Insolvency and Arbitration

INSOLVENCY AND ARBITRATION:Insolvency:An incapacity to pay debts upon the date when they become due in the ordinary course of business; the condition of an individual whose property and assets are inadequate to discharge the person's debts. 1) The condition of having more debts (liabilities) than total assets which might be available to pay them, even if the assets were mortgaged or sold. 2) A determination by a bankruptcy court that a person or business cannot raise the funds to pay all of his/her debts. The court will then "discharge" (forgive) some or all of the debts, leaving those creditors holding the bag and not getting what is owed them. The supposedly insolvent individual debtor, even though found to be bankrupt, is allowed certain exemptions, which permit him/her to retain a car, business equipment, personal property, and often a home as long as he/she continues to make payments on a loan secured by the property.

Conditions for Insolvency:There are four conditions that all must be fulfilled:

1.

Proceedings must be collective, and therefore all creditors concerned may seek satisfaction only through these insolvency proceedings, as individual actions will be precluded;

2. The proceedings must be based on the debtors insolvency and not on other grounds where the test of insolvency is based on the law applicable in the Member State within which a court opens such proceedings;

3. The proceedings must entail the total or partial divestment of the debtor; and 4. The proceedings should entail the appointment of a liquidator. Acts of Insolvency:Insolvency i.e., the inability to pay ones debts as they fall due is primarily governed in Pakistan in the case of individuals under the Provincial Insolvency Act, 1920 (the Insolvency Act), (Insolvency (Karachi Division) Act, 1909, for

courts exercising jurisdiction within Karachi Division) and the Companies Ordinance, in the case of the winding up of corporate entities.

Order of Adjudicating:The law of personal insolvency is antiquated and dates back to 1920. Insolvency proceedings against individuals are rarely filed, as the proceedings are slow and cumbersome. Under the Insolvency Act a District Court has jurisdiction to deal with insolvency issues. The creditor or the debtor himself brings a petition to the court upon occurrence of an act of insolvency where after the court may pass an order of adjudging the debtor an insolvent called an order of adjudication. A wide variety of acts constitute acts of insolvency and include a fraudulent preference, disappearance of the debtor with the intention of delaying or defeating the payment to the creditors, sale of the property in execution of the decree of any court for the payment of money or the imprisonment in execution of a decree for the payment of money. Pending adjudication the insolvency court has the power to detain the debtor in a civil prison and order the attachment of his property.

Discharge of Insolvent:The court may, after passing an order of adjudication, discharge the debtor. However, an order of discharge shall not release the debtor from his debts due to the government, any debt or liability incurred by means of a fraud and any liability under an order for the maintenance of his wife or children. The company law imports into the winding-up of insolvent companies the rules as are in force for the time being under the law of insolvency. The legal status of an undischarged insolvent carries with it certain disabilities that prevent him from conducting certain businesses. For instance, if an undischarged insolvent receives a credit of Rs.50 or more without disclosing his legal status to his creditor he shall be punishable on conviction for a term of up to six months, while a fine can also be imposed. Under the Insolvency Act an insolvent stands disqualified from being appointed or acting as a magistrate; or being elected to any office of any local authority where the appointment to such office is by election or holding any such office to which no salary is attached; and being elected or sitting or voting as a member of any local authority. These disqualifications are removed if the order of adjudication is annulled because all debts have been paid in full or if the court finds that the order should not have been passed in the first place. In addition, the company law, too, prescribes a two years imprisonment and fine for an undischarged insolvent in case he acts as a director, chief executive or a managing agent of a company. Some other laws too prescribe similar disabilities for undischarged insolvents.

ARBITRATION:Arbitration is a dispute resolution process in which the disputing parties present their case to a third party intermediary (or a panel of arbitrators) that examine all the evidence and

then make a decision for the parties. This decision is usually binding. Like court-based adjudication, arbitration is adversarial. The presentations are made to prove one side right, the other wrong. Thus the parties assume they are working against each other, not cooperatively. Arbitration is generally not as formal as court adjudication, however, and the rules can be altered to some extent to meet the parties needs. As in court-based adjudication, arbitration outcomes are typically won-lose, not win-win. Thus, the arbitrator usually decides that one side was right and the other wrong. They do not often go out of their way to develop new approaches for meeting the interests of both sides simultaneously, as a mediator would do, though if a win-win solution is apparent, the arbitrator would probably recommend it.

Parties to arbitration:The parties to an arbitration agreement may agree that any reference there under shall be to an arbitrator or arbitrators to be appointed by a person designated in the agreement either by name or as the holder for the time being of any office or appointment. ADR. Usually, the parties in arbitration agree that the third partys decision will be legally binding, although the parties can also agree to nonbinding arbitration. (Additionally, arbitration that is mandated by the courts often is not binding on the parties.) In nonbinding arbitration, the parties can go forward with a lawsuit if they do not agree with the arbitrators decision. In some respects, formal arbitration resembles a trial, although usually the procedural rules are much less restrictive than those governing litigation. In the typical arbitration, the parties present opening arguments and ask for specific remedies. Evidence is then presented, and witnesses may be called and examined by both sides. The arbitrator then renders a decision, which is called an award.

Classes of Arbitration:There are two main Classes of arbitration. Binding arbitration is where the parties of the dispute agree to waive their right to go to court for a decision by a judge. In non-binding arbitration the parties involved have the discretion on whether to abide by the decision made by the arbitrator. Binding Arbitration: As an alternative to judges or courts settling disputes between consumers and businesses, binding arbitration works out a deal through an independent, third-party body. Binding arbitration may save time, money, and energy when two parties disagree over a contract, the performance of a service, or the exchange of goods. The arbitrator's decision is final and cannot be disputed or appealed.

Businesses often prefer to resolve claims through binding arbitration because it is usually more private, and helps to avoid possible bad publicity that could erupt in a trial. They are also not bound to certain legal requirements, such as "discovery," whereby the persons involved in the claim have access to otherwise private information. Increasingly, lenders and distributors are requiring consumers to sign binding arbitration agreements, which might lessen the load on courts, but may also erode a consumer's constitutional rights. Non- Binding Arbitration: Non-binding arbitration is a type of arbitration in which the arbitrator makes a determination of the rights of the parties to the dispute, but this determination is not binding upon them, and no enforceable arbitration award is issued. The "award" is in effect an advisory opinion of the arbitrator's view of the respective merits of the parties cases. Non-binding arbitration is used in connection with attempts to reach a negotiated settlement. The role of an arbitrator in non-binding arbitration is, on the surface, similar to that of a mediator in mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground to compromise at, the arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable. Subsequent to a non-binding arbitration, the parties remain free to pursue their claims either through the courts, or by way of a binding arbitration, although in practice a settlement is the most common outcome. The award and reasoning in a non-binding arbitration is almost invariably inadmissible in any subsequent action in the courts or in another arbitration tribunal

Powers of arbitrator:An arbitrator is person selected by mutual consent of the parties to settle the matters in controversy between them. A person appointed to adjudicate the difference is called an arbitrator. An arbitrator is a tribunal chosen by the consent of the parties. Any person who enjoys the confidence of the parties may be selected as an arbitrator. Every person is free to choose his own judge for the settlement of any matter in controversy, and the judge so chosen, if accepted by the opposite party, becomes an arbitrator. They may choose an arbitrator by lot or in any other way. If they an incompetent or unfit person, that is their own affair. An arbitrator should be a person who stands indifferent between the parties. He should have no interest direct or remote in the subject-matter of the controversy or in the parties. Any person who is under any legal disability by virtue of statutory provision or by reason of public policy cannot act as an arbitrator. An arbitration agreement appointing a supreme head of the state as an arbitrator would be against public policy and hence void at its inception.

Powers of Arbitrator and Umpire:

It is subject to the agreement of the parties. But they cannot be compelled to exercise those powers. This section is applicable to statutory arbitration as well. The various powers are as under : (1) To administer oath to parties and witnesses appearing before him; (2) To state a special case for the opinion of the court on any question of law or state the award in the form of a special case for the opinion of the court; (3) To make the award conditional or in the alternative; (4) To correct in an award any clerical mistake or error arising from any accidental slip or omission; (5) To administer any party interrogatories.