INSOL International Panel: International Insolvency and Mediation

INSOL International Panel: International Insolvency and Mediation

 

Callum Hutchinson

The inaugural Canadian Arbitration Week kicked off September 21^st, 2020 with a panel on International Insolvency and Mediation, hosted by INSOL International.

Felicity Toube, QC (South Square), moderated the discussion between Chief Justice Geoffrey B. Morawetz (Ontario Superior Court of Justice), Justice Ian Kawaley (Grand Court of the Cayman Islands), Justice Kannan Ramesh (Supreme Court of Singapore, Singapore International Commercial Court), and Felicia Tan (TSMP Law Corporation, Singapore).

Toube began by noting how it was peculiar to start a week-long conference about arbitration with a session on mediation. However, as she pointed out: “how can one talk to a client about arbitration without also considering the alternatives?” Indeed, a main theme of the discussion, and the first topic posed to the panel, was when it is appropriate to employ mediation, as opposed to other forms of dispute resolution, in an insolvency context. Justice Ramesh said that, in the United States, mediation is becoming an increasingly viable process for dealing with statutory claims, multi-party negotiations, pre-filing resolutions of gatekeeping issues, and cross-border issues during restructuring. Felicia Tan, however, was more doubtful. Drawing from her experience practising in Asia, Tan noted it is less common for creditors to go through a formal mediation process because it can be perceived as “backing down.” Justice Kawaley optimistically opined that, with skilful mediators, there are no limits to when mediation can be used to achieve just commercial outcomes. His only concern was that courts must also have an opportunity to develop points of law of public importance. Finally, Chief Justice Morawetz discussed the use of mediation in the context of pensions disputes. For retirees seeking quick resolutions of pension claims against their insolvent former employers, mediation is often a more attractive option than litigation, as it is designed to be a more expedient process. However, a judicial resolution may be better for finality and commercial certainty.

The second topic was the effectiveness of cross-border mediation. Justice Ramesh lamented the failure of mediation in the Oro Negro case,^[1] despite it being a “good fact pattern” for mediation. But Justice Ramesh brought up a successful mediation in another case: 70 individuals from Europe, Australia, and China had been unable to agree on a single court’s jurisdiction, and the informal nature of mediation helped bypass some jurisdictional concerns. Chief Justice Morawetz contrasted mediation with the traditional court process, noting that taking out the adversarial aspect of court processes was a key factor in successful cross-border mediations. He praised the UNCITRAL Model Law on Cross-Border Insolvency^[2] and called “communication and cooperation” its “major components,” making mediation a natural fit for insolvency disputes governed by national laws based on the Model Law. However, he emphasized two points that were crucial for cross-border mediation: faith in the foreign jurisdiction where the mediation takes place, and faith in the mediator themselves.

The third topic considered the effectiveness of mediation between a creditor and a solvent entity related to the insolvent party, typically a parent corporation. Tan asserted that such a connection is fundamental: some entity must be solvent for mediation to work at all. Chief Justice Morawetz agreed: if one party has “nothing to lose” in litigation, such as when an entire corporate group is insolvent, then mediation becomes problematic.

On the fourth topic, which considered mediation between only a single creditor and debtor, Tan raised the issue of unfair preferences or clawbacks. To avoid these issues, a creditor might prefer a court process, despite the risk of “los[ing] everything”. Chief Justice Morawetz described insolvency proceedings as a class remedy, so mediation must bring finality for the entire class in order to be effective. Two-party mediation undermines this goal: if more parties are brought to the table after a private deal, the mediator must revisit what they have done, creating an unhelpful “circular” motion.

On the fifth topic, compulsory mediation of insolvency disputes, the panelists diverged. Justice Ramesh said that compulsory mediation stops parties from making partial bargains, and thereby avoids issues downstream in the restructuring process. As examples of successful compulsory mediation provisions, he cited the US Bankruptcy Court of the Southern District of New York’s June 2013 General Order^[3] and the European Commission Recommendation of March 2014.^[4] Justice Kawaley took an opposing stance, calling mediation fundamentally “a consensual process.” Instead of forcing the parties into mediation, a judge could confer a mediation role onto a provisional liquidator. Chief Justice Morawetz agreed: the monitor observing an insolvency proceeding can recommend mediation to the court. It all depends on the willingness of both parties to enter into some kind of settlement with each other.

Next, Toube asked the panelists to consider unsuccessful mediations, and what makes them unsuccessful. Chief Justice Morawetz brought up the four Nortel mediations,^[5] of which only the last was successful. He listed some reasons for the initial failures: no secured creditors, novel legal issues, regulators’ involvement, and a large asset pool. Justice Kawaley identified some factors for determining a mediation’s success, including the likelihood of asset recovery and the “human dimensions” between the parties, like perceived affronts to personal dignity.

The seventh topic dealt with whether mediation can be successful in the restructuring context, as well as the insolvency context. Justice Kawaley brought up the SPhinX case,^[6] in which Toube had served as counsel, where mediation resolved a dispute between secured and unsecured creditors during a restructuring. Justice Ramesh contrasted this with a case where the critical creditors held out and refused to talk, without offering reasons why. He noted that parties are not obliged to offer reasons in such a context, and also not obliged to settle; although mediation seemed to be a good fit for the dispute, there was no option but to continue to a judicial resolution.

The eighth topic was whether sitting judges should mediate. Justice Kawaley brought up family mediation by judges, but he raised concerns about scarce judicial resources and the ability of judges in the Cayman Islands (or other such offshore jurisdictions) to solve disputes happening elsewhere. Chief Justice Morawetz’s opinion differed slightly, stating that judges are already involved in case management, so little extra is required for them to mediate. However, he agreed with Justice Kawaley’s point about scarce judicial resources, especially during the COVID-19 pandemic.

On the ninth topic, the panel agreed unanimously that mediated settlements must have some reliable enforcement regime. Tan cited the Singapore Convention,^[7] in force as of September 12^th, which provides that mediated agreements can be registered in both the Singapore courts and another country which has ratified the Convention. If agreements were not broadly enforceable in an expeditious manner, Tan suggested, mediating would be a waste of the parties’ time. Justice Kawaley said that the very purpose of an agreement is enforceability. All that is required are clear terms signifying the agreement was intended to be binding, and it can be enforced as any other contract without the support of the Singapore Convention.

A name frequently invoked during discussion was former Judge James Michael Peck, who oversaw the bankruptcy proceedings of Lehman Brothers after its infamous collapse during the 2008 financial crisis.^[8] Justice Ramesh praised former Judge Peck’s mediation protocol, which recognizes the mediator’s quasi-adjudicatory role, while noting that even former Judge Peck oversaw an unsuccessful mediation in the Oro Negro case. Chief Justice Morawetz also cited former Judge Peck’s 2019 lecture to the Singapore Academy of Law,^[9] in which he emphasized that mediators more than anything else must come to understand the parties and their positions and their underlying interests; by doing so, the mediator can obtain leverage – identifying the wedge issue that, if addressed, will kickstart negotiations.

The panel discussion concluded with a short and succinct word of wisdom from Toube: no matter how skilful the mediator, they need “participants who are willing to participate” to reach a mediated settlement.