The National Company Law Appellate Tribunal (“NCLAT”) in the case of Slimline Realty Private Limited v. Mr. Jigar Bhatt has recently held that the statutory requirement under the proviso of Section 33(5), Insolvency and Bankruptcy Code (“IBC”), for obtaining prior approval of the Adjudicating Authority (“AA”) by a liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement.

Brief Facts:

The Appellants in the present case had issued Non-Convertible Unsecured Bonds (“Bonds”) to Reliance Marine & Offshore Limited (“RMOL”). An application under Section 7, IBC was filed against RMOL (“Company Petition”) and RMOL was admitted into Corporate Insolvency Resolution Process (“CIRP”) vide order dated August 21, 2019. Subsequently, CIRP of RMOL failed and on December 6, 2021, the AA passed an order of liquidation of RMOL. Accordingly, the Respondent was appointed as the liquidator of RMOL.

The payments pertaining to the Bonds were due and payable by the Appellants to RMOL on July 25, 2019. Resultantly, the Respondent issued a demand notice to the Appellants to make payments with respect to the Bonds subscribed by RMOL, however, the Appellants did not comply with the demand notice and failed to redeem the amounts and pay the amounts due and payable to RMOL. Thereafter, the Respondent filed separate applications under Section 7, IBC against each Appellant before the AA.

After the filing of the applications under Section 7, IBC against the Appellants before the AA, the Respondent also filed an application under Section 33(5), IBC in the Company Petition inter-alia seeking ex-post facto approval to the Respondent to continue and proceed with the applications under Section 7, IBC filed against the Appellants. On February 7, 2024, the AA allowed the aforesaid application in the Company Petition and granted ex-post facto approval to the Respondent to continue and proceed with the applications filed under Section 7, IBC against the Appellants (“Impugned Order”).

Aggrieved by the Impugned Order, the Appellants filed their respective appeals before the Hon’ble NCLAT, inter-alia, contending that Section 33(5), IBC is a mandatory provision and therefore no ex-post facto approval to initiate the respective applications under Section 7, IBC against the Appellants could have been granted by the AA to the Respondent.

Submissions of the Parties:  

1. Appellants’ submissions

a. Section 33(5), IBC provides that after liquidation order has been passed no suit or legal proceeding can be instituted by or against the Corporate Debtor and proviso to the section provides for an exception that a suit or legal proceeding may be instituted by the liquidator/ Respondent only after obtaining prior approval of the AA.

b. The provision under Section 33(5), IBC is a mandatory provision according to which liquidator/ Respondent was not competent to initiate any proceeding on behalf of the Corporate Debtor without obtaining prior approval. The prior approval contemplated under the proviso of Section 33(5), IBC cannot be equated with post-facto approval. The proceeding initiated by the liquidator/ Respondent without obtaining prior approval is void and nullity and cannot be cured by any post-facto approval.

c. There is distinction between expressions 'sanction/permission', 'approval' and 'prior approval'. When a statute requires a sanction, permission or approval, a post-facto approval may cure the defect. However, when a statute mandates a prior approval, defect in initiation of proceedings cannot be cured by post-facto approval.

d. The expression 'prior approval' has been used cautiously and every word used in the statute has to be given its proper and effective meaning, as the legislature uses no expression without purpose or meaning.

5. Respondent’s submissions

a. Section 33(5), IBC is directory and not mandatory in nature. The said provision does not provide for any consequences for its non-compliance. When no consequences are provided, the provision is always treated as directory. Since the section does not expressly provide for nullification of the proceedings as a consequence of non-compliance with the requirement of the section, it only renders the provision directory in nature.

b. Other provisions such as Sections 28(3), 28(4) and 25A(3) of IBC expressly provide for consequences for non-compliance. Therefore, not providing for any consequence of breach in Section 33(5), IBC is clear indicator of the intention of the legislature that breach of 33(5), IBC is not viewed as breach of any mandatory provision.

c. The object and purposes of IBC is to maximize the value of the assets of the Corporate Debtor and Section 33(5), IBC ought to be read with its object and purposes. The liquidator/ Respondent in fulfilment of objectives mentioned in the statute initiated proceeding under Section 7 against the Appellants who failed to redeem the bonds. The objective of Section 33(5), IBC is that the AA be made aware of the actions of the liquidator/ Respondent. 

d. Liquidator/ Respondent also relied on the provisions of Section 171 of the Companies Act, 1913 and Section 446 of Companies Act, 1956 to submit that in terms of pre-requirement of permission, Hon'ble Supreme Court in the context of the above-mentioned two provisions has already held that leave of court is not condition precedent.

Findings and analysis by the NCLAT:

(i) The legislative scheme of Section 33(5), IBC is clear that once the liquidation order has been passed, no suit or legal proceeding can be instituted by or against the Corporate Debtor with only one exception being that suit or legal proceeding on behalf of the Corporate Debtor can be instituted with the prior approval of the AA.

(ii) The NCLAT after analyzing the statutory scheme in detail held that the requirement of prior approval by the AA for instituting any suit or proceeding is mandatory and cannot be held to be directory. The mere fact that no consequences has been provided in the provision, cannot be a ground to treat the requirement as directory.

(iii) The NCLAT observed that from a reading of of the Companies Act, 1913 and Section 446 of Companies Act, 1956, it is clear that leave of the Court must be prior to the instituting any proceeding. The expression ‘leave of the Court’ and ‘prior approval’ denote the same meaning. The legislative scheme which was earlier operating in the Companies Act, 1913 and Companies Act, 1956 has now been carried forward by the IBC in so far as requirement under Section 33(5), IBC is concerned.

(iv) Based on the above, the NCLAT held that the consequence of the proceedings instituted by the liquidator/ Respondent on behalf of the Corporate Debtor without prior approval of the AA under Section 33(5), IBC is unauthorized and incompetent. The NCLAT further held that post-facto approval granted by the AA with regard to continuation of proceedings already instituted by the liquidator/ Respondent which were instituted without obtaining prior approval will make the proceedings authorized and competent from the date when post facto approval is granted.

Please find attached a copy of the judgement. 

This update has been contributed by Udit Mendirattar (Partner) and Shivkrit Rai (Associate).

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