The Structural Implications of Belt-and-Road Arbitration: China’s Legal Gamble across Eurasia – Kluwer Arbit ration Blog

http://arbitrationblog.kluwerarbitration.com/2018/03/19/structural-implications-belt-road-arbitration-chinas-legal-gamble-across-eurasia/

The Structural Implications of Belt-and-Road Arbitration: China’s Legal Gamble across Eurasia

Horia Ciurtin/March 19, 2018

The Belt-and-Road Initiative (“BRI“) is a grand vision about connectivity, infrastructure, trade and unimpeded foreign direct investment (“FDI“) flows. It is a path to China’s largest export market 1) – the European Union – which does not only propose to ‘transit’ Eurasia (and coastal East Africa), but to radically transform it. And, thus, mere construction and outpours of capital do not suffice for such an ambitious project. The scale and depth of the BRI require a substantial ‘investment’ in establishing a common normative nexus. For connectivity to actually exist as a functional feature of the project, it must also – on the long-term – take the shape of legal harmonization.

However, in this initial phase of the BRI, more modest objectives need to be achieved. And China has taken small – but firm steps – in this direction. Thus, while previously considered a problematic jurisdiction for arbitrating commercial disputes (and a difficult Respondent in investment litigation), China’s status has significantly improved in the last few years. As it envisions itself to rather be the source of investors and contractors along the Belt-and-Road (and not a destination for FDI), Beijing is seeking legal mechanisms to ensure the protection of Chinese companies’ interests abroad.

For this reason, China is well set on the course of strengthening CIETAC and also offering it – for the first time – a clear set of rules 2) that will deal with investor-state disputes. However, if ADR as a whole is considered, it must be noted that China still favors mediation (usually state-to-state driven) as a manner of solving disputes, seeing arbitration as a measure of last resort. Nonetheless, it got involved in ensuring that this legal ultima ratio is circumscribed within a discernable pattern which is not so different from similar measures proposed by Western states. It might be a form of globalization with Chinese characteristics – as Beijing likes to portray it – but it does not diverge too much from the beaten track regarding international arbitration.

Returning to the BRI’s intrinsic (and necessary) relationship with arbitration, it must be ascertained that it is the only viable way to ensure a stable and predictable framework for solving disputes over such a large area, with dozens of different jurisdictions, legal cultures and diverging geoeconomic interests. Most of the states that will become part of the BRI are not consolidated democracies, lacking independent judiciaries and national courts that uphold the rule of law. And that might be a problem for Chinese investors which will – inevitably – face the risk of (creeping) expropriation or breaches of the FPS and FET standards. And thus, although arbitration might not be the preferred solution for China, it is the best answer to such systemic risks.

On the other hand, for companies along the Belt-and-Road that trade, construct and invest in the opposite direction, targeting the Chinese mainland as a destination for their goods and FDI, arbitration against China (and within China) still remains problematic. Especially on the enforcement side. The judiciary is sometimes less than collaborative and – although it might permit enforcement on a regular basis – it strongly takes into consideration matters of public policy and personal ties to the Party members involved. Most large Chinese private entities are linked with the Party nomenklatura one way or another, representing a matter that BRI investors need to carefully take into account.

In this sense, China might seek to improve some procedural aspects of arbitration within its territory, but it will stick to its ‘systemic’ approach of favoring state-owned entities and Party-linked companies, even by making enforcement against them extremely difficult. On the short term, it is unlikely that significant improvements will take place where there are high stakes involved. Especially if they are in any way linked to the political scene. However, what can be expected is a more predictable framework and improved procedures in the statutes. How they will work in practice, it is difficult to tell.

Thus, even the recent enactment of the CIETAC ‘investment arbitration rules’ seems to be – at this stage – more an exercise in wishful thinking and PR for the BRI. Its practical effects upon existing BITs from the third generation that offer ICSID rules or UNCITRAL rules as possibilities. But such new rules might – nonetheless – impact the manner in which the Belt-and-Road contracts and treaties will be further modelled. If ‘legal traditions’ and ‘customs’ are taken into consideration when developing the arbitration framework, that will give a high margin of appreciation to the arbitrators that will be called to rule upon those disputes. Of course, if China has sufficient leverage on one country, it can renegotiate the existing BIT and introduce a mandatory reference to its new rules, but it is unlikely that many states will switch ICSID or UNCITRAL rules for CIETAC. Or choose an arbitral seat anywhere in Chinese mainland territory.

And that is why the Belt-and-Road is dependent upon a ‘string’ of regional arbitral venues that fulfil all the impartiality and quality requirements for every party involved. More precisely, in East and Southeast Asia, Hong Kong proves to be an excellent choice for the seat’s jurisdiction when arbitrating with Chinese entities. Its legal system comes from a long Anglo-Saxon tradition of upholding the rule of law and an independent judiciary. The quality of the arbitral institutions is extremely high (see the HKIAC, ICC-HK), as well as of local arbitrators. The enforcement is quite swift (compared to mainland China) and it is within the bounds of what a Western-based investor would expect. In addition, for this region, the Singapore International Arbitration Centre is also a good choice, benefitting from the same qualities as Hong Kong and – even more – a total disconnection with Chinese authorities.

On the other hand, in Central Asia, the Middle East, the Balkans or Eastern Europe, the offer is quite scarce. The projected arbitral venue 3) in Astana is still just in blueprint phase, while Moscow and Teheran do not have a consistent track record in large commercial arbitration (and no experience in investment disputes). That could, perhaps, leave Istanbul on-route and – for the BRI end-point – one could consider the Vienna International Arbitral Centre. Otherwise, almost all other parties will consider using Hong Kong, Singapore or a traditional Western-based institution.

For these reasons, China must seriously invest in developing a network of sister-institutions along the entire BRI, each having a regional focus. Unitary rules could be adopted, drafted along the UNCITRAL ones, but with additional provisions that allow the BRI specifics to emerge. CIETAC ones might work just fine for Chinese companies that wish to settle a dispute against foreign entities or sovereigns, but they could prove insufficient and inadequate for a litigation going the other way round. And that is where such regional centers – ‘decoupled’ from China’s state apparatus – need to emerge. As a measure to build confidence and to symbolically reveal all other parties that Beijing is accepting to be bound by clear and transparent rules, well beyond its jurisdiction.

To make sure you do not miss out on regular updates on the Kluwer Arbitration Blog, please subscribe here.

1. http://www.ier.ro/sites/default/files/pdf/Final_Policy%20Brief%205_Horia%20Ciurtin%20-%20A%20Pivot%20to%20Europe_web.pdf
2. http://www.kwm.com/en/knowledge/insights/new-cietac-investment-arbitration-rules-english-chinese-treaty-disputes-20171115
3. http://arbitrationblog.kluwerarbitration.com/2017/08/06/astana-international-financial-centre-aifc-court-international-arbitration-centre-legal-systems-based-english-common-law

Advertisements

EMPLOYEES CLAIMS AND THE TREATMENT OF CONCURRENT CREDITORS IN A BUSINESS RESCUE – By Don Mahon, Lisa-Marie Bowes and Kyle Telfer

The Employer generally gets the employees he deserves.” – J. Paul Getty

 

The introduction of the Business Rescue regime into South African Company Law has been a boon for litigators, whilst stakeholders and business rescue practitioners navigate their way through a minefield of difficult legislative provisions in an effort to give effect to the purpose of the regime.

In this article, we intend dealing with two aspects, namely:

  • a proper interpretation of section 135 of the Companies Act 71 of 2008 (“the Act”) dealing with the preferent rights of employees; and
  • whether creditors are obliged to accept a payment of less than what is owed to them, on the basis that their claims may be classified as concurrent.

 

A Proper Interpretation of Section 135 of the Act

 

Section 135 of the Act provides as follows:

(1)    To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company’s business rescue proceedings, but is not paid to the employee –

  • the money is regarded to be post-commencement financing; and
  • will be paid in the order of preference set out in subsection (3)(a).

(3)     After payment of the practitioner’s remuneration and expenses referred to in section 143, and any other claims arising out of the costs of the business rescue proceedings, all claims contemplated –

(a) in subsection (1) will be treated equally, but will have preference over –

(i) all claims contemplated in subsection (2), irrespective of whether or not they are secured; and

(ii) all unsecured claims against the company…

(4)     If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.

[Our emphasis]

The question arises as to what meaning must be attributed to the words “becomes due and payable”. Although the section, at first blush, does not induce a sense of ambiguity, upon closer analysis it appears that two possible interpretations could be extracted from the wording used, as is set out more fully below.

It has been held that a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See    White v Municipal Council Of Potchefstroom 1906 TS 47; And HMBMP Properties (Pty) Ltd V King 1981 (1) SA 906 (N) At 909d

It has also been held that the word “payable” means “that which may be paid or may have to be paid” and that “payable by him” means “for which he is liable in respect of such future loss”.

See    Marine & Trade Insurance Co Limited V Katz No 1979 (4) SA 961 (A) at 975-976

It can therefore be observed that if a debt is “due” then it must also be “payable”, but that a debt may be “payable” without yet being “due”.

A preliminary examination of section 135 of the Act discloses, in our view, two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

In order to overcome the interpretational difficulty posed by section 135, one must apply the principles enunciated by Wallis JA in the judgment of Natal Municipal Joint Pension Fund v Endumeni 2012 (4) SA 593 (SCA).

We are thus enjoined to attribute meaning to the words used, having regard to the context provided by reading the particular provision in the light of the statute as a whole, giving due consideration to the language used in the light of the ordinary rules of grammar and syntax, the context in which the provision appears, the apparent purpose to which it is directed, and to weigh each possible interpretation against each of these factors. A sensible meaning is to be preferred to one that leads to insensible or un-businesslike results or one that would undermine the purpose of the Act.

The purpose of the Act can be ascertained from section 7 thereof, the most apposite subsection being section 7(k), which directs the purpose of the Act to “… the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders …”.

Section 144(2) of the Act provides that:

To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment became due and payable by a company to an employee at any time before the beginning of the company’s business rescue proceedings, and has not been paid to that employee immediately before the beginning of those proceedings, the employee is a preferred unsecured creditor of the company for the purposes of this Chapter.

It can immediately be observed that section 144(2) refers to amounts of money which became “due and payable” prior to the commencement of business rescue proceedings where a mere reference to a debt which had become “due” would suffice to bear the same meaning. One can therefore not presume that the Act necessarily seeks to distinguish between debts which are due and payable on the one hand, and debts which are payable but not due on the other hand.

If the provisions of section 135 were to be interpreted on the basis that they refer only to debts which became payable during business rescue and not before, this would lead to insensible or unbusinesslike results or a result that would undermine the purpose of the Act.

We say this because, implying such an interpretation, the Act would give preferent status:

  • to employees to whom payment had become due prior to the commencement of business rescue proceedings; and
  • to employees in respect of whom employment-related claims arose and became due during business rescue proceedings.

Protection would, however, on such an interpretation, not be afforded to employees in respect of whom employment-related claims arose prior to business rescue but which only became due subsequent to the commencement of business rescue. We fail to see any legitimate basis for seeking to exclude this category (and only this category) of employees from the protection afforded by the Act through preferent status.

It would be more reasonable and businesslike, in our view, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is both due and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). In our view, an employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2).

 

­Can Concurrent Creditors Lose the Right to Enforce Their Debt or a Part Thereof

 

We have witnessed an increasing practice on the part of Business Rescue Practitioners to make provision in the proposed business rescue plan for payment to creditors which they have classified as concurrent, of a concurrent dividend which is less than the full amount of their claim. This is similar, in principle, to how concurrent creditors are treated in liquidation proceedings.

Where all of the creditors concerned agree to such a proposal, no difficulty arises. However, can a creditor be forced to accept such a proposal, if he has unsuccessfully voted against the adoption of the proposed business rescue plan?

In our view, this approach is contrary to the provisions of section 154(1) of the Act which provides as follows:

A business rescue plan may provide that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of a whole or part of a debt owing to that creditor will lose the right to enforce the relevant debt or part of it.

In DH Brothers Industries v Gribnitz No 2014 (1) SA 103 (KZP) At Para [67], Gorven J held that a business rescue plan may only provide that a creditor “who has acceded to the discharge of a whole or part of a debt” may be deprived of the right to enforce its claim. Since section 152(4) makes an adopted plan binding on non-consenting creditors and section 154(2) allows enforcement of pre-business rescue debts only to the extent allowed for in a plan, any provision in a plan which goes beyond a voluntary discharge of a whole or part of a debt is not competent.

We are mindful of the provisions of section 128(1)(b)(iii) of the Act, which contemplates a plan which results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company under circumstances where it is not possible for the company to continue to exist on a solvent basis.

At first blush this would seem to suggest that a business rescue plan may lawfully contemplate the discharge of a portion of debts owed to concurrent creditors for so long as the dividend which is paid to such creditors would constitute a better return than that which would prevail in the event of an immediate liquidation.

However, the Supreme Court of Appeal, in Oakdene Square Properties v Farm Bothasfontein (Kyalami) 2013 (4) Sa 539 (SCA) at para [33], has held that an alternative, informal kind of winding up of the company outside the liquidation provisions of the 1973 Companies Act was not the intention of the legislature when creating business rescue as an institution and that a winding-up of the company in order to avoid the consequences of liquidation is not what is contemplated by the Act.

A similar view was taken in the decision of Gormley v West City Precinct Properties (Pty) Ltd And Another, Anglo Irish Bank Corporation Ltd V West City Precinct Properties (Pty) Ltd And Another (19075/11, 15584/11) [2012] ZAWCHC 33 (18 April 2012) At Para [12].

In light of these decisions, one cannot help but wonder what was intended by the latter provisions of section 128(1)(b)(iii) of the Act and, as far as we are aware, the Supreme Court of Appeal is yet to provide meaningful guidance in this regard in light of what is stated Oakdene.

 

Adv Don Mahon

Attorney Lisa-Marie Bowes

Attorney Kyle Tristan Telfer