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Bankrupt Claimants in Investment Arbitration: Who’s in Charge?

It is not uncommon for a company to enter liquidation while pursuing an investment arbitration. At times, its bankruptcy can be traced to the very host-state measures the company is challenging as expropriatory before the arbitral tribunal.

When that happens, the new legal representatives of the company–i.e., the court-appointed liquidator or official receiver–may pursue diverging interests from the former directors. Indeed, a liquidator’s priority is to maximize recovery for the company’s creditors based on the remaining assets available to the company in liquidation, whereas the former directors may wish to prioritize their own interests along with those of the shareholders. In a pending investment arbitration, these diverging interests usually take the form of contrasting risk preferences, with the liquidator adopting a more conservative legal strategy and the former directors and the shareholders taking a riskier approach.

Another key reason for the differing views between old and new representatives may be a result of the different positions of their respective appointers. The national court that appoints the liquidator of the claimant in a pending investment arbitration can sometimes be a state organ of the respondent party in that same arbitration, particularly where a foreign-owned company acting as a claimant is incorporated in the respondent state. In such instances, it is critical for an investment arbitral tribunal to rule out possible conflicts of interest between the new legal representatives of the company in liquidation and the respondent state, as the liquidator may be indirectly dependent or controlled by the respondent state.

In order to reflect the changes of circumstances in the management of a company in liquidation and, simultaneously, avoid possible conflicts of interests, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has recently developed a two-step test, which will offer guidance for party representation issues going forward.

Issue of Party Representation in AS PNB Banka and others v. Latvia

In AS PNB Banka and others v. Latvia, an ICSID tribunal had to decide who should represent AS PNB Banka (hereinafter the “Bank”), a claimant that had entered liquidation during the arbitral proceedings. Following the insolvency process, two alleged representatives fought to represent the Bank: the nominee of the pre-insolvency directors and the Latvian court-appointed insolvency administrator.

The insolvency administrator, supported by the respondent in the ICSID case, relied on Latvian statutory law for his authority to represent the Bank and appoint counsel. The insolvency administrator and the respondent argued that, in the absence of any rule of international law on representation of corporations, Latvian law should apply.

According to Latvian insolvency law, an insolvent company is no longer represented by its organs, but by the insolvency administrator. Any action or decision professed to be taken on behalf of the insolvent company by the former directors has no legal effect. The administrator maintained that the tribunal should let him participate in the arbitral proceedings because no one else could properly represent the interests of the creditors of the insolvent company.

In contrast, the former directors (supported by the shareholders who were also acting as claimants in the same arbitral proceedings) submitted that their nominee was the appropriate representative of the Bank. They asserted that for the purposes of the ICSID arbitration, the Bank is not a Latvian corporation, but a UK national in accordance with Article 25(2)(b) of the ICSID Convention. This Article transmogrifies a corporation established in the host country into a national of the shareholders’ country by reason of foreign control.

The pre-insolvency directors and shareholders further argued that the respondent could not designate the representatives of the claimant because of a conflict of interest, thus framing this question as a due process issue. The former directors considered the insolvency administrator as controlled by the respondent since the administrator was appointed by a Latvian court on the application of a Latvian government agency and his appointment could have been revoked by a Latvian court.

The pre-insolvency directors and shareholders relied for their argument on the precedents of three different international tribunals: the decision on party representation of the ICSID Annulment ad hoc Committee in Carnegie v. Gambia, the ruling of the Court of Justice of the European Union (CJEU) in Trasta, and the decision of the European Court of Human Rights in Capital Bank AD v. Bulgaria. These three precedents together postulate that a party’s representation in a pending proceeding cannot be compromised by the adverse party.

Nevertheless, the ICSID tribunal in AS PNB Banka declined to interpret these three precedents in the way intended by the former directors and shareholders who were advocating for an automatic dis-entitlement of a liquidator appointed by a domestic court of the respondent state.

ICSID Tribunal’s Procedural Order on Party Representation

Since there is no rule of international law concerning appointment of agents of corporations, nor could the ICSID Convention or the applicable bilateral investment treaty fill this gap, the ICSID tribunal resorted to its procedural powers to ensure the fairness and integrity of the arbitral process in determining who could represent the insolvent claimant.

In doing this, the tribunal applied a sort of two-step test to determine who was entitled to represent the insolvent corporation. The test was based on (1) the authority to represent a party and (2) the absence of conflicts of interest or control between the new representative of a party and the respondent State.

The authority to represent a party is a question of domestic law, whereas the absence of conflict of interest is a matter of fact. Although at the end, before an ICSID tribunal both questions are issues of fact to which international law applies. Indeed, the respondent state's domestic law is also merely a fact which as such has to be pleaded and proven by the disputing parties before an international arbitral tribunal (especially considering that the representation of a party is a procedural issue where the internal law of a state would have little to say).

Of course, this is not to say that recourse to domestic law is irrelevant for the determination of party representation under international law. It simply means that domestic law alone would be inconclusive from an international standpoint. That is why the authority to represent a party under the relevant domestic law needs to be proven and checked against possible conflicts of interest connecting the new representative of a party with its counterparty.

Nevertheless, the tribunal’s departing point was rightly the domestic law of the country where the company was incorporated—Latvia. By applying Latvian insolvency law, the tribunal determined that the insolvency administrator was the one to have the authority to represent the Bank.

As to the second limb of the test, the rationale behind the absence of a conflict of interest is to make sure that a respondent state may not control the supervening liquidator representing the claimant by reason of the fact that a respondent state’s court appointed that liquidator (and may have the residual power to revoke the liquidator as well). Therefore, in such cases, it is important to ensure that the liquidator is independent from the respondent state. This is why the first criterion alone would not suffice, since it may hinge upon the respondent State’s domestic law. Accordingly, it needs be filtered through the second criterion.

Obviously, in order to guarantee the integrity and fairness of the proceedings, an arbitral tribunal cannot allow a state to appoint a puppet liquidator, effectively giving it control over its adversary in the arbitration. Thus, the authority of the insolvency administrator to represent a claimant is subject to the absence of conflicts of interest between the insolvency administrator and the respondent state.

On this point, the ICSID tribunal concluded that in the AS PNB Banka case no conflict of interest could be established (save with respect to the shareholder-claimants’ ancillary claim that placing the Bank into liquidation itself constituted a breach of Latvia’s international obligations under the relevant BIT). The tribunal also noted that diverging interests between the insolvency administrator and the shareholders did not create a conflict of interest—rather, it constituted merely a natural “difference of interests.”

Accordingly, the two criteria serve to balance each other out. Nevertheless, it would appear that the second criterion is preponderant, especially where there is no continuity of representation from the period before insolvency because of the withdrawal of the party’s original counsel.

Hence, by applying this two-step test (slightly tilted more towards guaranteeing the absence of conflicts of interest between the new representative and the respondent state), the ICSID tribunal resolved that the nominee of the former directors of the Bank had no authority to represent the company. It held that the insolvency administrator was the appropriate representative of the claimant, but allowed the former directors to represent the Bank with respect to the ancillary claim regarding whether it was appropriate to place the bank in liquidation. Thus, the tribunal gave access to the case file to both the insolvency administrator and the former directors.

A Possible Role for the UNCITRAL Model Laws on Insolvency

Admitting that there is no rule of international law on representation of corporations, some transnational legal instruments can nevertheless provide guidance on the issue of party representation in the case of insolvency, including the 1997 UNCITRAL Model Law on Cross-Border Insolvency and the 2018 UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments. To the extent that these instruments enshrine internationally recognized standards and provide effective mechanisms for dealing with the issue of party representation of an insolvent company, arbitral tribunals may apply them as soft law.

Specifically, the 1997 UNCITRAL Model Law on Cross-Border Insolvency provides the representatives of foreign insolvency proceedings and creditors with a direct right of access to the court seized with parallel proceedings to seek its assistance. Furthermore, it accords recognition for orders issued by foreign courts commencing insolvency proceedings and appointing the insolvency administrator, thus quickly solving the problem of party representation of an insolvent company.

This Model Law also grants the insolvency administrator the necessary relief for the orderly and fair conduct of simultaneous proceedings, including a temporary “breathing space” in order to have time to take the appropriate measures for the liquidation of the assets of the debtor. Finally, the UNCITRAL Model Law also authorizes the courts hearing concurrent proceedings and the foreign representatives of the insolvent company to cooperate and have a direct channel of communication in order to foster decisions that would best serve each parallel ongoing proceeding.

The UNCITRAL Model Laws provide States with a uniform template to deal with certain specific issues. Hence, they are meant to apply to the domestic courts of the enacting States. However, the same principles and procedures may be applied mutatis mutandis by tribunals in international arbitration given the transnational character of the procedural issues arbitral tribunals are often called to deal with.


Because the supervening insolvency of claimants in investment arbitrations is a recurring problem, the two-step test adopted by the ICSID tribunal in AS PNB Banka has great utility for future cases. Other arbitral tribunals tackling the issue of party representation may apply this two-step test by first looking into the representatives’ authority in compliance with the domestic law of the country of incorporation of the company-claimant and then scanning for any conflicts of interest between the party’s insolvency representative and the counterparty in the arbitral proceedings. Further guidance may be provided by the UNCITRAL Model Laws on insolvency.

As a final question, is there a way to insulate an investment arbitral claim from having the company locally incorporated in the host-state subsequently put into liquidation with the intrinsic risk of a liquidator influenced by the respondent state? Probably yes: by filing the investment arbitration on behalf of the foreign shareholders only, without including the local company among the claimants.


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