Insolvency frequently intersects with arbitration, raising complex procedural and strategic questions when companies enter financial distress. In this SCC Spotlight Talk, we speak with Emma Berglund Uväng, co‑head of Schjødt’s Insolvency group and a leading insolvency practitioner, about how bankruptcy affects ongoing and contemplated arbitral proceedings in Sweden.

Emma shares her insights on the role of the bankruptcy estate in arbitration, including the considerations behind whether to enter, take over or initiate disputes, and how issues of cost exposure, recovery prospects and timing influence these decisions.

Is it common for disputes to be ongoing when bankruptcies are initiated?

It is not uncommon for a company entering bankruptcy to be a party to a dispute at the time bankruptcy is initiated. In some cases, the dispute may even be a triggering factor for the bankruptcy itself. For instance, a company may be sued and lack the financial capacity to continue defending the claim, leading it to apply for bankruptcy instead.

When a bankrupt company is a defendant in ongoing arbitration at the commencement of bankruptcy, the arbitral tribunal will enquire whether the bankruptcy estate wishes to enter the proceedings alongside the debtor. In such circumstances, it is extremely rare for the estate to choose to enter the proceedings. The bankruptcy estate’s primary focus is to maximise assets rather than to minimise debts. Should the estate enter the dispute and lose, it may become liable for arbitration costs relating to both the period before and after its entry into the proceedings.

If the bankrupt company is the claimant in a dispute at the commencement of bankruptcy, the court or arbitral tribunal will enquire whether the estate wishes to take over the claim. The bankruptcy estate conducts an analysis of the procedural situation, considering:

• Does the bankruptcy estate have a reasonable prospect of success?
• Does the counterparty have the ability to pay?
• Can the estate bear potential liability for the counterparty’s litigation costs in the event of a loss?

If the bankruptcy estate chooses to take over the claim, it becomes liable for arbitration costs jointly and severally with the claimant debtor for the period before bankruptcy, and solely liable thereafter. If the estate declines to take over the claimant debtor’s action, any property recovered through the proceedings belongs to the bankrupt claimant debtor personally, not to the bankruptcy estate. This reflects the strict separation between the bankrupt company and the bankruptcy estate under Swedish insolvency law.

Can the bankruptcy estate change its decision?

If the bankruptcy estate regrets its decision not to enter a dispute, it may reverse this decision provided the dispute remains in arbitration. In court, it is not possible for the bankruptcy estate to reconsider if the dispute is not at the same instance as when the original decision was communicated. If the bankruptcy estate regrets having entered a dispute, the consequence is equivalent to withdrawing the action, meaning the bankruptcy estate becomes liable for arbitration or litigation costs.

Can the bankruptcy estate initiate disputes during bankruptcy, and if yes, what considerations are made?

The bankruptcy estate may initiate disputes during the bankruptcy proceedings. These may concern, for example, collecting outstanding customer receivables, claiming damages, pursuing claw-back claims, or bringing actions regarding unlawful value transfers.

Before initiating any dispute, a bankruptcy estate makes careful considerations. There is no scope to pursue arbitration or litigation merely to set a precedent or test a point of principle. Rather, the bankruptcy estate must have a genuine belief that it will succeed and that the counterparty has the financial capacity to pay, thereby adding funds to the bankruptcy estate.

Whilst it is not uncommon for a bankruptcy estate to make claims with threats of legal proceedings, it is relatively unusual for disputes to progress to full hearings in court or examination by an arbitral tribunal. Instead, the bankruptcy estate’s claims often result in negotiated settlements.

Bankruptcy is a winding-up procedure that should proceed expeditiously. Many creditors wish to receive their distribution promptly rather than wait for an arbitral tribunal’s decision. Additionally, if in the bankruptcy estate’s assessment the counterparty lacks the ability to pay, it is usually preferable to reach a settlement rather than pursue a dispute where the bankruptcy estate may succeed with its dispute but risks receiving no payment.

Is the bankruptcy estate bound by an arbitration clause?

If a dispute concerns a matter subject to an agreement containing an arbitration clause, the bankruptcy estate is generally considered bound by it. However, regarding disputes initiated by the bankruptcy estate concerning claw-back claims and unlawful value transfers, the bankruptcy estate is not bound by any arbitration clause.