Domestic insolvency proceedings before investment treaty arbitration^*

ABSTRACT

INTRODUCTION

In recent years, there has been an increasing trend of cases in investment treaty arbitration entailing the involvement of foreign investors in domestic insolvency proceedings. This is highly likely to become a salient issue in the upcoming years within the field of investment arbitration. In particular, this becomes pertinent when considering, among others, the measures that states took to confront the COVID-19 pandemic, which inevitably brought far-reaching ramifications to the economic sector.

Insolvency law and arbitration, though both legal procedures, serve distinct purposes and often reflect competing policy interests. When a party involved in international arbitration becomes subject to insolvency proceedings, this intersection can introduce significant substantive and procedural complexities. In particular, insolvency introduces intricate challenges in international commercial arbitration, including questions of arbitrability and complex conflict-of-laws issues. In the context of investment treaty arbitration, these complexities are further compounded by the hybrid nature of the process, which combines elements of both public and private international law. Among the contentious issues at the intersection of insolvency law and investment treaty arbitration are the access of insolvent claimants to investment treaty arbitration and the implications of insolvency proceedings for representation. Further, exploring the potential substantive grounds for holding a host state responsible for measures leading to the insolvency of a foreign investor or otherwise involvement of a foreign investor in bankruptcy proceedings remains highly relevant under investment treaty arbitration.

Investment treaty arbitration, as a lex specialis regime under international law, imposes certain constraints and conditions on access. A foreign investor claimant may become subject to insolvency proceedings before or during the pursuit of investment arbitration. This subjection to domestic insolvency proceedings, along with the resulting limitations on the insolvent investors’ powers over the disposition and management of their estate, can impact their legal standing before an arbitral tribunal. Consequently, the insolvency of a foreign investor, whether or not attributable to the host state due to an act or omission that breaches investment treaty protection standards, can introduce complexities regarding the personal jurisdiction of the arbitral tribunal and the representation of the insolvent foreign investor in arbitration proceedings.

Moreover, the insolvency of a corporation or an individual can stem from measures adopted by the host state government or other state organs, which may be found to constitute a breach of treaty obligations. In addition, in certain cases, the conduct of insolvency proceedings involving a foreign investor may itself be considered a breach of treaty obligations, for example, due to a breach of due process. Such claims regarding the breach of treaty obligations raise important questions about the requirements for the host state’s responsibility under international law, both in terms of attribution of the conduct to the state and the application of the standard of protection to the disputed conduct.

Notably, foreign investors who are creditors in domestic insolvency proceedings in the host state may initiate arbitration under investment treaties, alleging a breach of treaty obligations arising during the insolvency process. However, this article is mainly concerned with the scenario where a foreign investor, acting as a debtor in insolvency proceedings or in some way getting involved in such proceedings, brings claims against the host state in investment treaty arbitration. Based on these premises, this article first provides a brief introduction to the investment treaty regime and the direct conferral of rights upon foreign investors under international law, followed by an overview of insolvency law and the role of insolvency administrators. It then examines the main issues related to the legal standing of the insolvency administrator to continue or initiate investment treaty arbitration on behalf of the insolvent investor. Finally, it addresses the substantive grounds on which various aspects of insolvency proceedings or related measures in the host state can be challenged for breaching investment treaty obligations.

INVESTMENT TREATY REGIME AND CONFERRAL OF RIGHTS UPON INVESTORS UNDER INTERNATIONAL LAW

Prior to the emergence of international investment treaties, private persons had no standing and direct cause of action against a sovereign state for a violation of international law that had affected their investment.¹ International investment agreements—particularly bilateral investment treaties (BITs)—are intended to simultaneously satisfy the interests of investors by improving the investment climate, the interests of the host state through the facilitation of capital flows, as well as the interests of the capital-exporting states.² Most notably, investment treaties contain an arbitration mechanism in order to provide a guarantee to foreign investors. This guarantee is of particular significance because in the absence of international arbitration under investment treaties, foreign investors would, in principle, have to submit to the jurisdiction of local courts of their host state.³ Investment treaties contain a standing offer to arbitrate addressed to the investors of the other state party to the treaty.⁴ This offer is accepted when a foreign investor files a claim against the host state.

Investment treaty arbitration essentially addresses disputes between foreign investors and host states regarding the breach of investment treaty protections, which mostly include standards such as fair and equitable treatment (FET), full protection and security (FPS), national treatment, international minimum standards, most-favoured-nation treatment, and protection against expropriation. The idea behind investment treaty arbitration is that the foreign investor can directly seek damages suffered from wrongful acts of the host state. This right to bring a claim against the host stage for breach of investment treaty protections is the personal right of the investor. This personal right for foreign investors is the main distinctive feature of investment treaty arbitration from diplomatic protection existing under the customary international law regarding the treatment of aliens, which has been used by states to protect the investments of their nationals abroad. In diplomatic protection, it is generally presumed that the national state of the injured person has suffered loss as a consequence of the breach of international law in relation to the treatment of aliens by the other state. Hence the national state of the foreign individual is exercising its own right when pursuing the diplomatic protection procedure.⁵ It is because of this presumption that diplomatic protection is accorded at the discretion of the state, and the extent to which an investor benefits or does not benefit from the protection of its national state depends on the political relations between the two states.

Jurisdiction of an investment treaty arbitration tribunal often entails complex elements, which must be separately satisfied in each case. Among the essential components are subject-matter jurisdiction (ratione materiae) and jurisdiction over the parties (ratione personae). Specifically, the tribunals’ jurisdiction extends only to legal disputes concerning an investment—as defined by the applicable treaty—made by eligible investors. Depending on the individual treaty, these investors include individuals, corporations, or shareholders who are nationals of a state party to the relevant treaty, other than the host state, and who have made the investment within the territory of a state party to the treaty.

A significant point with respect to the ratione personae element of the jurisdiction of investment arbitration is the definition of a foreign investor. Under the International Centre for Settlement of Investment Disputes (ICSID) system, which provides a special treaty-based regime for the settlement of investment disputes between foreign investors and host states, a host state may explicitly agree to treat a local company—controlled by a foreign company—as a foreign investor.⁶ This provision addresses the common practice where national laws require foreign investors to establish a local company in the host state as a precondition for foreign investment. This is particularly relevant for claims by insolvent foreign investors in investment arbitration, as the insolvent entity may sometimes be a locally incorporated company.

Prior to delving into the main analysis, it is important to note that despite the international law regime of investment treaty arbitration, domestic law can play a crucial role in these types of arbitrations. In general, while the application and interpretation of bilateral or multilateral investment treaties are governed by public international law, investment contracts are typically governed by municipal law.⁷ More specifically, by virtue of the acquisition of rights under national law, foreign investors become subject to the laws of the host state. Such subjection is nevertheless constrained by the protection standards of investment treaties. Consequently, the international investment law regime represents an array of complex interactions between domestic law and international law.

The complex structure of rules applicable to international investment has been insightfully held by a leading commentator on international investment law to be composed of:

(1) the national legal framework consisting of the national laws and regulatory systems of the states having jurisdiction over the investment transaction and the related investors; (2) the contractual legal framework composed of the various agreements negotiated by the parties to govern the investment; and (3) the international law framework, the complex of treaties, customary laws, and international institutions that the nations of the world have agreed, either bilaterally or multilaterally, to put in place to regulate international investment.⁸

INSOLVENCY LAW AND THE ROLE OF INSOLVENCY ADMINISTRATORS

Most legal systems provide for a collective mechanism to address the range of interests of different stakeholders when a debtor’s resources are insufficient to satisfy its debts as they fall due. Insolvency, or bankruptcy law, is concerned with such collective mechanisms.⁹ In its broadest sense, insolvency law deals with proceedings for the collection and distribution of the debtor’s estate in a speedy and orderly manner, or proceedings providing for reorganization and rehabilitation of a debtor’s business.¹⁰ By providing a structured method for administering the remaining assets according to a predetermined scheme, insolvency law replaces the private competition among creditors with an orderly process, ensuring a fair distribution of available assets.¹¹

Despite variations in national insolvency laws, their primary purposes are twofold: to maximize the assets of a financially distressed debtor and to allocate risk in a predictable, equitable, and transparent manner.¹² As a result, the commencement of liquidation proceedings often entails a limitation of the debtor’s right of management and disposal of the property comprising the estate. Whether or not reorganization proceedings would also lead to the dispossession of the debtor varies across different jurisdictions. In any case, the dispossession of the debtor does not mean that no one is authorized to perform legal acts concerning the estate. Rather, powers regarding the disposition and management of the estate are usually conferred upon the insolvency administrator.

An insolvency administrator is a person or body whose function is to supervise the administration of the debtor’s affairs, to protect the debtor’s assets and their value, as well as the collective interests of creditors and employees, and to ensure that the law is applied effectively and impartially.¹³ Generally, insolvency administrators may be appointed by national courts, independent appointing authorities, creditors, or in certain cases the debtor itself.¹⁴ The scope of the authority of insolvency administrators varies depending on the type of insolvency proceedings and the specific legal system. In carrying out their duties and functions in the administration of the proceedings and preservation and protection of the estate, they often pursue claims on behalf of the debtor. The terminology used to refer to the role of the person responsible for administering the insolvency proceeding varies across jurisdictions and international instruments. Examples of this terminology are: Insolvency practitioner, insolvency representative, liquidator, trustee, supervisor, receiver, mediator, curator, official, office holder, judicial manager, or commissioner.¹⁵

In sum, as a result of the insolvency of a company, its normal corporate governance regime transitions into a different governance regime. By way of example, under English law, company directors are almost deprived of their powers upon the appointment of the administrator; the powers of the company directors may be exercised only with the administrator’s consent to the extent that they are exercisable in such a way that does not interfere with the exercise of the administrator’s powers. The administrator takes control of the company’s property and manages its business and property in the interests of the creditors.¹⁶ Under chapter 11 of the United States Bankruptcy Code, although it is rather difficult for creditors to initiate compulsory bankruptcy proceedings, upon filing a voluntary petition by a debtor, the property of the estate constitutes a legal entity that is controlled by the debtor in possession—incumbent management—subject to the potential appointment of a trustee or replacement of certain directors.¹⁷ In Germany, the court may take preliminary measures to protect creditors’ rights prior to bankruptcy proceedings. In particular, the court may appoint a preliminary insolvency administrator and/or a preliminary creditors committee, and further may impose a ban on disposals of the debtor’s assets or subject such disposals to the preliminary administrator’s consent.¹⁸ Under French law, in certain circumstances the court may appoint a supervising judge, an insolvency administrator, and a creditors’ representative; the administrator supports wholly or partially the incumbent directors in continuation of the debtor company business during an observation period.¹⁹

INSOLVENT FOREIGN INVESTOR AND ACCESS TO INVESTMENT TREATY ARBITRATION

The involvement of a foreign investor in insolvency proceedings raises questions about the possibility for its shareholders to bring claims before an investment arbitration tribunal as well as identifying the appropriate representative for the insolvent investor in investment treaty arbitration. Furthermore, while the tribunal’s personal jurisdiction (ratione personae) in an investment treaty arbitration covers only qualified foreign investors, it is worth considering whether this jurisdiction can also extend to an insolvency administrator acting on behalf of the insolvent investor. This section will analyse each of these issues in detail.

Lack of standing of shareholders to step into the shoes of the insolvent entity in arbitration

The issue of standing pertains to whether the party seeking a legal remedy has the right to bring a particular case or to seek particular relief.²⁰ Arbitral tribunals have been particularly dynamic in addressing the legal standing of shareholders in investment arbitration,²¹ largely due to the broad interpretation of ‘investment’ in international investment treaties.²² In general, shareholders’ losses can be divided into direct and reflective categories. Direct loss occurs when an obligation owed to the shareholder rather than the company is breached.²³ This type of loss affects the shareholder directly, such as when primary rights (eg voting, dividends) or secondary rights (eg access to information) are directly infringed.²⁴ International courts and tribunals have had little difficulty in accepting the standing of the shareholders for such claims.²⁵

By contrast, reflective loss arises when harm to the company indirectly harms the shareholder.²⁶ For example, wrongful actions reducing the company’s asset value can diminish share value, leading to reflective loss. This form of loss also includes losses from reduced dividends or other payments due to the company’s financial deprivation. While domestic legal systems typically adopt the ‘no reflective loss principle’,²⁷ international investment arbitration case law generally recognizes the standing of shareholders in investment disputes for the loss of value of their own shares.²⁸

It is noteworthy that the shareholders’ right to claim for reflective loss is distinct from any right for action by the corporate entity for harm done to it. Consequently, when it comes to the insolvency of a subsidiary entity, the parent company may benefit from its independent cause of action before an investment treaty tribunal as the shareholder. This was the case both in Dan Cake v Hungary²⁹ and Yukos Universal Limited v The Russian Federation.³⁰

Nevertheless, a shareholder’s claim for reflective loss in investment arbitration highlights a conflict between the underlying policies of insolvency law and international investment law.³¹ While international investment law seeks to protect shareholders (as investors) and their investments, insolvency law prioritizes the interests of creditors, with shareholder protection being a low priority.³²

Specifically, it has been observed that shareholder’s claims for reflective loss can result in the bypass of ordinary priority rules in domestic insolvency law.³³ This issue arose in the case of Alicia Grace and Others v Mexico,³⁴ where American investors in a Mexico-incorporated company alleged that Mexico had violated its obligations under NAFTA and sought compensation. Concurrently with the NAFTA arbitration, these investors pursued substantial claims against the assets of the local company in its domestic insolvency proceedings. By bringing an indirect shareholder claim, the American investors sought compensation that, if awarded to the insolvent company instead, would have been distributed to the creditors. Recognizing this potential risk, the first-priority secured creditors of the locally incorporated company attempted to intervene in the arbitration, requesting permission to submit their own arguments. They contended that they had a right to any compensation awarded to the claimants, as it would stem from the harm allegedly suffered by the local subsidiary, of which they were secured priority creditors.³⁵

The tribunal considered the creditors’ request in light of the recommendations in the NAFTA Free Trade Commission’s Statement on Non-Disputing Party Participation. In a Procedural Order, the tribunal rejected the creditors’ submission, finding that it did not meet the criteria set forth in the Commission’s recommendations.³⁶ Notably, the tribunal argued that while tribunals may allow non-disputing party submissions to assist in resolving the case, the creditors’ submission aimed to protect their financial position in the bankruptcy process rather than contribute to the arbitration.³⁷The tribunal concluded that the bankruptcy proceedings were irrelevant to the arbitration, which was focussed solely on Mexico’s alleged breach of NAFTA.³⁸ Nevertheless, in its final award, the tribunal acknowledged the potential for conflicting outcomes, stating that issuing a decision on the merits could lead to ‘an incompatible and/or contradictory outcome’ with respect to the ongoing insolvency proceedings.³⁹ Ultimately, however, the tribunal concluded that it lacked jurisdiction over all of the claimants’ claims,⁴⁰ which precluded any substantive analysis of how such incompatibilities between arbitration and insolvency proceedings might be managed in practice.

To mitigate the potentially distortive effects of reflective loss claims, it has been suggested that tribunals can prevent double recovery and overcompensation by carefully assessing the quantum of damages and applying legal doctrines such as abuse of rights, res judicata, and lis pendens when investors attempt to pursue multiple claims for the same harm.⁴¹ Additionally, proposed reforms in investment treaty arbitration might impact reflective loss claims. Notably, UNCITRAL Working Group III has issued ‘Draft Provisions on Procedural and Cross-Cutting Issues’, which suggest a near-complete exclusion of reflective loss claims in future investment agreements.⁴² If widely adopted, these reforms could significantly limit shareholders’ ability to bring such claims. However, a paradigm shift in the tribunals’ approach to reflective loss claims has not been considered to be feasible at this point in time.⁴³ Until then, tribunals must strike a balance between the interests of foreign investors and other stakeholders, including creditors.⁴⁴

It is important to note that for shareholders’ reflective loss claims to be upheld, there must be a breach of a duty owed by the state to the shareholder that is distinct from any duty owed to the company. In other words, if the shareholder cannot prove the independent cause of action for its loss under the applicable treaty, it cannot simply stand in the shoes of the insolvent subsidiary entity for the loss that the insolvent subsidiary has directly incurred as a result of a contractual breach. This situation typically arises when the investor’s claim is solely based on wrongful conduct aimed at the subsidiary rather than the investor itself.⁴⁵ An example of this can be seen in Lotus Holding Anonim Sirketi v Turkmenistan,⁴⁶ an ICSID arbitration brought under the Energy Charter Treaty (ECT) and the Turkey–Turkmenistan BIT. In this case, the claimant, Lotus Holding, attempted to stand in the shoes of its wholly owned subsidiary to make claims on its subsidiary’s behalf for harm suffered directly by its subsidiary. Lotus Holding Anonim Şirketi, a company incorporated under Turkish law, had, since 2007, secured eight major industrial projects in Turkmenistan through its investment vehicle, Lotus Enerji, a fully owned subsidiary. However, Turkmenistan failed to pay the required amounts due under some of the contracts it had concluded with Lotus Enerji for the construction and installation of various facilities in Turkmenistan.

On 24 November 2016, Lotus Enerji was declared bankrupt by the Commercial Court of First Instance in Ankara, Turkey. Subsequently, on 28 July 2017, Lotus Holding submitted a request for arbitration to ICSID. The subsidiary remained in liquidation under Turkish law and was not a party to the arbitration. Furthermore, the claimant had no authorization from the Turkish bankruptcy authorities to pursue its claims in an ICSID arbitration on behalf of the subsidiary. According to the claimant, Lotus Enerji itself and its claims for money qualified as the claimant’s investment under Article 1(6) of the ECT. The respondent, however, emphasized that Article 1(6) of the ECT requires that the investment be owned or controlled by the investor. Since Lotus Enerji had been under the sole control of the Turkish bankruptcy authorities for eight months before the claimant filed the request for arbitration, the respondent contended that the claimant no longer qualified as an investor under the ECT.

In its award, the tribunal unanimously dismissed all claims against Turkmenistan brought by Lotus Holding for manifest lack of legal merit. The tribunal characterized all of the claims brought by the claimant as ‘contract claims relating to contracts entered into by Lotus Enerji’ which was not a party to the arbitration.⁴⁷ The tribunal further confirmed the lack of standing of Lotus Holding and recognized that it would in principle have no right to receive any part of the assets of the insolvent subsidiary outside of the insolvency process taking place in Turkey.⁴⁸ As shown in the above-mentioned case, while the shareholders of an insolvent company may benefit from a separate cause of action for reflective loss, they cannot, in principle, claim reparation for the damage incurred by the insolvent company itself. The latter is only possible if derivative claims⁴⁹ by shareholders on behalf of the company are permissible under the applicable investment treaty.⁵⁰ In such cases, it may be possible for shareholders to bring a claim against the host state on behalf of an insolvent company. Such derivative action by shareholders clashes with domestic insolvency law regimes, which often entail passing the right of legal standing in proceedings concerning the estate to the insolvency administrator. Nevertheless, when derivative claims for shareholders on behalf of the company are explicitly provided in international treaties, they should, in principle, override conflicting domestic laws. It is noteworthy, however, that since in derivative actions, awards are made payable to the company rather than to the shareholders,⁵¹ any damages paid by the host state would fall for distribution under the control of the insolvency administrator. This enforcement mechanism mitigates the possibility for shareholders to circumvent the creditors of an insolvent entity by bringing a derivative claim.

The impact of appointment of the insolvency administrator on the representation of the insolvent investor and conflict of interest

In principle, after the opening of insolvency proceedings, the right of the debtor to sue and to be sued with respect to the property comprising the estate passes to the insolvency administrator. More specifically, claims for money owed to an insolvent company belong to its bankruptcy estate and can only be pursued in accordance with the applicable insolvency law (lex fori concursus). These limitations may affect the capacity of an insolvent investor to initiate or continue claims or to grant a power of attorney to legal representatives in proceedings related to its investment in the host state. Additionally, the continued effectiveness of powers of attorney granted by the company directors prior to insolvency may be questioned. These issues also involve a conflict-of-laws aspect, as it is essential to first determine which law governs the capacity of the insolvent foreign investor.

In Teinver v Argentina,⁵² the claimants, which were all entities incorporated under Spanish law, brought a claim against Argentina for expropriation. All claimants initiated voluntary insolvency proceedings in Spain after the arbitration was commenced. The respondent asserted that according to Spanish Bankruptcy law, the claimant’s insolvency terminated the power of attorney granted to the law firm to represent claimants before the arbitral tribunal. Therefore, a new power of attorney was needed. The claimants, on the other hand, submitted that a power of attorney remained valid and that the claimant’s reorganization administrators were simply ‘stepping into the shoes’ of the claimants for purposes of the continuation of this arbitration.

In its award, the tribunal recognized that issues related to the capacity of claimants, including the validity of powers of attorney granted by those entities, should be determined based on the domestic law of the investor, ie Spanish law. In particular, the tribunal took note of Article 52(2) of Spanish Bankruptcy Law, which provides that arbitration proceedings pending at the time when reorganization proceedings are declared shall continue until the issuance of the award. The tribunal added that pursuant to the Spanish Bankruptcy Law, the reorganization administrators step into the shoes of the debtor upon the commencement of liquidation proceedings. In this case, they had ratified the actions taken by the counsels to the claimant in writing and confirmed their authorization to proceed with the arbitration.⁵³ The tribunal further concluded that: ‘there was no obligation at Spanish law to produce a new power of attorney in the circumstances of this case’.⁵⁴

In Teinver v Argentina, since all the claimants were entities incorporated and organized under Spanish law, the application of lex societatis to legal representation was not disputed. Rather, the disagreement between the parties was on the implications of the application of Spanish law to legal representation. However, when the investor is incorporated under the laws of the host state (but is also deemed to be a national of another contracting state for the purposes of the BIT and/or ICSID Convention), the effect of insolvency on the representation of the investor under the laws of respondent state results in more unique problems. In such cases, the insolvency administrator might have been appointed by the national courts of the host state and there is a risk that the respondent state may control the insolvency administrator representing the claimant. More specifically, if the domestic law of the host state is applied to determine who represents the investor, the latter might be deprived of being treated in the same way as a national of another contracting state.

BRIF-TC v Serbia⁵⁵ is an example of a case involving a foreign investor incorporated under the laws of the host state. Though a locally incorporated company, BRIF-TC qualified for being considered as a foreign national pursuant to Article 25(2) (b) of the ICSID Convention. In this case, Serbia relied on Serbian bankruptcy law to argue that the opening of bankruptcy proceedings entailed that the insolvency administrator was the rightful representative of the insolvent locally incorporated entity. The claimant, on the other hand, argued that the issues of representation should be governed by international law and that the operation of Serbian bankruptcy should not affect the representation of the insolvent entity.

The tribunal recognized that party representation issues should, in general, be governed by the lex societatis. Nevertheless, the BRIF-TC v Serbia tribunal clarified that it is for the respondent state to prove that pre-insolvency representation is extinguished by the opening of the insolvency proceedings. In its analysis of the impact of change of control under the lex societatis on the issue of representation, the tribunal drew an analogy with the critical date in determining jurisdiction. While acknowledging that issues of jurisdiction and representation are distinct, the tribunal took note that jurisdiction under Article 25(2)(b) of the ICSID Convention should be assessed at the time of consent—otherwise, states could simply take over domestic companies and discontinue an arbitration. Accordingly and based on the operation of Article 25(2)(b), which freezes ‘foreign control’ at the time of the consent for arbitration, the tribunal concluded that the appointment of an insolvency administrator had no impact on the representation of the bankrupt Serbian claimant. Consequently, the tribunal decided that changes of control under the lex societatis after the date of the parties’ consent to arbitration and the signature of the original power of attorney should not affect international law.⁵⁶

The issue of applicable law to party representation of locally incorporated insolvent companies was also addressed by the ICSID Annulment Committee in Carnegie Minerals v Gambia. In this case, Gambia argued that Carnegie had been placed in liquidation by the Gambian courts, and a liquidator had been appointed who should have been the sole representative of Carnegie under Gambian law. Carnegie, on the other hand, claimed that the liquidator has no authority in the arbitral proceedings, and hence, the authorization from Carnegie’s Board of Directors suffices for the purpose of representation.

In its decision regarding party representation, the ICSID Annulment Committee ruled that the ICSID Convention does not provide for the question of representation of a claimant deemed a national of another contracting state under Article 25(2)(b) to be determined by the domestic law of the respondent state.⁵⁷ The ICSID Annulment Committee further explained that ‘[i]f the domestic law of Gambia were to be applied to determine who represents Carnegie in these proceedings, Carnegie would not be treated in the same way as a national of another contracting state for the purposes of the Convention’.⁵⁸ Accordingly, the Committee decided that the appointment of a liquidator under Gambian law should not affect the question of representation and the counsel authorized to represent Carnegie could continue to act.

In AS PNB Banka and others v Latvia, the tribunal took a more nuanced approach by characterizing the issue of representation as a conflict of interests.⁵⁹ AS PNB Banka and its majority shareholder initiated arbitration proceedings against Latvia in 2017, alleging that its treatment at the hands of national regulators was in breach of the UK–Latvia BIT. On 12 September 2019, the competent Court in Latvia declared the bank insolvent and appointed an insolvency administrator. Therefore, the question arose as to whether the insolvency administrator appointed by a Latvian court or the nominee of the former directors of the bank was the appropriate representative of the bank in arbitral proceedings. While the insolvency administrator relied on Latvian statutory law for his authority to represent the bank, the pre-insolvency stakeholders referred to the ICSID Annulment Committee decision in the Carnegie case and challenged the insolvency administrator’s role in arbitration. The tribunal affirmed that as a result of insolvency, the normal governance mechanism of the bank no longer existed, and under Latvian law, the insolvency administrator was the only person with the authority to enforce the bank’s legal rights. Nevertheless, the tribunal clarified that it was not required to apply Latvian law to a procedural issue, and it was because of the absence of any other sources that domestic law could be considered as a source of guidance.⁶⁰

The arbitral tribunal then turned its focus on the issue of conflict of interests in party representation and concluded that the relevant issue before it was not about authority but about conflict of interests. Recognizing the shareholders and the bank as the co-claimants of this case, the tribunal noted that the role of the former directors of the bank was suspended as a matter of Latvian law. While recognizing that the tribunal is not bound by that suspension as a matter of international law, the tribunal decided that the insolvency administrator had the authority to represent the bank, subject to allegations of conflict or other disentitling conduct. The tribunal further explained that although the interests of the insolvency administrator and the shareholders might not coincide, ‘such a divergence does not create a conflict of interest. It merely represents a difference of interests’.⁶¹ According to the tribunal, such divergences may also emerge in cases with co-claimants. The tribunal then rejected the claim that the insolvency administrator was dependent on or controlled by the respondent so as to establish a conflict of interest on all issues. Nevertheless, the tribunal recognized ‘the obvious conflict of interest that the Administrator would have if he were required to take a position on behalf of the Bank concerning the shareholder claimants’ claim that placing the Bank into liquidation was or was not itself a breach of Latvia’s obligations under the UK–Latvia BIT (the “Ancillary Claim”)’.⁶² Therefore, the tribunal divided the representation of the bank so as to recognize the insolvency administrator as the bank’s representative for purposes of all claims other than the Ancillary Claim and to recognize the former directors as the bank’s representatives for any position the bank may take with regard to the Ancillary Claim, which concerned the conduct of Latvia’s Financial and Capital Market Commission and the adoption of the insolvency judgment.⁶³

In another relatively recent case, although outside the context of investment treaty arbitration and involving a contractual dispute based on a concession agreement with a state, the appointment of a liquidator was not deemed to have deprived the insolvent company’s management of the authority to represent the company in arbitration. The proceedings were brought by the Republic of Uganda before English courts to set aside a decision of a London-seated arbitration tribunal on the basis of the lack of standing of the management of the claimant in the arbitration.⁶⁴ Although the court did not explicitly address the representation issue, the outcome allowed the directors of the insolvent company to continue pursuing the company’s existing claim after it became subject to involuntary insolvency proceedings.

Rift Valley Railways Uganda Limited (RVRU), which had been granted a concession to provide freight services to the Republic of Uganda, initiated arbitration against Uganda in 2018 and claimed damages arising from the alleged wrongful termination of the concession agreement by Uganda. The Ugandan High Court placed RVRU into involuntary liquidation in 2019.⁶⁵ The Republic of Uganda submitted a request to the tribunal to stay the arbitration pending the decision of the liquidator whether to continue the arbitration, on which the tribunal declined to make a ruling.⁶⁶ In a procedural order, which particularly was the subject of set aside proceedings before the English court, the tribunal considered that the liquidator was aware of the arbitration proceedings and decided that in the absence of any contrary direction from the liquidator, RVRU could proceed with the arbitration.⁶⁷ Specifically, the tribunal applied section 97(1)(c) of the Ugandan Insolvency Act to the case, concluding that ‘there is no statutory stay on claims brought by a company in liquidation’.⁶⁸ The tribunal also subsequently denied the request of the Republic of Uganda to dismiss the arbitration proceedings or alternatively stay the proceedings pending its application under section 67 of the English Arbitration Act seeking a declaration that the former management of RVRU has no standing to take any action on behalf of RVRU.⁶⁹

The English Commercial Court did not entertain any discussion as to the power of RVRU management to represent the company in the arbitration proceedings while a liquidator had taken over the control of the company. It relied upon a precedent according to which ‘the court does not have a general power to supervise the conduct of an arbitration prior to award’.⁷⁰ The court was of the view that the subject of the setting aside application was a procedural ruling rather than an award. The court argued that it did not comply with the formal requirements for an award as set forth by the English Arbitration Act since the procedural order did not state the seat of arbitration, and also it was only signed by the president of the tribunal. Most significantly, the procedural order in question also ‘would not have been understood by a reasonable recipient as an award as to jurisdiction’.⁷¹

The arbitral tribunal’s decision in its Procedural Order is not publicly available. However, based on excerpts cited in the Judgment of the English Commercial Court, it can be inferred that the tribunal did not engage in a conflict of law analysis but instead assumed that Ugandan law would govern the issues of a stay of proceedings and the impact of a winding-up petition on the claimant’s representation. This position is understandable given the fact that arbitration based on an arbitration clause in a state contract differs from investment treaty arbitration. In its application of domestic law, the tribunal distinguished between proceedings initiated against a company in liquidation, which is prohibited, and those commenced or continued by the company itself, which are not prohibited.⁷² It then concluded that the liquidator’s inaction, despite being aware of the arbitration, did not impede the arbitral proceedings. However, it remains unclear how the tribunal would have addressed the continuity of representation from the pre-insolvency period and the potential influence of the respondent state on the appointment of the liquidator if the liquidator had expressed a desire to take control of the proceedings.

In summary, investment treaty arbitral tribunals have approached the issues related to the representation of an insolvent foreign investor from different angles depending on the specific facts of each case. The starting point for the analysis of the issue is a general rule in investment treaty arbitration according to which ‘the legal standing of a company to sue is determined by the lex societatis’.⁷³ However, in ICSID arbitrations, representation of locally incorporated companies before arbitral tribunals post-insolvency requires a more nuanced analysis due to the possible impact of the respondent state on determining the legal representation of an insolvent investor. In such cases, tribunals tend to emphasize that matters of representation, including the appointment of counsel, are to be determined under international law rather than domestic law. Nonetheless, tribunals also acknowledge that domestic law is not entirely irrelevant in this context and may serve as a source of guidance in resolving the issue under international law.

In those cases where there has been a prior appointment of legal counsel at the pre-insolvency stage, it is arguable that representation should continue. The rationale for this is that the change in the management of the company after the date of consent to arbitration (ie filing the request for arbitration) should not affect the issue of representation under international law. This emphasis on the critical date, which was explicitly adopted by the BRIF-TC v Serbia tribunal and in a more implicit way by the ICSID Annulment Committee in Carnegie Minerals v Gambia, is pragmatic and in conformity with the logic of Article 25(2)(b) of ICSID Convention. In order for a locally incorporated company to be treated in the same way as a national of another contracting state for the purposes of the ICSID Convention, its representation should not be subject to the domestic law of the respondent state. This argument is more persuasive in those cases where the foreign shareholders of the locally incorporated entity have not brought a claim against the host state in their own rights.

In contrast, when there is no continuity of representation from the pre-insolvency period, a total disregard for the changes of circumstances in the management of an already insolvent company in liquidation does not seem justified. In such cases, although the issue of representation should still be governed by international law, the status of the insolvent entity, under domestic law at the time when the request for arbitration is submitted, is a relevant factor to be considered. The approach adopted by the AS PNB Banka v Latvia in characterizing such cases as a conflict of interest is a reasonable one. This characterization requires the arbitral tribunal to conduct a case-by-case analysis to determine if the involvement of an insolvency administrator appointed by host state courts in submitting and pursuing a claim against the host state entails a potential conflict of interests. If a conflict of interest is proved with regard to a claim, the insolvency administrator would be disentitled from being the rightful representative for the purpose of that claim. In such cases, the pre-insolvency directors might retain the power to represent the insolvent entity.

Ratione personae jurisdiction of investment treaty arbitral tribunals and insolvency administrators

According to a fundamental concept in international law, there is no automatic jurisdiction for international courts and tribunals. Therefore, the fact that direct substantive rights have been created for foreign investors under investment treaties is not corollary to the immediate access of investors to arbitration under these treaties.⁷⁴ In order to invoke an investment treaty protection, among other requirements, the claimant needs to be a foreign national and qualify as an investor. There are various criteria in investment treaties when it comes to the nationality requirement with respect to legal persons; however, it is generally determined based on criteria such as control, place of incorporation, registered office, or a combination of these criteria.⁷⁵

As described above, after initiation of insolvency proceedings and loss of locus standi of the debtor, the insolvency administrator will, in principle, be the legal successor in instituting or defending legal actions relating to the estate.⁷⁶ When it comes to investment treaty arbitration, besides the above-mentioned questions as to the determination of the rightful representative of the foreign investor post-insolvency, the jurisdiction ratione personae of an investment treaty arbitral tribunal to decide about the claims pursued by an insolvency administrator, might be challenged. It is arguable that the insolvency administrator is not an investor bringing claims in relation to an investment that he actually made.⁷⁷ Moreover, claims pursued by insolvency administrators of the same nationality as the respondent state might face challenges as to the standing of the insolvency administrator to pursue an investment treaty arbitration. It can be argued that an insolvency administrator is not controlled or instructed by the foreign investor, and therefore, there is no jurisdiction ratione personae for the arbitral tribunal.

When the insolvency administrator has the same nationality as the foreign investor, the issue of ratione personae jurisdiction seems to be less problematic as, in such cases, the question of foreign control or lack thereof is not at issue. In Walter Bau v Thailand, the claim by the German investor, Walter Bau, was pursued by a German insolvency administrator. Although Thailand did contest the jurisdiction of the tribunal, the insolvency of the investor, and pursuit of the claim by the German insolvency administrator did not form the basis of those jurisdictional objections, and eventually, the arbitral tribunal affirmed its jurisdiction.⁷⁸

Nevertheless, the ratione personae jurisdiction of an arbitral tribunal may still be challenged despite the identical nationality of the foreign investor and the insolvency administrator based on the insolvency administrator not qualifying as an investor under the BIT. This was the case in Dirk Herzig as Insolvency Administrator over Assets of Unionmatex v Turkmenistan.⁷⁹ In this unpublished ICSID case, despite the fact that both the foreign investor and the insolvency administrator were German nationals, the ratione personae jurisdiction was reportedly challenged by the respondent state based on the insolvency administrator’s lack of beneficial ownership.⁸⁰ The respondent state argued that the Germany–Turkmenistan BIT conditioned the ratione personae jurisdiction of the tribunal on the claimant having made an investment.⁸¹ It has been reported that the tribunal rejected the bulk of the claimants’ claims.⁸² However, it is not known how the tribunal addressed the jurisdictional objections against the insolvency administrator.

The situation becomes more complex when the insolvency administrator, who shares the same nationality as the respondent state, brings a case against the host state, as a jurisdictional roadblock might occur. In Eskosol v Italy,⁸³ the claimant was a company incorporated in Italy with a company in Belgium being its majority shareholder. At the time of the initiation of the dispute, Eskosol was in liquidation proceedings in Italy, and an Italian national was appointed as the insolvency administrator. In response to challenges brought by Italy, as to the lack of foreign control requirement by virtue of the entry of Eskosol into receivership, the tribunal ruled that ‘Eskosol’s status as being in liquidation proceedings does not suffice to make either the Italian receiver or the Italian court the controlling entity, for purposes of determining jurisdiction’.⁸⁴ The tribunal further clarified that an insolvency administrator ‘acts essentially as a trustee or agent—not as a principal—on behalf of those with dominant legal and financial interests in the company (e.g., shareholders and priority creditors)’.⁸⁵ Accordingly, the nationality of the insolvency administrator is irrelevant to the jurisdiction ratione personae of an arbitral tribunal. Acting as a trustee or agent, an insolvency administrator does not need to qualify as an investor in order to have access to investment treaty arbitration. Rather, it is the insolvent debtor that should meet the requirements for qualifying as an investor.

The analysis can be further nuanced by distinguishing between those cases where initiation of arbitration precedes insolvency and those cases where the investor is declared insolvent before the commencement of arbitration.⁸⁶ In the former, jurisdiction should be assessed at the time of consent (ie filing of the request for arbitration). This approach is consistent with the established principle of international adjudication, which prescribes that jurisdiction must be determined at the time the case is filed, and once established, it continues to exist regardless of subsequent events.⁸⁷ In those cases where arbitration is initiated by an insolvency administrator who is of the same nationality as the respondent state, the trustee status of insolvency administrators, as explained by the tribunal in Eskosol v Italy, can be used in response to jurisdictional objections. In essence, a subsequent collapse in the financial situation of a company owned by foreign investors should not deprive it of its right to pursue claims against the host state in investment treaty arbitration. Otherwise, states can easily strip away the foreign control element of Article 25(2)(b) of the ICSID Convention by contributing to the financial collapse of local companies owned by foreign shareholders.

INSOLVENCY PROCEEDINGS AND STATE RESPONSIBILITY UNDER INVESTMENT TREATIES

Insolvency proceedings are primarily a matter of domestic law, and generally, international tribunals do not interfere with the findings of domestic authorities unless there are violations of treaty obligations. However, if the treaty provides for investor-state arbitration, various aspects related to the insolvency of a foreign investor or its investment can indeed become the subject of a dispute. This includes measures leading to insolvency, placing the investment into administration or similar institutions, the insolvency proceedings themselves, and the conduct of the insolvency administrator.⁸⁸

Breach of an investment treaty obligation—as an internationally wrongful act—generally entails the state’s responsibility in a similar way to other international obligations. Consequently, breaches of investment treaty protection standards related to insolvency proceedings may be assessed against the two necessary elements of an internationally wrongful act: attribution of conduct to the state and a breach of an international obligation.

The question of attribution

As for attribution of conduct to the state, investment arbitration tribunals generally adhere to the rules of attribution in customary international law,⁸⁹ which have been embodied in the Draft Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA) adopted by the International Law Commission in 2001. However, there are two important caveats to consider: first, aspects of domestic law may be relevant when determining whether an entity qualifies as a state organ for the purposes of state responsibility.⁹⁰ This is exemplified in the cases discussed below, where the arbitral tribunals delve into discussions of domestic insolvency laws. Second, international law rules on attribution do not apply to matters governed by domestic or contractual law; for example, international law cannot extend a contract to a party that is not a signatory.⁹¹

For a state to be held responsible under an investment treaty, there should be a breach of an investment treaty obligation that is attributable to the state. Within the context of state responsibility, attribution means that acts or omissions of the state organs can be legally considered as the acts and omissions of the state. While domestic courts are unequivocally considered state organs and customary international law recognizes that a state is responsible for the actions of its judiciary,⁹² attribution with respect to insolvency proceedings might be perplexing in view of the relevance of the legal status of the insolvency administrator. It seems undisputed that the acts of insolvency administrators cannot be attributed to the state under Article 4 of the ARSIWA because they are usually not state organs.⁹³ However, Articles 5 and 8 offer potential avenues for attributing actions of a non-state organ to the state based on their exercise of governmental authority or state control.

According to Article 5 of the ARSIWA:

The conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance.

Arbitral tribunals have generally adopted a three-pronged test for determining attribution of an entity’s conduct to a state when the entity is not an organ of the state: ‘(1) the exercise of a governmental authority; (2) the specific empowerment to do so under domestic law; and (3) the requirement that the conduct at hand be performed in the exercise of this authority.’⁹⁴

Additionally, Article 8 of the ARSIWA states:

The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that State in carrying out the conduct.

A few decisions addressing the issue of attribution have been rendered by investment arbitration tribunals in cases involving the insolvency of entities with foreign investors. These decisions, which will be discussed below, provide insight into how tribunals have approached the matter of attribution.

In Plama v Bulgaria, the claimant complained that the syndics (trustees) appointed to manage Nova Plama (in which the claimant had shares) bankruptcy, failed to fulfil their obligations and took unlawful actions which harmed Nova Plama. The claimant contended that having failed to properly control the trustees, the Bulgarian Government and Courts breached the FET as well as the most constant protection and security obligations under the ECT. The claimant alleged that such breaches, together with other violations, amounted to indirect expropriation contrary to Article 13 of the ECT.⁹⁵ The tribunal came to the conclusion that syndics in bankruptcy proceedings were not instruments or organs of the state for whose acts the state was responsible.⁹⁶ The Tribunal accepted an expert opinion presented by the respondent according to which, the courts of Bulgaria had relatively limited control over syndics. It went on to add that the claimant could resort to the courts to challenge the actions of the syndics with which they disagreed; in view of the tribunal, neither the access to the courts was obstructed nor the courts decided unfairly the issues presented to them in this respect.⁹⁷ Therefore, despite being appointed by the court, the insolvency administrators in this case were not regarded as agents of the state for the purpose of attribution.

Similarly, in Jan Oostergetel and Theodora Laurentius v The Slovak Republic,⁹⁸ the tribunal rejected the claimant’s argument that the Slovak state should be held responsible for the actions of the trustees. Based on Slovak law, the tribunal determined that the actions of both preliminary and bankruptcy trustees were neither executed under governmental authority nor directed or controlled by the State. The tribunal highlighted that, according to Slovak law, bankruptcy trustees operate independently of the State in carrying out their duties. The court’s involvement is primarily limited to appointing trustees, setting their fees, and removing them in exceptional situations. The tribunal concluded that the court’s role in bankruptcy proceedings does not provide a sufficient basis to attribute the trustees’ actions to the State under international law. In the same vein, different arbitral awards in the Yukos saga concluded that the actions of the insolvency administrator were not attributable to the respondent state because, under Russian law, an insolvency administrator is substantially autonomous from the State authorities.⁹⁹

In Voecklinghaus v Czech Republic,¹⁰⁰ the claimant argued that the rushed sale of assets through a public tender, which failed to maximize returns, was due to inadequate supervision of the bankruptcy trustee. The claimant, who owned 50 per cent of the company in insolvency proceedings, maintained that bankruptcy trustees were state organs. The tribunal, however, accepted the respondent’s submission that, according to the Constitutional Court and the Supreme Court of the Czech Republic, the state bore no liability for the conduct of bankruptcy trustees, who were personally liable for their actions.¹⁰¹ In rejecting the claimant’s position, the tribunal also expressly referred to the ARSIWA on attribution and came to the conclusion that bankruptcy trustees are not state organs since under Czech law they do not represent and are independent of the Czech Republic,¹⁰² without exercising elements of governmental authority.¹⁰³ The conclusion of the tribunal has been criticized by a commentator arguing that although the tribunal did not find elements of governmental authority for the bankruptcy trustees, it confirmed the trustees’ power to coercively sell the debtor’s estate based on the Czech Bankruptcy Law, which is in itself an exercise of the public authority.¹⁰⁴

Whether or not the forced sale of a debtor’s assets has an element of governmental authority was also addressed by the tribunal in Dan Cake v Hungary, which apparently took a stance opposite to the cases discussed above. The Dan Cake v Hungary tribunal recognized that such a measure indeed has an element of governmental authority, stating that ‘it rests on a power specifically conferred by the law to the liquidator, and it is an act which deprives, under constraint, the debtor of the ownership of its assets’.¹⁰⁵ However, the tribunal did not consider it necessary to resolve the issue ‘since the liquidator’s action, even if it were attributed to the Hungarian State, did not constitute a violation of international law’.¹⁰⁶

In another notable case, Aircraftleasing Meier & Fischer GmbH & Co. KG v Czech Republic,¹⁰⁷ the tribunal clearly diverged from the findings in Voecklinghaus v Czech Republic and ruled that the actions of bankruptcy trustees under Czech law were indeed attributable to the state. The tribunal acknowledged that Article 8 ARSIWA was not applicable in this case since the bankruptcy trustees acted within the framework of their statutory duties and without specific directions, instructions, or control from the state.¹⁰⁸ However, applying the criterion outlined in Article 5 of the ARSIWA, which pertains to entities not formally state organs but empowered by law to exercise elements of governmental authority, the tribunal analysed the status of bankruptcy trustees under Czech law, referencing two decisions from the Czech Constitutional Court. In particular, one of the decisions relied upon by the tribunal contained analyses concerning the legal nature of the status of bankruptcy trustees under Czech law. The Constitutional Court, addressing the issue of payment for bankruptcy trustees’ services, identified three defining attributes of a public law body: its public purpose, method of constitution, and powers. The Court concluded that bankruptcy trustees, having met these criteria, qualify as special public-law bodies and are thus entitled to constitutional safeguards for the reimbursement of costs associated with performing public functions.¹⁰⁹ In light of the analysis of the decisions of the Constitutional Court, the tribunal concluded that the acts and omissions of bankruptcy trustees are attributable to the state, as they perform delegated public duties within a limited remit.¹¹⁰

Nonetheless, it is important to note that not all investment arbitration cases involving insolvency matters address the issue of attribution in relation to bankruptcy administrators or other organs involved in such proceedings. For example, in the Noble Ventures case,¹¹¹ budgetary creditors, including some government ministries, filed a judicial reorganization petition against an entity privatized and acquired by a foreign investor. The claimant alleged that Romania failed to meet its obligation under the share purchase agreement to restructure the budgetary debt of the privatized entity. Furthermore, the claimant contended that Romania used this debt to initiate judicial reorganization proceedings as part of a deliberate strategy to rescind the privatization agreement and regain control of the entity. While the tribunal in Noble Ventures examined the attribution of conduct by state organs related to the privatization of the entity acquired by the foreign investor, it was not necessary to address the attribution of conduct by the court-appointed private administrator to the host state. This was because the challenged conduct concerned the initiation and conduct of judicial reorganization, not the actions of the insolvency administrator per se. Ultimately, as discussed below in 2.1, the tribunal dismissed the foreign investor’s claims and concluded that the initiation or the conduct of the judicial proceedings was not in breach of the BIT.

It has been observed that in the majority of publicly available insolvency-related cases where tribunals have addressed the issue of attribution, the actions of insolvency administrators have not been attributed to the state.¹¹² Overall, the assessment regarding attribution of any acts conducted in connection with domestic insolvency proceedings, specifically those of insolvency administrators, should primarily focus on the criteria of exercising governmental authority over the disputed measures and the existence of conduct directed or controlled by the state. This evaluation necessitates an examination of the scope and nature of the powers of the insolvency administrators, as well as their independence from national courts and other state organs under domestic law.

Breach of the standards of protection

To hold the host state accountable under international law, it is not only necessary to establish attribution but also to demonstrate a breach of investment treaty protection standards. The actions of insolvency administrators or the judiciary within domestic bankruptcy proceedings could potentially violate the host state’s obligations under applicable investment treaties. Furthermore, deliberate actions by state organs aimed at forcing a company into insolvency or a state’s decision to place a company in insolvency or resolution may also give rise to state responsibility under an investment treaty.¹¹³

Most of the standards of protection laid down in investment treaties are relevant to the interests of foreign investors involved in insolvency proceedings. Thus, it is essential to examine these protection standards and relevant case law to determine their applicability in investment treaty arbitration related to insolvency matters. This discussion will focus primarily on recent pertinent cases in investment treaty arbitration.

FET

The most prominent obligation in connection with domestic insolvency proceedings relating to foreign investors is the FET standard. Although the exact meaning and contents of the FET are far from being undisputed, generally there are traditional and new components to this standard,¹¹⁴ among which denial of justice might seem to be the most relevant one in the context of domestic insolvency proceedings. It can be defined as any unfairness in the administration of justice causing damage to the investment of the foreign investor.¹¹⁵ When it comes to domestic insolvency proceedings, it may entail any procedural bias to the detriment of the foreign investor. For example, denial of justice can occur through a failure to exercise jurisdiction when domestic courts have it or through an illegitimate assertion of jurisdiction by domestic courts in insolvency proceedings.¹¹⁶ Any irregularity and unfairness in procedure influenced by factors such as corruption and fraud may also entail denial of justice. Such elements suggest that contrary to the view expressed by some commentators signifying that denial of justice should be confined to its procedural dimension,¹¹⁷ it could go beyond and include substantive aspects, as well.

Moreover, cases such as unreasonable delay in insolvency proceedings or denying unjustifiably the foreign investor from exercising any rights provided for under procedural laws or insolvency law might be covered by the protection against denial of justice. The latter was the basis for finding the denial of justice in Dan Cake v Hungary. Under Hungarian bankruptcy law, there is a legal right for the debtor to request the court to convene the composition hearing in order for the creditors to vote for an agreement with the debtor. Subject to the court’s approval of the agreement, the sale of assets will be avoided.¹¹⁸ In the tribunal’s view, time was of the essence for convening the composition hearing partly because, in the absence of which, the liquidator was under an obligation to start the public sale of the debtor’s assets within 120 days of the date of publication of the liquidation proceedings.¹¹⁹ The tribunal ruled that the Hungarian court had conditioned the mandatory convening of the composition hearing on a set of unnecessary requirements, and at least one of the requirements was impossible to satisfy within a reasonable time.¹²⁰ As a result, the tribunal found a violation of the FET standard, which took the form of a denial of justice.¹²¹

Notably, the merits of a judicial decision are generally beyond the scope of review under the denial of justice standard. Nevertheless, a manifestly unfair application of insolvency law, misapplication of law, or unfair assessment on facts would also amount to a denial of justice.¹²² Consequently, such cases represent a denial of justice as a standard covering both substantive and procedural elements. In any event, bias in the application of the law may, provided other conditions are met, also fall under non-discrimination standards or other components of the FET.

As a distinct element of the FET, the legitimate expectations of the investor may also not be frustrated for instance through a drastic change of regulations—compared to those in force at the time of the making of the investment—leading the foreign investor to become subject to insolvency proceedings.¹²³ Moreover, forcing settlements on the foreign investor may amount to coercion and harassment, which will be a basis to claim a breach of the FET standard.¹²⁴ Furthermore, arbitrary and discriminatory measures or measures taken contrary to good faith against the foreign investor in the whole process of the insolvency on the part of any organ of the host state would amount to a breach of FET standard. Good faith obligation in the context of FET has been known to imply acting coherently and transparently (transparency means decisions taken based on genuine reasons with the possibility of appeal).¹²⁵

In certain cases, the initiation of insolvency proceedings may itself be viewed as a discriminatory measure, potentially giving rise to a cause of action under an investment treaty. For example, in Noble Ventures v Romania, the tribunal addressed whether the initiation of judicial reorganization against the investment of a foreign investor was a breach of the FET and the prohibition against arbitrary or discriminatory measures. As mentioned above, the dispute in the Noble Venture case arose from a privatization agreement between Noble Ventures Inc. (a US company) and the Romanian State Ownership Fund for the acquisition, management, and operation of a large steel mill called Combinatul Siderurgic Resita (CSR) in Romania. The CSR faced significant financial liabilities, including substantial debt owed to Romanian government entities. Shortly after privatization, a political shift resulted in the replacement of the government authority that had signed the agreement with a new state entity.¹²⁶ Meanwhile, several issues emerged, ultimately leading Noble Ventures to initiate arbitration.

In 2001, proceedings for the judicial reorganization of CSR were initiated by budgetary creditors (namely certain government agencies, including ministries), which resulted in Noble Ventures’ loss of control over CSR until the end of the proceedings in 2002. The claimant considered the initiation of reorganization proceedings, among other breaches, as an abuse of process contrary to the FET obligation, and an arbitrary and discriminatory measure prohibited under the 1992 Romania–US BIT.¹²⁷ In the claimant’s view, ‘the true purpose of the judicial reorganization proceedings was to rescind the Privatization Agreement and allow Romania to take back control of CSR. Since the time of privatization, CSR has become effectively insolvent due to Romania’s failure to meet its obligations under the BIT and the Privatization Agreement. Now, as a result of the directive from the Minister of Privatization, CSR’s budgetary creditors would apply for judicial reorganization based on the very debts that were to be restructured under the SPA.’¹²⁸ Considering a labour unrest initiated by the local trade union that took place in Resita in 2001,¹²⁹ the claimant contended that the decision to place CSR in judicial reorganization was informed by political intentions in order to quench the demonstration in Resita.¹³⁰

The Noble Venture tribunal found no violation of the FET standard, concluding that neither the initiation nor the conduct of the judicial proceedings could be deemed arbitrary or discriminatory.¹³¹ The tribunal emphasized that such proceedings are a common feature of legal systems worldwide, serving similar purposes across different jurisdictions.¹³² Therefore, in the absence of any indication that a specific measure during the insolvency proceedings was directed against a particular investor based on their nationality, and when an entity is in a situation that would justify the initiation of comparable proceedings in most other countries, it is difficult to prove that the initiation of insolvency proceedings breaches the FET standard.

Expropriation

In certain instances, the insolvency of a foreign investor may be considered tantamount to expropriation. For instance, disproportionate taxation or fines leading to forced liquidation may constitute indirect expropriation. Yukos Universal Limited v The Russian Federation, brought by the former majority shareholders against the Russian Federation, is often cited as a paradigmatic or classic case of creeping (indirect) expropriation.¹³³ The tribunal, after examining the treatment of Yukos by the tax authorities, bailiffs, and courts, concluded that the primary objective of the respondent state behind the tax measures was to force the claimant into bankruptcy and expropriate its assets rather than merely collecting taxes.¹³⁴

With respect to the tax treatment of Yukos, the tribunal dealt with the denial by the Russian tax authorities of the tax exemption to Yukos and found that the respondent’s tax authorities went far beyond than was necessary in terms of legitimate tax collection purposes.¹³⁵ In addition, with respect to the challenge by the claimants of the imposition of wilful offender and repeat offender tax fines by the Russian tax authorities for the years 2000–03, the tribunal held that imposition of such fines was ungrounded and should not have been levied on Yukos.¹³⁶ More specifically, the claimants (three controlling shareholders of Yukos) argued that Yukos’s bankruptcy, announced in 2006, and the expropriation of its assets, primarily due to significant tax liabilities, were solely for the benefit of the Russian state and state-owned companies. The claimants alleged that the respondent instigated a syndicate of banks to commence bankruptcy proceedings against Yukos, followed by discriminatory treatment of bankruptcy claims. Yukos deemed its liquidation as the expropriation of its assets, with the Russian state receiving the bankruptcy proceeds.¹³⁷

The tribunal, while acknowledging Yukos’s own fault in the initiation of bankruptcy¹³⁸ by not repaying a loan, held that the initiation was ultimately provoked by the respondent.¹³⁹ Regarding the manner of conducting the bankruptcy proceedings, the tribunal assessed them as improper and unfair, considering all substantial aspects of those proceedings.¹⁴⁰ The tribunal concluded that it was not ‘fair for the creditors’ committee to reject the Rehabilitation Plan, for the court to declare Yukos bankrupt, or for Yukos to have been deprived of all of its remaining assets through a hasty and questionable liquidation process.’¹⁴¹ This conclusion could be supported in the tribunal’s view, for instance, by the fact that Yukos was faced with a 6 billion USD claim that related only to the profit tax to be collected by the Federal Taxation Services, which had a majority vote at the creditors’ meeting when determining whether Yukos should be rehabilitated or liquidated from the liquidation proceeds.¹⁴²

The Yukos award represents a full-scale illustration of how the conduct of domestic bankruptcy proceedings against a foreign investor-owned entity can impact investment arbitration rulings. A contentious issue in such cases is the standard of review applied by tribunals to the substantive correctness of decisions made by domestic courts. Indeed, the scope of review that investment arbitration tribunals have over the substantive aspects of domestic proceedings and determinations of facts or law by domestic authorities seems far from a settled issue in investment arbitration practice.¹⁴³ In the Yukos case, the tribunal deemed the bankruptcy proceedings against Yukos improper and unfair, noting that ‘[a]ll claims filed by Rosneft and the Federal Taxation Service, valued in the billions, were peremptorily accepted by the Court, while the many claims filed by Yukos’ affiliated companies were rejected by the Court in a very summary way.’¹⁴⁴ This finding underscores the blurred line between the exclusive powers of domestic authorities and the extent to which investment arbitration tribunals can review the exercise of such powers.

Another recent investment arbitration case in which putting an entity under administration was a basis for the tribunal to decide that indirect expropriation occurred by the host state is Bank Melli and Bank Saderat v Bahrain.¹⁴⁵ At the centre of this case was whether the measures taken by the respondent against Future Bank (which the claimants established in 2004 together with a bank incorporated in Bahrain, ABU), namely the forced administration of Future Bank and subsequent notice of liquidation issued by the Central Bank of Bahrain (CBB), constituted an expropriation of claimants’ investments.

The Tribunal noted that the CBB’s decisions concerning the administration and liquidation of Future Bank directly affected the claimants’ shareholding in Future Bank.¹⁴⁶ In order to determine whether such measures were expropriatory in nature, the tribunal carried out an assessment of those measures against the limits defined under regulatory and police powers. For this purpose, the tribunal firstly examined whether the respondent’s measures were bona fide exercise of regulatory powers. According to the relevant regulatory framework under Bahraini law, the CBB may ‘appoint a person to be the administrator of a licensed bank if the bank “continued to provide regulated services which resulted in inflicting damages to financial services industry” in Bahrain’.¹⁴⁷ The tribunal’s analysis led it to the conclusion that the measures at hand did not qualify as ‘genuine regulatory measures aiming at addressing Future Bank’s unlawful conduct’,¹⁴⁸ because there was no document—other than the Crisis Management Committee minutes—setting out the reasons for the decision to place Future Bank under administration. This lack of reasoning for such a severe decision did not comply, in view of the tribunal, with the applicable regulatory framework.¹⁴⁹

In addition, the tribunal, in this case, noted that reference in the records of a meeting between the CBB and Future Bank to a ‘sovereign decision’ to put Future Bank into administration and the decision to liquidate the bank demonstrates that the CBB’s measures against the Future Bank were informed by political rather than regulatory considerations.¹⁵⁰ In its analysis of the measures taken by the CBB, the tribunal also pointed out as an indication of the fact that it never considered less restrictive measures—which are authorized under the regulatory framework—to achieve its supervisory objectives.¹⁵¹

The tribunal concluded that placing the bank into administration was not a legitimate exercise of regulatory powers but constituted an indirect expropriation from the outset of the administration. It held that the respondent’s obligation to pay compensation arose at the time when the CBB placed Future Bank under administration.¹⁵² Consequently, this case provides a strikingly straightforward example of host state measures directly leading to liquidation, which is tantamount to expropriation and thus violates investment treaty protection standards.

Aspects of bankruptcy proceedings were also alleged to have led to the expropriation in A.M.F. Aircraftleasing Meier & Fischer GmbH & Co. KG v Czech Republic.¹⁵³ This case did not entail the insolvency of the claimant itself. Nevertheless, the foreign investor claimant (AMF) was directly involved in a dispute over two aircraft in two different sets of local bankruptcy proceedings. Numerous proceedings and various court decisions addressed the inclusion and exclusion of the aircraft, allegedly owned by the claimant, from the bankruptcy estate.¹⁵⁴

In this case, the seizure of the aircraft belonging to AMF and inclusion of them into Mr Fischer’s bankruptcy and subsequently into Charter Air’s bankruptcy estate by the bankruptcy trustee was seen by the investor as the beginning of the alleged expropriation and other treaty violations.¹⁵⁵ The claimant believed that a set of acts and omissions of the host state had resulted in the creeping or de facto expropriation: the aircraft was included to a bankruptcy estate despite the fact that it was already included in Mr Fischer’s bankruptcy estate, which the claimant believed resulted in maintaining the loss of its property rights after the aircraft exclusion from Mr Fischer’s bankruptcy estate. The claimant also held that the bankruptcy trustees and courts did not take any measure to prevent damage to the aircraft, and finally, the sale of the aircraft permanently deprived the claimant of its property rights.¹⁵⁶

The tribunal in this case was in agreement with the respondent, which argued that there must be the state’s intent to expropriate in order for an expropriation to take place.¹⁵⁷ The tribunal relied upon the awards of tribunals in Saluka¹⁵⁸ and Binder¹⁵⁹ cases to conclude that bankruptcy proceedings are within the lawful regulatory power of the host state. The tribunal went on to state that bankruptcy proceedings by nature might result in the temporary sequestration of assets, yet there might be contested ownership claims over the assets. Therefore, the sequestration took place lawfully in the tribunal’s view.¹⁶⁰ The tribunal was convinced that bankruptcy proceedings respected all the requirements of Czech law: for instance, under Czech law, the trustee must maintain any disputed assets in the bankrupt estate, and the alleged owners have to bring an action before the court to exclude the assets.¹⁶¹ Therefore, requirements for the lawfulness of the proceedings have been met, which prevented them from leading to a de facto expropriation.

The cases above illustrate that many allegations of expropriation in insolvency-related investment arbitrations arise from actions by the host state that led to insolvency or placed the foreign investor under forced administration. In the absence of such actions, proving that the insolvency proceedings themselves and the actions of the courts or the insolvency administrator (if attribution has already been established) have led to expropriation is challenging. This is especially true if all the requirements of domestic law have been duly respected, making it difficult to demonstrate that an unlawful or bad-faith exercise of the state’s legitimate police powers has occurred.

Other standards

Non-discrimination standards (including most-favoured-nation and national treatment) may come into play in connection with domestic insolvency proceedings when the host state treats foreign investors less favourably—compared to the treatment accorded to its nationals—in such a manner leading to insolvency of the foreign investor.

Even the FPS standard, which is historically concerned with the protection of the physical integrity of the investment, has been considered by commentators as capable of covering any decision of the judiciary regarding insolvency proceedings and related enforcement actions.¹⁶² Although there have recently been some examples of the extension of FPS to legal interests in addition to physical security,¹⁶³ in the absence of explicit treaty language qualifying legal protection as part of the obligation, extending this standard beyond physical protection to include legal and commercial security is questionable. As a result, unless the applicable treaty provides otherwise, it is not easily conceivable that any irregularity in domestic insolvency proceedings can amount to a breach of the FPS obligation, since it can be covered by other relevant standards such as FET.

The violation of the FSP standard was raised, further to other violations including FET and the duty not to expropriate, in A.M.F. Aircraftleasing Meier & Fischer GmbH & Co. KG v Czech Republic. The claimant argued that this standard extends to legal and commercial protection, in addition to physical protection. According to the claimant, in this case, the bankruptcy trustees neither took the necessary measures to physically protect the aircraft (which had been included in the bankruptcy estate) nor did they provide the aircraft with commercial and legal protection, such as insurance and lease agreements.¹⁶⁴ However, the tribunal came to a conclusion on this point that ‘the trustees did not ignore the issue of the depreciating asset value. The trustees were alert to the asset depreciation and tried to forestall it in a variety of ways, but ultimately failed notwithstanding their efforts’.¹⁶⁵

While the FPS claim in the aforementioned case was unsuccessful, the tribunal concluded that ‘[t]he FPS standard extends beyond physical protection to include (at least) the provision of legal security, in the sense of a duty of due diligence in maintaining a functioning judicial system that is available to foreign investors seeking redress’.¹⁶⁶ This suggests that the tribunal interpreted the scope of FPS broadly, indicating a potential cause of action if domestic insolvency proceedings lack due diligence or if foreign investors are denied full access to the judicial system within such proceedings.

Considering the more recent developments in practice around the FPS standard, which extends the scope of its protection to legal safeguards, it remains to be seen whether other arbitral tribunals might similarly extend the meaning and scope of FPS to encompass legal and commercial security in the context of bankruptcy proceedings.

CONCLUSION

When foreign investors are involved in domestic insolvency proceedings within the host state, this can have significant implications for investment treaty arbitration. First, the insolvent investor’s access to the arbitration mechanism provided in the applicable investment treaty may become a complex issue, as insolvency affects the investor’s legal status, including the capacity to bring or continue to pursue its claim in arbitration. Several recent cases have addressed this challenge. Investment treaty tribunals have generally tended to uphold insolvent investors’ access to arbitration when jurisdiction ratione personae and representation are in question. If host states could easily invoke investor’s insolvency—potentially caused by their own actions—to deny access to international arbitration and evade liability, the integrity of the investment protection regime would be severely undermined.

Second, concerning substantive obligations under investment treaties, a host state’s responsibility may arise if its actions have caused the investor’s bankruptcy or otherwise impacted the investor through insolvency proceedings. While the attribution of the wrongful act to the state, which is the first element of state responsibility, is generally straightforward when it involves direct measures by the government or state organs, including the judiciary, attributing the conduct of insolvency administrators to the state is more complex. Although there is no clear-cut answer regarding the attribution of insolvency administrators’ conduct to the host state, the host state’s domestic law often plays a crucial role in determining whether such actions can be attributed to the state. Regarding the second element of state responsibility, namely the breach of international obligations by the state, it is essential to differentiate between cases involving irregularities and unfairness in bankruptcy proceedings that affect foreign investors and those where state measures directly lead to the investor’s insolvency. Depending on the nature of the state’s conduct and its impact on the insolvent investor, foreign investors may rely on various treaty obligations, particularly FET and the prohibition of expropriation, to bring claims against the host state.

In addition to the procedural and substantive issues at the intersection of domestic insolvency law and investment treaties in arbitration, another critical area for future research is the enforcement phase of arbitration awards. A key question is whether and to what extent the enforcement of investment arbitration awards interacts with domestic insolvency priority schemes. The enforcement of an arbitral award in favour of an insolvent foreign investor may disrupt the priority arrangements under domestic insolvency law. Whereas it can be argued that international law obligations take precedence over domestic law arrangements, one may critically consider the possibility of claims for shareholders’ reflective loss under investment treaties as an unfair bypass of priority schemes provided for domestic insolvency regimes. As the number of cases involving insolvent claimants in investment arbitration continues to rise, it remains to be seen how this interplay will unfold in the future and whether, and if so how, tribunals might seek to balance the rights of foreign shareholders and creditors to mitigate potential challenges in enforcing their awards.

FUNDING

This research did not receive any grants from funding agencies in the public, commercial, or not-for-profit sectors. Additionally, none of the authors have been involved in any of the cases mentioned in this article.

Footnotes