Adjudicating Authority Cannot Allow Arbitration During IBC Moratorium: NCLT Chandigarh

The National Company Law Tribunal (NCLT) at Chandigarh has recently held that the adjudicating authority (NCLT) cannot direct the continuation of pending arbitration proceedings during the moratorium under Section 14 of the Insolvency and Bankruptcy Code.

It ruled that such a direction would be beyond the tribunal's jurisdiction under Section 60(5) and would defeat the purpose of the moratorium.

A bench of Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal passed the ruling while dealing with an application filed by Nephrocare in the corporate insolvency resolution process of Nayati Healthcare. Nephrocare had challenged the resolution professional's decision to partly reject its claim and had sought continuation of arbitration proceedings despite the moratorium.

The bench observed, “…since the moratorium under Section 14 is operative, the arbitration proceedings cannot be allowed to continue, as any determination therein would result in the creation of additional liabilities against the Corporate Debtor, thereby defeating the object of Section 14. The moratorium is intended to maintain the status quo and preserve the value of the corporate debtor's assets until completion of the resolution process.”

The dispute arose from a Master Medical Services Agreement between Nephrocare and Nayati Healthcare. Under the agreement, Nephrocare was to operate kidney care and dialysis centres at Nayati hospitals in Agra, Mathura and Delhi. The arrangement was on a revenue sharing basis with a 12 year lock-in period.

Nayati Healthcare terminated the agreement within a year, alleging patient negligence. Nephrocare claimed the termination was unilateral and wrongful. It also alleged that its dialysis machines and RO plants were retained despite its ownership rights.

Nephrocare raised a total claim of Rs 28.89 crore against the corporate debtor. This included Rs 1.10 crore towards unpaid revenue share, Rs 22.89 crore as termination penalty, and Rs 5 crore as damages for loss of goodwill and reputation. The resolution professional of Nayati Healthcare admitted only the revenue-share claim of Rs 1.10 crore under the category of other creditor. The damages claim was not admitted and was referred to arbitration.

The Delhi High Court appointed retired Justice Kailash Gambhir as the arbitrator. It also directed maintenance of status quo on the assets. The arbitral proceedings were later adjourned sine die after the admission of Nayati Healthcare into CIRP.

Nephrocare argued that the resolution professional had wrongly failed to admit its claim in full. It submitted that the amounts claimed constituted “operational debt.” It relied on the Supreme Court's ruling in Fourth Dimension Solutions Ltd. v. Ricoh India Ltd (2021). to argue that arbitration proceedings could continue despite the moratorium.

The tribunal rejected these submissions. It held that the role of the resolution professional is administrative and not adjudicatory. It said the RP cannot decide disputed questions of law or quantify unadjudicated damages. Referring to the Supreme Court's decision in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2020), the bench noted that disputed or contingent claims can only be admitted at a notional value to preserve the sanctity of the resolution process and the clean-slate doctrine.

The NCLT held that the damages claim arose from an alleged breach of contract and had not been adjudicated. It was already pending before an arbitral tribunal. The resolution professional was therefore justified in not admitting the claim.

The tribunal also clarified that Fourth Dimension Solutions  does not assist the applicant. It only recognises that arbitration proceedings may continue for adjudication of rights. It does not direct the resolution professional or the adjudicating authority to reopen or admit such claims during CIRP.

The tribunal ruled that allowing arbitration to continue during the moratorium would result in fresh liabilities. This would defeat the objective of Section 14 of the IBC.

The application was accordingly dismissed, with the bench holding that the resolution professional had neither exceeded his authority nor acted arbitrarily in partly declining to admit the claim.