Hungary: arbitration agreement is not binding on insolvent claimant

By Zoltán Fabók

A recently published ruling of a Hungarian regional court of appeal has held that the enforcement of claims by an insolvent claimant in arbitration is contradictory to the aims of the insolvency proceedings and to a creditor’s interests. Consequently, an arbitration agreement may not be binding in Hungary in circumstances where a potential claimant is insolvent.

This conclusion is not inconsistent with the approach taken in some other European jurisdictions, on the basis of the significance of insolvency proceedings. Ongoing arbitral proceedings can be suspended or even terminated on the basis of insolvency, and parties may be prevented from commencing an arbitration once insolvency proceedings are under way against one of them. The question of whether this is justifiable in the arbitration context is debatable, but the extraordinary nature of insolvency proceedings often overrules contracts and property law. It is harder in those circumstances to make the case for arbitration being an exception to these rules.

The Hungarian Insolvency Act indirectly prohibits arbitral proceedings in circumstances where there is an outstanding monetary claim against the insolvent party. This is because once insolvency proceedings have been commenced against a debtor, any monetary claims against the debtor can only be enforced by lodging the claim with the administrator. If the administrator does not recognise the claim then, as a general rule, the bankruptcy court has exclusive jurisdiction to decide the disputed claim. Since it has exclusive jurisdiction, it logically follows as a matter of Hungarian law that once liquidation proceedings have been commenced, no arbitration proceedings can be initiated against an insolvent debtor…

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