13 March 2017

When Arbitration Meets Insolvency in Montenegro - Can They Coexist?

Even at first blush, it is apparent that arbitration and insolvency make strange bedfellows.

The reason they make such an odd couple is the different underlying policies, objectives, and purposes they stand for. The heart of arbitration lies at the privity of contract and the existence of party autonomy independent from the state. In contrast, insolvency reflects a centralized and to a certain extent state-managed procedure that holds all creditors equal, within a set system of ranking – a transparent and accountable process governed by mandatory substantive and procedural law provisions.

However, with insolvency on the rise, parties to arbitration agreements may find themselves increasingly often considering a claim against a counterparty who is insolvent or becomes insolvent during the dispute. This is no different in Montenegro.

When arbitration meets insolvency or insolvency meets arbitration in Montenegro, can they coexist? Does insolvency affect the arbitrability of claims in Montenegro? Is there exclusive jurisdiction of Montenegrin courts for all disputes against or with an insolvent party? 

Montenegrin statutory law does not provide a clear answer.

It is undisputed that once initiated, an insolvency proceeding is carried out ex officio by the Montenegrin court competent within the territory where the insolvency debtor is seated or has its residence. It is equally unquestionable that creditors can settle their claims against an insolvent debtor exclusively within these insolvency proceedings. Montenegrin insolvency law also provides that disputes arising within or in relation to insolvency proceedings in Montenegro fall within the exclusive territorial jurisdiction of the court seated in the territory of the insolvency court. This rule intends to attract all insolvency-related litigations under the auspices of one court – the one conducting insolvency.

There are no further provisions explicitly conferring jurisdiction on Montenegrin courts in relation to insolvency.

Still, how broadly are these jurisdictional rules interpreted in practice? 

Do they inevitably affect the validity of the arbitration agreement? Can they be stretched so far as to justify a court’s refusal to (i) enforce a previous arbitration agreement relating to an insolvent debtor, or (ii) recognize and enforce an arbitral award against an insolvency debtor?

It seems that Montenegrin court practice is yet to be settled in this respect. 

However, some recent court decisions indicate that Montenegrin courts may be quick to interpret exclusive territorial jurisdiction very broadly. Thus, one can find decisions where the court construed this rule of territorial jurisdiction to imply exclusive jurisdiction of Montenegrin courts. There are also instances in which courts have read the subject matter scope of this territorial jurisdiction rule expansively. With no attempt to explain, in those cases courts understood the wording “disputes arising within or in relation to insolvency proceedings administered in Montenegro” to encompass, in principle, all disputes commenced by or against an insolvency debtor after the initiation of the insolvency proceeding in Montenegro. Some courts have recognized a far-reaching jurisdiction of the Montenegrin insolvency court, even if only from such court’s exclusive jurisdiction for insolvency. 

Obviously, this reasoning would impede the use of an arbitration agreement against the insolvency debtor, i.e. an insolvency administrator. It could equally affect the enforcement of an arbitration award rendered against a Montenegrin insolvency debtor after initiation of the insolvency proceeding. 

Jurisprudence, on the other hand, appears to offer a more elaborated and analytical approach. It has been underlined that the law itself provides no justification for converting the exclusive territorial jurisdiction into exclusive jurisdiction of Montenegrin courts. For that reason, insolvency should not be an absolute bar to arbitration with or against an insolvency debtor. In terms of monetary claims, it is unquestionable that any such claim needs to be registered and settled within the insolvency procedure. This is mandatory even where arbitration is pending for such claims. If the registered claim remains undisputed in insolvency, there is no need for arbitration. But if the insolvency administrator disputes the existence and/or amount of the claim, many argue that these issues should be decided in arbitration if the insolvency debtor had previously so agreed.

The above evidently shows that the meeting of arbitration and insolvency in Montenegro is rather a difficult matter. In that clash, projections for arbitration are currently still uncertain. Given the severity of possible implications, the parties are strongly advised to take this issue into account and monitor further developments of court practice and legal doctrine in this respect.   

This article was originally published in CEE Legal Matters Magazine.