Originally from Handbook on International Commercial Arbitration - Second Edition

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In the context of arbitration proceedings either of both parties may be insolvent either as a consequence of events that give rise to the reference or otherwise (and hence may be insolvent when the reference commences) or may become insolvent during the reference itself, perhaps as a consequence of the proceedings themselves (although a tactical insolvency cannot always be ruled out). Post-award insolvency is not considered in this book.

The insolvency regime does not sit happily alongside arbitration laws and difficult issues will arise. The general philosophy underlying most insolvency regimes is to provide a legislative framework for the following:

• The collection and realization of the property and assets of an insolvent company1
• The payment or discharge of the costs and expenses of the insolvency; in an orderly manner for the benefit of creditors as a class;
• The payment of secured creditors out of the property over which they are secured;
• The payment of any preferential creditors; and
• The payment of other creditors on a fair basis, usually parri passu.

Of course different national laws will have different ways of dealing with specific issues and priorities but a common feature is a tightly controlled and prescribed legislative framework backed up by significant judicial intervention or intervention by a liquidator or administrator enshrined with significant powers to ensure that there is a prompt realization of assets and a fair distribution of those assets to creditors. Most will, in addition to formal processes, have statutory routes to make compositions or arrangements with creditors or for the re-organisation of the affairs of a debtor in financial difficulties.