Bankruptcy Cases Not Arbitrable In Kyrgyzstan

kyrgyzA decision of the Supreme Court of Kyrgyzstan of 20 August 2013 confirms that bankruptcy issues are not capable of settlement by arbitration under the laws of Kyrgyzstan. The decision may be seen as a clarification that the relevant restriction applies both to domestic and international arbitration.

Facts of the Case

In a contract concluded in 2008, German Berlin Chemie AG and Kyrgyz OsOO Vital Pharma agreed that all disputes, controversies, and claims which may arise in connection with the contract, its termination, change, or invalidity shall be decided by the International Commercial Arbitration Court at the Moscow Chamber of Commerce and Industry in accordance with its rules.

It appears that Vital Pharma did not make certain payments they had promised to make. Berlin Chemie consequently filed a motion in the Inter-Rayon Court of the City of Bishkek to have Vital Pharma declared bankrupt. Berlin Chemie submitted that it would not be necessary to go to arbitration, as Vital Pharma had already acknowledged the debt. However, it also appears from the case file that Vital Pharma disputed at least the amount of the debt.

The court did not grant Vital Pharma’s request to discontinue the proceedings, which was presumably based on the arbitration clause in the contract. Instead, it handed down a decision to leave Berlin Chemie’s motion without examination. In doing so, the court possibly relied on provisions of Kyrgyz law which establish that a motion to have a debtor declared bankrupt may be left without examination if the creditor who had filed that motion had not, at the same time, submitted evidence to substantiate its request. Such evidence may include a previous confirmation of the creditor’s claims in separate judicial or arbitral proceedings.

Berlin Chemie filed an appeal against the part of this decision that left the motion without examination. On 5 June 2013, the Judicial College for Administrative and Economic Cases of the Bishkek City Court granted the appeal and remanded the case to the first instance court for an examination of the merits.

The Supreme Court decision

The Supreme Court of the Republic of Kyrgyzstan confirmed the appellate court’s holding.

Responding to Vital Pharma’s reliance on the arbitration clause, the court invoked Article 27(4)(1) of the Kyrgyz Law “On Bankruptcy (Insolvency)”, according to which cases on bankruptcy may not be submitted to arbitration. Instead, it follows from Article 27-1(1) of the same law that such claims are to be examined by the court at the seat or residence of the debtor, which in the present case was Bishkek.

In addition, the court concluded that the dispute was not covered by the arbitration agreement, as the subject matter of the dispute – declaring Vital Pharma bankrupt – neither concerned the termination, change, or invalidity of the contract, nor the performance of any of its conditions.

The reported decision may be seen as a clarification that “cases on bankruptcy” are not capable of settlement by both domestic and international arbitration under the law of Kyrgyzstan. Article 27(4)(1) of the Kyrgyz Law “On Bankruptcy (Insolvency)” reads: “Cases on bankruptcy may not be submitted to examination by an arbitral tribunal.” The term translated as “arbitral tribunal” here corresponds to “treteyskiy sud” in the Russian language version of the provision. While the distinction between “treteyskiy sud” and “arbitrazhniy sud” is far from being clear throughout the CIS, the term “treteyskiy sud” arguably refers to domestic arbitration only in other CIS jurisdictions and in certain cases.

A summary of and excerpts from the reported decision will be published in the Yearbook Commercial Arbitration 2014.

Michael Wietzorek

About the Author:

Michael Wietzorek is a Junior Associate with Stibbe in Luxembourg where he practices mainly corporate and finance law. He has provided administrative and research assistance to arbitrators and counsel in commercial, investment, and sports arbitrations under the ICC, DIS, ICSID, UNCITRAL, VIAC, and CEAC Hamburg Rules, as well as in ad hoc arbitrations. Michael holds a law degree from the University of Erlangen-Nuremberg and is admitted to the bar in Dusseldorf as well as registered with the bar in Luxembourg.

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