Moratorium Under IBC Does Not Bar Payment Of Fees To Arbitrator Due Prior To Moratorium: Madras High Court

The bench of Justice Abdul Quddhose has held that mere initiation of insolvency proceedings against an entity should not be a ground to deny the legitimate fees to the arbitral tribunal. It observed that arbitrators provide essential services which are saved by Section 14(2) of the IBC. Moreover, it observed that when the award has been passed against the corporate debtor (CD) and the lien has been exercised by the arbitrator against the CD, the payment of arbitrator’s fees would be treated as part of costs of CIRP as it would enable the CD to challenge an unfavourable award.

Facts

Pursuant to a dispute between the parties, the Court had appointed the arbitrator (2^nd respondent) under Section 11 of the A&C Act. In the order appointing the arbitrator, the Court had granted liberty to the arbitrator to fix his fees in consultation with both the parties. Pursuant thereto, the arbitrator entered reference and his fees was fixed. It was agreed that the arbitrator would be paid for the number of hearings and no fixed amount was decided.

The parties filed their respective pleadings. During the arbitration proceedings both the parties defaulted in making timely payments to the arbitrator as his fees which led the arbitrator to exercise his power of lien on award as provided under Section 39(1) of the Act. However, the first respondent (claimant in arbitration) cleared its dues and the award was delivered to it. But, the applicant (respondent in arbitration) instead of clearing its dues choose to file an application under Section 39(2) of the Act praying the High Court for release of lien and challenging the fees as due to arbitrator as exorbitant and excessive.

Contention of the Parties

The applicant sought the release of lien and delivery of the award on the following grounds:

• The second respondent/arbitrator has imposed and demanded exorbitant fees and has wrongly exercised lien on the award.
• The fees demanded by the arbitrator is in excess and above the amount permissible under the IVth schedule to the Act.
• The applicant is admitted under insolvency and a moratorium is declared against it, therefore, it cannot be burdened with the payment of an such a big amount.

The second respondent made the following counter arguments:

• The fees were fixed with the mutual agreement of the parties.
• The applicant had never contested the amount of fees as fixed by the arbitrator and it is only when the award was made that the said ground was taken by the applicant as an afterthought.
• Periodical statement of account was filed by the arbitrator indicating every meeting and the outstanding payment.
• The arbitrator has rightly exercised its statutory right granted under Section 39(1) of the Act and the award can be delivered to the applicant on the payment of the due amount.

Analysis by the Court

Firstly, the Court examined the law on the fees of the arbitrator. The Court referred to the decision of the Supreme Court in ONGC v. Afcons Gunanusa, wherein the Apex Court had noted that fee schedule prescribed in Schedule IV of the Arbitration and Conciliation Act, 1996 is not mandatory and that parties to Arbitration may choose another fee structure for the Arbitrator by agreement, therefore, the arbitrator would be at liberty to determine his fees with the consent of the parties.

The Court observed that both the parties had consented to the fixation of the fees by the arbitrator and the same is recorded in several orders passed by the arbitrator and the fees determined by the arbitrator was never contested by the applicant during the arbitral proceedings and it had only sought time to pay the remaining fees.

The Court held that once a party has unconditionally accepted the fees fixed by the arbitral tribunal during the arbitral proceeding cannot later challenge the fees of the arbitral tribunal by filing petition under Section 39(2) of the A&C Act.

The Court clarified that as per Section 39(1) of the Act, the arbitral tribunal possesses a lien on the award to cover any outstanding arbitration costs, and it has the authority to withhold the award's delivery until these costs are settled. Additionally, the Court emphasized that once a party unconditionally accepts the fees set by the tribunal during arbitration, they cannot later challenge the fees as unreasonable and request the release of the lien under Section 39(2).

The Court observed that the arbitrator had filed periodical statement of account which had all the details of the date of hearing, number of meetings/sittings held and the outstanding fees of the arbitrator. The Court observed that the applicant had never disputed the amount as mentioned by the arbitrator in those statement of accounts.

The Court again referred to the judgment in ONGC (supra) to hold that the fees of the arbitrator would depend on a variety of reasons such as

1. complexity of the disputes;
2. difficulty or novelty of the questions involved;
3. the skill, specialised knowledge and responsibility of the Arbitral Tribunal;
4. number and importance of documents to be studied;
5. value of the property involved or the amount or the sum in issue and
6. importance of the dispute to the parties.

The Court held that the second respondent/arbitrator is a former judge of the Supreme Court and undoubtedly, his fees cannot be equated to a regular Arbitrator. His experience as a Chief Justice of Jammu and Kashmir High Court and as a Judge of the Hon'ble Supreme Court will certainly add enormous value /weight to an Arbitral Award.

The Court also observed that the second respondent had spent enormous time and effort for passing the Arbitral Award, therefore, the amount of fees as fixed by him with the consent of the parties is not exorbitant. It held that the application filed by the applicant was a pure afterthought and an abuse of process of law as no dispute was ever raised before the tribunal regarding the fees fixed by the arbitrator.

The Court also observed that the applicant was in violation of several orders of the Court regarding direction to deposit the due amount as a pre-condition to hearing the application which indicates their contumacious conduct.

Next, the Court dealt with the issue of payment of the fees of the arbitrator during the moratorium. The Court held that the fees of the arbitrator for an arbitration that was concluded prior to the date of the moratorium would not be affected by the bar under Section 14 of the IBC, 2016.

The Court observed that the award has been passed against the applicant and unless it pays the agreed balance arbitrator’s fees, it would not be able to challenge the award as the delivery of award is withheld unless the lien is cleared. It held that since the Arbitral Award is for a huge amount, which will be detrimental to the interest of the applicant, if the same is not challenged, ergo, the payment of the arbitrator’s fees to get the award would be a payment to minimize the liabilities of the applicant and in aid of the insolvency proceedings.

The Court held that the payment of the fees to arbitrator has to be treated on parity with the fees of the liquidator and must be given a preferential status in terms of priority of dues.

The Court remarked that if the arbitrator’s are not paid their dues, the object of arbitration will get defeated as competent arbitrators would hesitate to adjudicate disputes of companies facing financial crisis.

The Court held that mere initiation of insolvency proceedings against an entity should not be a ground to deny the legitimate fees to the arbitral tribunal. It observed that arbitrators provide essential services which are saved by Section 14(2) of the IBC. Moreover, it observed that when the award has been passed against the corporate debtor (CD) and the lien has been exercised by the arbitrator against the CD, the payment of arbitrator’s fees would be treated as part of costs of CIRP as it would enable the CD to challenge an unfavourable award.

Accordingly, the Court dismissed the application and directed the application to pay to the second respondent/arbitrator the balance fees. Moreover, the Court imposed a cost of Rs. 5 lakhs on the application for abuse of process and directed the said amount to be paid to the second respondent.

Case Title: EDAC Engineering v. Industrial Fans (India) Pvt Ltd, Application Nos 2080 and 4609 of 2021

Date: 31.08.2023

Counsel for the Applicant: Mr. G. Veerapathiran

Counsel for the Respondents: Ms. J. Jyothi for R1 and Ms. Vinithra Srinivasan for R2

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