RiverRock Securities and Arbitrability of Avoidance Claims in Insolvency


Rohan Deshpande
Counsel at the Bombay High Court, Mumbai


Time to read

5 Minutes

In an important development, RiverRock Securities Ltd v International Bank of St Petersburg (JSC) (decided on September 23, 2020), the England & Wales High Court held that avoidance claims on behalf of a company undergoing foreign insolvency proceedings were arbitrable, and on that basis, granted an anti-suit injunction under section 37 of the Senior Courts Act, 1981. Compared to the previous ruling in Nori Holding Ltd v PJSC Bank Otkritie Financial Corp, the decision of Foxton J marks an important development under English law. In particular, the approach preferred by Foxton J towards considering questions of arbitrability in the context of insolvency proceedings is more nuanced and serves to highlight that the characterisation of a claim as an ‘insolvency claim’ is not in itself a basis to consider the claim as non-arbitrable.

Through nine contracts, RiverRock Securities (‘RiverRock’) sold securities (in the form of credit-linked notes which had been issued by another bank) to the International Bank of St Petersburg (‘IBSP’). The effect of the contracts was to transfer the credit risk arising under certain loans to IBSP. The contracts contained a London-seated LCIA arbitration clause couched in expansive terms (‘any dispute arising under … or in connections (sic) with’), and English law was expressly designated as the governing law.

After IBSP was declared insolvent and the Russian State Corporation Deposit Insurance Agency was appointed as its official receiver in bankruptcy, IBSP initiated proceedings against RiverRock in St Petersburg seeking invalidation of the contracts. IBSP based its claim on Articles 61.2(1) (providing for avoidance of transactions entered into at ‘unequal’ consideration) and 62.2(2) (providing for avoidance of transactions concluded for the purpose of harming creditors) of the Bankruptcy Law of the Russian Federation, and on Article 10 of the Civil Code of the Russian Federation (under which invalidation was sought on the basis that the transactions involved an ‘abuse of rights’).

Having failed to secure the cooperation of IBSP in bringing its claim in LCIA arbitration, RiverRock sought an anti-suit injunction in respect of the St Petersburg proceedings as being commenced in breach of the LCIA arbitration agreements. 

Foxton J reaffirmed the principle laid down in Fiona Trust & Holding Corp v Privalov that ‘English law has adopted a generous approach to the construction of arbitration agreements’, with ‘little scope for implied limitations’ being read into the arbitration clause as a matter of construction [56]. IBSP’s claims were held to be founded on contract and within the ambit of the arbitration clause [66]. The contention that express language was required to bring avoidance claims under the arbitration clause, as ‘the company’s pre-insolvency management would not have contemplated that such claims would fall within the scope of the arbitration agreement’ [55] was rejected, as was IBSP’s reliance upon the decision of the Singapore Court of Appeal in Larsen Oil and Gas Pte Ltd v Petroprod Ltd (which was found to be ‘not part of English law’ in its approach to the issue of construction of the arbitration clause) [56].

Having found that the claim was within the scope of the arbitration clause as a matter of construction, Foxton J turned to the question of whether the claims were ‘arbitrable’ at all. In support of its contention that avoidance claims were not arbitrable, IBSP again relied on Larsen. In that case, the Singapore Court of Appeal found force in the submission that the pre-insolvency management should not be able to determine the forum in which post-insolvency claims would necessarily have to be agitated. But Foxton J disagreed: in his view, the force of the submission was ‘limited to those cases in which the arbitration clause appears in a contract between the company and its management or vehicles associated with them, and in which the circumstances in which the arbitration agreement had been concluded did not themselves provide a basis for impugning that agreement’ [71].  

Foxton J proceeded to answer the question of arbitrability in the affirmative, and applied Lord Hoffmann’s principle of ‘modified universalism’ laid down in Re HIH Casualty and General Insurance Ltd [80-81]. ‘Modified universalism’ advocates for international co-operation in corporate insolvency and ensuring that a consolidated distribution system to all creditors is achieved, and it was Foxton J’s view that any recoveries made on behalf of IBSP by its official receiver in bankruptcy in the LCIA arbitration ‘would be subject to, and administered in accordance with, the single scheme for distribution constituted by the St Petersburg bankruptcy proceedings’ [81]. The ultimate conclusion was therefore that the St Petersburg claims seeking relief ‘which the arbitration tribunal is able to grant, and do not engage the interests of third parties save to the extent that any creditor of an insolvent company will benefit from its success in arbitration, those claims are arbitrable’ [87(ii)].

In a nuance which could have important implications, Foxton J held that the claims were properly characterised as insolvency claims under English law but that this characterisation did not render the claims automatically non-arbitrable. There appears to be a slight difference in the approach adopted by Foxton J and the approach preferred by Males J in Nori Holding. Males J had held that the characterisation of the claim as an insolvency claim under Russian law was ‘irrelevant’ and did not discuss whether avoidance claims would be characterised as ‘insolvency claims’ under English law as well. For Foxton J, the claims were indeed ‘insolvency claims’ under English law, but this characterisation was not conclusive on the question of non-arbitrability of the claims. 

Seen in this perspective, despite observing that ‘whatever the position might be if [the avoidance claims] were English law insolvency claims’ [87(iii)], the approach of Foxton J is likely to impact even the arbitrability of contractual voidable preference claims under English law (sections 238-239 of the Insolvency Act, 1986). The decision provides a credible basis for contending that, even as a matter of English law, there is no countervailing policy which prevents arbitrability of voidable preference claims.

It would be in accordance with the pro-arbitration approach of English law to arbitrate upon such claims founded on avoidance of a contract. The ruling in Fulham Football Club (1987) Ltd v Richards in context of arbitrability of unfair prejudice claims and more recently, in Bridgehouse (Bradford No 2) Ltd v BAE systems plc on arbitrability of a claim under section 1028(3) of the Companies Act, 2006, would also aid and support such a contention. 

One of the limbs of ‘modified universalism’ is to ensure a consolidated distribution of assets to all creditors. If this is applied in a domestic law context to an arbitrator’s award against a company admitted to insolvency, there can still be such a consolidated distribution of assets, encompassing the proceeds (if any) realised by the liquidator or the administrator in the arbitration.

The observation in Fulham to the effect that sections 238-239 of the Insolvency Act, 1986 vest the liquidator with statutory powers and rights ‘for the benefit of the creditors as a whole and cannot be overridden by a contract entered into by the company prior to its liquidation’ [74], would not preclude such a conclusion on arbitrability. A contractual avoidance claim by a liquidator, whether asserted under statute or in arbitration, would operate in personam against the counterparty to the contract, till such time as there is realisation of assets as a consequence of the arbitrator’s award.

Rohan Deshpande is a Counsel at the Bombay High Court, Mumbai. He is grateful to Mihir Naniwadekar, Counsel at the Bombay High Court, for his comments on a draft version.


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