The Federal Court of Australia recently determined an application brought by the administrators of a company in voluntary administration seeking judicial guidance on how to deal with claims for costs and interests resulting from two prior arbitrations. The key issue was whether the costs and interests awarded in the previous arbitrations were admissible to proof in the administration of the company, having regard to the fact that the relevant arbitral awards were made after the appointment of administrators.
The Court made a distinction between the two arbitrations as follows:
- In respect of an arbitration conducted under the UNCITRAL Rules, which include a provision requiring that the arbitral tribunal fix the costs of the arbitration (as is the case in the rules of arbitration of major arbitral institutions), there was “certainty” that costs would be awarded and, therefore, the claim for arbitration costs was a provable claim in the administration of the company.
- In respect of a different arbitration which was conducted under the statutory framework of the International Arbitration Act 1974 (Cth), there was no such “certainty” since the tribunal had the discretion to award costs but was not expressly required to do so and, therefore, the claim for costs was not a provable claim. The Court applied the same rationale to held that both claims for interests were not provable in the administration.
Bumbak v Dalian Huarui Heavy Industry Group International Co Ltd, in the matter of Duro Felguera Australia Pty Limited (Subject to a Deed of Company Arrangement)  FCA 765 (Bumbak) concerned a court application brought by the administrators of Duro Felguera Australia Pty Limited (DFA), seeking judicial guidance on how to deal with claims against DFA for costs and interests resulting from two prior arbitrations.
The key facts were as follows:
- DFA was established in July 2013 for the purpose of providing engineering and construction services in relation to the Roy Hill Mine project in the Pilbara region of Western Australia. Throughout the duration of the project, DFA engaged several subcontractors, including Dalian Huarui Heavy Industry Group International Co Ltd (DHHI) and Trans Global Projects Pty Ltd (TGP)
- On 28 February 2020, pursuant to resolution of DFA’s directors, DFA was placed in voluntary administration. Subsequently, DFA’s creditors resolved to execute a Deed of Company Arrangement (DOCA).
- After the execution of the DOCA, TGP and DHHI made claims against DFA (that accounted for over 90% of all of DFA’s total debt) for their costs and interests accrued in arbitral proceedings pursued against DFA.
The two arbitrations
DFA was the respondent in the following two arbitrations:
- arbitration initiated by DHHI in September 2016, which was seated in Singapore and conducted under the UNCITRAL Rules (DHHI Arbitration); and
- arbitration commenced by TGP in May 2018, which was seated in Western Australia and conducted under the Commercial Arbitration Act 2012 (WA) (TGP Arbitration).
On 19 December 2019, before DFA was placed in administration, the tribunal in the DHHI Arbitration issued its first award which:
- ordered that DFA pay over US$32 million to DHHI; and
- reserved all matters concerning interest and costs until a further award.
Between March and August 2020, i.e. after DFA was placed in administration, the administrators participated in the DHHI Arbitration by filing submissions in relation to costs and interest. On 14 August 2020, the tribunal published its Final Award determining that DFA was liable to pay DHHI various sums for costs and interests. On 27 July 2021, DHHI lodged a revised proof of debt in the administration comprising, as is relevant for present purposes, the outstanding principal from the first award, costs pursuant to the final award, and pre-award and post-award interest.
On 19 February 2020, before DFA was placed in administration, the tribunal in the TGP Arbitration advised TGP and DFA that it was “ready to publish its award” but would “withhold publication until payment of the arbitrators’ fees”.
On 27 May 2020, after DFA was placed in administration, the administrators authorised payment of the tribunal’s fees and the tribunal published its award, which included orders that DFA pay TGP a principal amount, the costs of the arbitration, and pre-award and post-award interest. On 29 July 2020, TGP lodged an updated proof of debt claiming these amounts.
The parties were not in dispute regarding the amounts owing under the respective arbitration awards. The key issue in contention was whether the costs and interests awarded by the arbitral tribunals were admissible to proof under the DOCA, having regard to the fact that costs and interests were awarded after the appointment of administrators.
At the outset, the Court held that the matter involved “complex legal issues”, as opposed to a “business or commercial decision”, and it was therefore appropriate for the administrators to seek, and for the court to give, court guidance under s 90-15 of the Insolvency Practice Schedule (being Schedule 2 to the Corporations Act).
The key provision of the DOCA was the definition of “claim” as “debts or claims which arose on or before the Appointment Date [i.e. 28 February 2020] or the circumstances giving rise to which occurred before the Appointment Date”.
Against this framework, the Court determined that the key to assessing whether claims for arbitration costs and interests awarded by the respective arbitral tribunals fell within “circumstances giving rise to the claims which occurred before the Appointment Date”, was whether there was “certainty” that an arbitration award would be made. In this regard, the Court distinguished the present case from Larkden Pty Ltd v Lloyd Energy Systems  NSWSC 268; (2011) 279 ALR 772, as follows:
- In Larkden, the Court held that since an order for arbitration costs was discretionary, there was no “certainty” that a costs order would be made or even that a party would apply for such an order.
- However, in the present case, the supply contract between DHHI and DFA included an arbitration clause providing for arbitration in accordance with the UNCITRAL Arbitration Rules, with Article 40 of those rules providing that the arbitral tribunal “shall fix the costs of the arbitration”.
- On the basis of the requirement to fix costs under the UNCITRAL Rules, the Court found that if no order as to arbitration costs was made, the tribunal would not have conducted the arbitration in accordance with the parties’ supply contract and so the “contractual entitlement to have a costs order fixed was a circumstance which existed at the appointment date”. DHHI’s claim for arbitration costs was therefore a provable claim in the administration of DFA.
- It is relevant to note that the Court’s assessment of the UNCITRAL Rules provision requiring a tribunal to fix the costs of the arbitration as providing “certainty” for the purposes of determining that the relevant claims constituted provable claims, would extent to arbitrations conducted the rules of major arbitral institutions such as, for example, the ICC, SIAC and ACICA, which contain similar provisions requiring that the tribunal fix costs.
- In contrast, the contract between TGP and DFA did not contain a clause providing for arbitration under a specific set of arbitration rules, with the arbitration instead being conducted under the statutory framework of the International Arbitration Act 1974 (Cth). The Court found that, absent a provision requiring the tribunal to fix costs, there was no “certainty” that the tribunal would award costs and that, therefore, TGP did not have a provable claim for the purposes of either s 553(1) of the Corporations Act or clause 9.2 of the DOCA.
- In relation to both parties’ claims for interests, the Court likewise found that these claims lacked the necessary “certainty” to be a provable claim in the administration, given that the arbitral tribunals had discretion to award those sums, but were not expressly required to so under the parties’ contracts.
The interplay between arbitration and insolvency proceedings is nuanced and requires careful assessment.
For more information, please contact Leon Chung, Partner, Guillermo Garcia-Perrote, Executive Counsel, Inigo Kwan-Parsons, Senior Associate, or your usual Herbert Smith Freehills contact.