Madras High Court: Arbitrator Fees Take Priority Amid Corporate Insolvency

Judge: Hon’ble Mr. Justice Abdul Quddhose

INTRODUCTION

The case of EDAC Engineering Ltd. v. Industrial Fans (India) Pvt. Ltd.ⁱ addresses the issue whether the fees of the arbitrator shall be considered as priority payment if any moratorium is issued by the adjudicating authority. The present case is an application under Section 39(2) of the Arbitration and Conciliation Act, 1996 (“A&C Act”) against the statutory lien exercised by the arbitrator and holding the arbitral award due to non-payment of the fees/costs.

A commercial dispute arose between EDAC Engineering Ltd. (“Applicant”)and Industrial Fans (India) Pvt. Ltd. (“Respondent”) (hereinafter collectively referred to as “Parties”) which was sought to be resolved by arbitration. Pursuant to which, a former Supreme Court judge was appointed as a sole arbitrator under Section 11 of the A&C Act to adjudicate upon the dispute. As a result of this arbitration proceeding, an award came to be passed by the sole arbitrator dated April 30, 2021. Subsequently, in light of the proceedings, the Appellant failed to pay its portion of the fees of the arbitrator amounting to INR 59,73,750 (Rupees Fifty-Nine Lakhs Seventy-Three Thousand Seven Hundred and Fifty Only). Thus, the arbitrator exercised his right of statutory lien in accordance with Section 39(1) of the A&C Act and abstained from delivering the original award to the Appellant. Parallelly, a corporate insolvency resolution process (“CIRP”) was pending and further moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 was imposed against the Appellant.

Aggrieved by the exercise of the statutory lien by the arbitrator, the Appellant filed the present application under Section 39(2) of the A&C Act praying for the release of the lien and reducing the fees and cost payable to the arbitrator.

Whether the payment of the fees of the arbitrator shall be hit by the moratorium order by the adjudicating authority.

ANALYSIS

It is the contention of the Applicant that, due to the moratorium imposed on them as a result of the pending CIRP, the arbitrator’s fees cannot be paid to the arbitrator. However, the contention of the arbitrator is that the fees was fixed on the basis of the mutual agreement between the parties recorded in the minutes of the arbitration proceedings and the Respondent has already paid the agreed fees.

On this issue, the Hon’ble Madras High Court reiterated the settled position that the fees of the arbitrator should be mutually agreed to between the parties and the arbitrator. The court analyzed the case of ONGC v. Afcons Gunanusaiiⁱⁱ where the Hon’ble Supreme Court through Hon’ble Mr. Justice Sanjiv Khanna discussed the various aspects relating to the fees of the arbitrator and stating that the fees of the arbitrator should be “agreed upon mutually and openly in a transparent manner to avoid disagreements.” Further the Hon’ble Supreme Court also stated that “the arbitrator in terms of Section 39(1) of the A&C Act, can exercise his lien over the arbitral award if any payment remains outstanding.”

Taking reference from the above judgement the Hon’ble Madras High Court in the present case held that both the Parties and arbitrator had mutually agreed to a stipulated sum as the fees of the arbitrator for the resolution of the dispute. Thus, the present applications are frivolous as the Appellant is taking a complete u-turn on the agreement of the fees and making false allegations that the arbitrator’s fee is exorbitant.

The Hon’ble Madras High Court further stated that despite knowing the credentials and experience of the arbitrator, such allegations on the part of the Appellant are without any merit or basis. The Parties had agreed to pay the arbitrator his fees in accordance with the minutes recorded in the various meetings held by the arbitrator.

In addressing the issue of fee payment during a moratorium, the court stated that the order of moratorium passed on August 08, 2023, is no bar for the payment of fees of the arbitrator who is liable to be paid for conducting the arbitration proceedings. Notably, the arbitral award was issued on April 30, 2021, predating the moratorium by 2 (two) years. The payment for the arbitrator's services is acknowledged as a liability of the Appellant and was due well before the moratorium order. The Hon’ble High Court referenced the Insolvency and Bankruptcy Board of India guidelines outlined in circular no. IBBI/IP/013/2018 emphasizing that the priority for an arbitrator's fee should be on par with that of fees for a liquidator or any other insolvency professional, the court held that the lien under Section 39(1) of the A&C Act cannot be extinguished until the arbitrator's fees are settled.

JUDGEMENT

The Hon’ble Madras High Court held that the arbitrator appointed by the court under Section 11 of the A&C Act must be given preferential status for his payment of fees. The fees of the arbitrator stand on a higher pedestal and must be treated as a priority payment. The arbitrator being an adjudicator cannot be left helpless. Even in the case of pending CIRP, the pending fees and costs of the arbitrator cannot be deferred.

CONCLUSION

The Hon’ble Madras High Court in this case has taken a stand for the arbitrator asking the Appellant to repay the balance amount as due and payable by him by stating that the balance amount of fees of the arbitrator was an admitted liability, amounting to a debt. However, it must be noted that the Hon’ble Delhi High Court in the case of SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd.ⁱⁱⁱheld that any recovery of amount from the corporate debtor shall be barred during CIRP. Additionally, the same court in Power Grid Corporation of India v. Jyoti Structures Ltd.^iv held that the aim of the moratorium under Section 14(1) of the Insolvency and Bankruptcy Code, 2016 is to prohibit debt recovery actions against the corporate debtor. Thus, the interpretation of the arbitrator’s fees as an admitted liability would lead to a conflict with regards to the preferential payment to the arbitrator as the Insolvency and Bankruptcy Code, 2016, prohibits preferential payment of debts

[Emphasis Applied]

ⁱApplication Nos. 2080 and 4609 of 2021
ⁱⁱ2022 SCC OnLine SC 1122.
ⁱⁱⁱCS(COMM) 470/2016 & CC(COMM) 73/2017.
^iv(2018) 246 DLT 485.