Introduction

It is bad business for an Award Creditor (one in whose favour an award has been issued) to find itself faced with a pyrrhic victory i.e., an Award that cannot be satisfied on account of an absence of assets belonging to the Award Debtor (the party against whom the Award has been issued). No one wants to throw good money after bad money, not to mention the wasted time and resources that would be involved in what would be a futile exercise.

As such, prior to commencing arbitral proceedings, it is expected that a diligent litigant will have engaged an inquiry agent to establish the existence and adequacy of assets that can be realised to satisfy an arbitral Award obtained in its favour.

Where assets have been identified, monitored and/or preserved during the pendency of arbitral proceedings, enforcement is generally straightforward. Unless there is a setting aside application or other serious legal challenge to enforcement, the process simply involves applying for recognition and enforcement of the arbitral Award in the jurisdiction where the Award Debtor holds assets, followed by the realisation of those assets to satisfy the Award. In some cases, the Award Debtor has assets and realisation of those assets to satisfy the arbitral Award is not difficult. This is the ide- al enforcement scenario. However, for a number of reasons, most arbitrations do not necessarily commence in that neat and tidy fashion.

In most cases, diversion of assets or insolvency of the Award Debtor will be discovered at the tail end of the arbitration when an Award has been issued. The reasons for the late discovery of diversion or the insolvency of an Award Debtor could be because there is some sort of urgency in commencing the arbitration and no time to undertake the preliminary steps discussed above; a looming limitations period or time bar; the cost of undertaking an asset inquiry may be prohibitive; or the diversion of assets and insolvency occurs in the course of the arbitration or after the issuance of an Award, amongst many other reasons.

In such a scenario, there are a number of options that may be available to the Award Creditor as discussed below:

i.  Insolvency Proceedings

Insolvency proceedings in Kenya include liquidation, administration, receiverships, Company Voluntary Arrangements (CVA) and Scheme of Arrangement (SOA). On the face of it, insolvency proceedings do not seem ideal as an Award enforcement tool in view of the ranking of creditors, given that the debt arising from an arbitral Award is always considered an unsecured debt and can only be settled after priority debts such as taxes, insolvency costs and secured creditor debts have been settled.

However, insolvency proceedings can prove to be a useful and effective enforcement tool for the disclosure and access to accurate information as to the Award Debtor’s assets and liabilities, including their location. It also allows for discovery of the existence of voidable transactions in the case of fraud or dissipation of assets by the directors of the Award Debtor, which may allow the insolvency practitioner (IP) to pursue the directors personally for the Award or unwind (or claw back) fraudulent or asset-diverting transactions.

However, when considering using insolvency proceedings as an enforcement tool, the following factors should be taken into account:

• The existence of priority or competing creditors vis-à-vis the availability of sufficient assets within the jurisdiction to settle the collective liability of all creditors.
• Whether the country that the award is to be enforced in is a signatory of the New York Convention or the United Nations Trade Commission on International Trade Model Law on Cross-Border Insolvency, which allows for the recognition of foreign insolvency practitioners.
• The type of insolvency proceedings is also a key consideration. For instance in Kenya, unsecured creditors have a better chance of recovery in an administration and CVA process rather than a liquidation or receivership. This is because in administrations, twenty percent (20%) of the assets of the Award Debtor have to be reserved for the unsecured creditors and in CVAs, the priority and ranking of creditors does not necessarily apply.
• The type or the nature of the asset available for realization in satisfaction of an arbitral Award is also an important consideration. If the assets are in the form of proceeds or receivables and unique assets that cannot be sold in whole but may need to be cannibalised, receivership or administration rather than liquidation may be the preferred enforcement mechanism.
• The amount of control that the Award Creditor has over the preferred insolvency process. The more control the Award Creditor has in the insolvency process the more likely it is to achieve its objective to enforce its arbitral award. There is less control over CVA proceedings in comparison to administrations, receiverships and liquidations, as this process is controlled entirely by the Award Debtor’s directors.
• There may be some benefit in first mover advantage i.e., where the Award Creditor is involved in the selection and appointment of the IP rather than relying on another creditor to ap- point the IP. This will ensure that the appointed IP is experienced, professional and has a clear understanding of his or her role and obligations and the objectives of the Award Creditor.

One may also consider selecting IPs from the same firm across various jurisdictions to allow for a coordinated approach where the assets of the insolvent Award Debtor are scattered across various jurisdictions.

Other than the foregoing, some other important considerations include: the requirement for leave of the court to commence or continue enforcement proceedings against an insolvent Award Debtor; whether one can commence insolvency proceedings prior to recognition of the award i.e., will it be considered a proven unsecured debt for purposes of ranking; whether the settlement of an arbitral award by an insolvent Award Debtor can be considered an unfair preference; and whether shadow directorships have been created.

One of the ways in which one can attempt to enforce an arbitral award against the assets of a related third party, such as a subsidiary of the Award Debtor, is by placing the parent holding company in liquidation, administration or receivership, which allows the IP to take control of the board of the parent company, which in turn controls the board and assets of the asset or receivable-rich subsidiary.

ii.  Enforcement Against Related Third-Parties

Enforcement against a related third-party can be considered in circumstances where the Award Debtor is a holding company of an asset-rich or receivable-rich subsidiary. However, separate corporate personality is the biggest obstacle to an attempt to enforce an arbitral award against a third-party entity as opposed to an insolvent Award Debtor. Most Commonwealth jurisdictions still uphold the sanctity of the separate corporate personality of a company save in very limited exceptional scenarios.

One of the ways in which one can attempt to enforce an arbitral Award against the assets of a related third-party, such as a subsidiary of the Award Debtor, is by placing the parent holding company in liquidation, administration or receivership, which allows the IP to take control of the board of the parent company, which in turn controls the board and assets of the asset or receivable rich subsidiary.

Courts may also issue tracing, preservation and vesting orders against the assets of subsidiaries or special purpose vehicles (SPVs) of an insolvent holding company that is an Award Debtor on grounds that the funds that were paid by creditors to the Award Debtor were fraudulently invested in the subsidiaries and SPVs and the Award Debtor was merely a shell.

Courts may also pierce the corporate veil of an Award Debtor and its subsidiaries in the case where it can be demonstrated that an Award Debtor fraudulently diverted or transferred its assets to related third party entities just before or in the course of the arbitral proceedings with a view to defeating or frustrating the enforcement of a valid arbitral Award against the Award Debtor.

iii.  The Appointment of an Equitable Receiver

The Civil Procedure Rules of most Commonwealth countries al- low for the appointment of an equitable receiver over any property of the Award Debtor (assuming that recognition of the Award has been granted and it is now a Decree of the Court) where it is just and equitable to do so. In this case, one may apply for attachment or a charge and collection of dividends of the shares held by the Award Debtor in an asset or receivable rich subsidiary.

Upshot

Based on the foregoing, it is plausible for an Award Creditor to enforce an arbitral Award by instituting insolvency proceedings against the Award Debtor or its asset or receivable-rich related third-parties; and through the appointment of an equitable receiver.

Whatever means of enforcement are eventually resorted to, an Award Creditor is better placed when it has various viable options available to it, as it through the exercise of such options that the fruits of the Award might ultimately be realised.