The intersection of insolvency proceedings and arbitration in financing transactions: a recent judgment of the Abu Dhabi Global Market (ADGM) Court of First Instance

September 2021 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING

financierworldwide.com

By last year, the NMC Group, the largest provider of private healthcare in the United Arab Emirates (UAE), had incurred debts, calculated at between US$4.3bn and US$5.3bn, which had not been disclosed in its financial statements.

In September 2020, the Abu Dhabi Global Market (ADGM) Court of First Instance made an administration order in respect of 36 companies in the NMC Group. Although originally incorporated in various UAE Emirates, the companies were by then registered in the ADGM, an international financial centre located in Abu Dhabi and established by UAE Federal Decree and Abu Dhabi law.

The ADGM is one of the first jurisdictions in the Middle East to implement English law with a legal system based on English common law, a number of English statutes and ADGM enactments. With a judiciary of eminent judges from other common law jurisdictions, ADGM Courts are comprised of a Court of First Instance (ADGMCFI) and a Court of Appeal, which handle civil and commercial disputes. They are also an integral member of Abu Dhabi’s judicial system.

In 2021, Dubai Islamic Bank PJSC (DIB), sought to stay, pursuant to the ADGM’s Arbitration Regulations 2015, proceedings brought before the ADGMCFI by the companies’ administrators and the companies (the Claim Form Proceedings). The DIB sought to rely on arbitration agreements in two Master Murabaha Agreements (MMAs) that it made with companies in the NMC Group.

Under the MMAs, the DIB agreed to make available a facility of up to US$230m to be applied to six hospital projects in the UAE, and a facility of up to US$120m to be applied to acquire five hospitals or clinics in the Kingdom of Saudi Arabia (KSA), in return for which, among other things, the DIB asserted it held security by way of an equitable assignment.

The ADGMCFI judgment

Section 16 of the Arbitration Regulations obliges the ADGMCFI to stay court proceedings brought in respect of a matter that is the subject of the arbitration agreement “unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed”. These provisions are similar to sections 9(1), 9(3) and 9(4) of the English Arbitration Act 1996.

The DIB relied on the leading judgment of the House of Lords in Fiona Trust & Holding Corp v. Privalov, in which it held that in interpreting an arbitration agreement and determining its scope the court is to construe it liberally, recognising that generally rational businessmen entering into an arbitration agreement will intend that any dispute arising out of their relationship should be resolved by the same tribunal. It submitted that, given the wide wording of the arbitration agreements in the MMAs, the court should stay the claim form proceedings.

The ADGMCFI noted that the English courts have taken the view that insolvency does not affect the construction of an arbitration clause, so that if it extends to the dispute then insolvency will not prevent the matter from being arbitrated even though the arbitral tribunal may not be able to make all the necessary orders. In contrast, the Singaporean approach, seen in Larsen Oil and Gas Pte Ltd v. Petropod Ltd, is to construe an arbitration agreement as excluding such disputes entirely.

The court confirmed that the ADGM courts would follow the approach of English law in accordance with the ADGM’s Application of English Law Regulations 2015. The court thus believed that the DIB’s case on its equitable assignment under the MMAs clearly fell within the scope of the arbitration agreements contained in the MMAs.

The court noted that the provisions of section 9 of the 1996 Act, with which Article 16 of the Arbitration Regulations are similar, is subject to section 81(1) which expressly preserves the operation of “any rule of law as to […]matters which are not capable of settlement by arbitration”. It observed that there is no comparable provision in the arbitration regulations, but it was not in dispute that the DIB would not be entitled to a stay if its case under the MMAs was not capable of being resolved by arbitration, that is to say were ‘non-arbitrable’.

The court considered that the issue of arbitrability might be accommodated within the structure of the arbitration regulations in either or both of two ways: one is that, if a dispute is not arbitrable, the conditions for applying for a stay under section 16(1) are not satisfied; the other analysis is to regard the arbitration agreement to be, in that regard, incapable of being performed, within the meaning of section 16(2). It noted that in Fulham Football Club (1987) Ltd v. Richards, Patten LJ preferred the second approach, and agreed with him.

The court also observed that a leading English commentary provided while there is no agreed or statutory definition of arbitrability, or of what is capable of settlement by arbitration, in English law (and there is none in ADGM law) – “In particular, a dispute will generally not be arbitrable if it involves an issue of public policy, public rights or the interests of third parties, or where the dispute in question is clearly covered by a statutory provision which provides inalienable access to the courts”.

In the context of insolvency, the ADGMCFI believed that questions of arbitrability engage these various considerations, and the focus of the inquiry was whether respect for the arbitration agreement gives way to a public policy in managing the insolvency in accordance with the statutory scheme in the interests of creditors and others.

The court noted that the question of whether and when disputes merely involving a bankrupt entity as a party or raising questions of bankruptcy law, such as the continued effect of a contract, may be resolved in arbitration is a controversial one. Different national legislative regimes and judicial decisions have reached different conclusions about these types of disputes. In many such cases, the desirability of a centralised forum for resolving all disputes involving the bankrupt entity is weighed against that entity’s pre-existing commitment to resolve disputes with a contractual counterparty by international arbitration, with different legal systems adopting different resolutions of these competing interests.

However, the Court felt that the weight of authority, particularly in recent years, supports narrow non-arbitrability rules in this context, and noted that English law adopts narrow non-arbitrability rules. The court cited with approval the remarks of Males LJ in Bridgehouse (Bradford No. 2) Ltd v. BAE Systems Ltd, a case concerning a company being struck off the companies register, albeit not for insolvency: “In considering whether a dispute is arbitrable, the fact that the parties have agreed that it should be arbitrated is an important starting point. What that means is that they have agreed, not only that it should be arbitrated, but also that it should not be decided by a court. The law permits commercial parties to choose arbitration and should respect their choice unless there are compelling reasons not to do so.… While I would accept that there are some kinds of application which are incapable of being arbitrated, of which an application to wind up a company is an example, this should in my judgment be a conclusion of last resort. Even then it may be appropriate […] for particular issues falling within the scope of an arbitration clause to be referred to arbitration before the court decides whether to make an order which only the court can make”.

The fact that a dispute arises in the context of proceedings on a statutory cause of action that can only be brought by a liquidator or administrator did not mean that the dispute is non-arbitrable.

The court concluded that DIB was entitled to have its case concerning the asserted equitable assignment in the MMAs determined in arbitration and to a stay of the claim form proceedings to the extent necessary to give effect to that entitlement.

Conclusion

There are a number of takeaways from the ADGMCFI’s judgment. First, it confirms the ADGM courts’ position as a common law island in a civil law archipelago, mindful that the ADGM courts are an integral part of the wider Abu Dhabi judicial system. Second, it affirms ADGM’s singularity in the direct application by its courts of English common law, which is unique to the region. As may be seen in the judgment, this unique approach permits the ADGM courts access to the latest evolving case law relevant to international commerce. Third, the judgment is a testament to the courts’ respect for party autonomy where parties agree to arbitration. It makes clear that generally insolvency will not prevent matters which fall within the scope of the relevant arbitration agreement from being arbitrated.

In short, the judgment will help further bolster ADGM’s position as a leading international financial centre, which possesses a robust, progressive and business-friendly ecosystem.

John Gaffney is a senior counsel at Al Tamimi & Company. He can be contacted on +971 (0) 2 813 0444 or by email: j.gaffney@tamimi.com.

John Gaffney

Al Tamimi & Company