondent, a Polish company, went bankrupt during the arbitration. The LCIA arbitral tribunal, seated in London, decided to apply English law (ie the law of the place of arbitration) to determine the effect of the bankruptcy on the validity of the arbitration agreement. Under English law a declaration of bankruptcy has no effect on ongoing arbitration proceedings, so the tribunal decided to continue the proceedings. This decision was subsequently upheld by the English High Court.1 In the final enforcement judgment issued in this case, on 16 November 20092 the Appellate Court of Warsaw decided that the award was enforceable in Poland, thereby expressing its pro-enforcement position. However, in an analogous case involving the same parties, an ICC arbitral tribunal, seated in Geneva decided that Polish law, as the law of the respondent’s place of incorporation, should apply to the question of the company’s legal capacity and consequently to the validity of the arbitration clause and, based on Article 142, discontinued the arbitration. This decision was then upheld by the Swiss Supreme Federal Court.3
Given the differences in opinion illustrated by these two cases, it is clear that the Polish Bankruptcy Law currently causes uncertainty as to whether an arbitration should be continued if bankruptcy is declared.
Articles 142 and 147 may also give rise to difficulties for an insolvent debtor. A bankruptcy receiver may be reluctant to pursue claims in foreign tribunals or to defend a bankrupt’s position in foreign arbitrations, for fear of not being able to claim fees associated with proceedings that are conducted in breach of Polish law.
Domestic arbitrations
A Polish seated tribunal is likely to enforce the Polish Bankruptcy Law provisions and discontinue the arbitration due to the risk of any award issued being annulled by a Polish court. A claimant would have to re-litigate the case in bankruptcy proceedings against a bankruptcy receiver, but would still be liable for any costs and fees associated with the arbitration. There is currently no clear legal basis for a claimant to be able to claim reimbursement of these costs.
Excluded entities
Articles 142 and 147 do not apply to certain entities, such as: the State Treasury, the National Bank of Poland, territorial/municipal self-government units, independent public healthcare institutions and institutions and legal entities established by an act of law, eg Polish Railways, Polish Airways, open pension funds, National Bank of Poland, Polish Chamber of Commerce, Polish Agency for Entrepreneurship Development and the Industry Development Agency. Consequently, in dealing with these entities, the risk of invalidity of an arbitration clause as a result of these provisions does not arise.
Plans to abolish Articles 142 and 147
Government proposals to abolish Articles 142 and 147 are part of a fundamental reform to Polish Bankruptcy Law and are still subject to consultation. Given the scale of the reform, its implementation by the Polish parliament is likely to take several months. If enacted, the amendments will help to reinforce Poland’s position as an arbitration venue in the CEE and provide some certainty in international arbitrations involving Polish parties or subject to Polish law.
Footnotes
1. Syska (Elektrim SA) v Vivendi Universal SA & ors [2009] EWCA Civ 677.
2. Decision of the Appellate Court of Warsaw of 16 November 2009, I A Cz 1883/09, not published.
3. Decision of the Swiss Supreme Court of 31 March 2009, 4_A428/2008.
