2024 (6) TMI 91 - AT - Insolvency and Bankruptcy

Prior approval under Section 33(5) IBC mandatory for liquidators to institute proceedings against corporate debtors

NCLAT held that prior approval under Section 33(5) of IBC for liquidators to institute proceedings on behalf of corporate debtors is mandatory, not ... Prohibition on suits during liquidation - prior approval of the Adjudicating Authority - mandatory versus directory requirement - post facto approval - liquidator's power to institute proceedings - maximisation of liquidation estate - opportunity to the proposed defendant before approvalProhibition on suits during liquidation - prior approval of the Adjudicating Authority - mandatory versus directory requirement - Requirement of prior approval under Section 33(5) is mandatory and not merely directory. - HELD THAT: - Section 33(5) enacts a prohibitory injunction that, on a liquidation order, no suit or legal proceeding shall be instituted by or against the corporate debtor, subject only to an exception permitting the liquidator to institute proceedings with the prior approval of the Adjudicating Authority. The provision's negative, prohibitory language and the placement of the proviso as an exception demonstrate a legislative intent to require prior approval. Reliance on canonical principles of statutory interpretation-giving effect to each word used and treating provisos as exceptions that cannot be read to nullify the main provision-supports treating the prior-approval requirement as mandatory. The absence of an explicit consequence for non-compliance does not convert a prohibitory requirement into a directory one. [Paras 26]The prior-approval requirement under Section 33(5) is mandatory.Liquidator's power to institute proceedings - post facto approval - Proceedings instituted by the liquidator without prior approval are unauthorized, but post facto approval by the Adjudicating Authority renders them competent from the date of such approval. - HELD THAT: - While institution of proceedings without the statutorily mandated prior approval is unauthorized and thus incompetent at the time of filing, established precedent concerning analogous company-winding provisions (e.g., decisions interpreting leave under Section 171/Section 446) recognises that leave or approval granted subsequently can validate earlier-initiated proceedings and treat them as instituted from the date of such leave/approval. The Court applied that principle to Section 33(5): non-compliant proceedings are not declared void ab initio in a manner that precludes later validation; a post facto approval authorises continuation and deems the proceedings competent from the date the Adjudicating Authority grants the approval. [Paras 43]Proceedings filed without prior approval are unauthorised; a post facto approval makes them authorised and competent from the date of that approval.Prior approval of the Adjudicating Authority - opportunity to the proposed defendant before approval - No statutory requirement exists to give the proposed defendant a prior notice or hearing before the Adjudicating Authority grants approval under Section 33(5). - HELD THAT: - Section 33(5)'s scheme aims to keep the Adjudicating Authority in control of litigation affecting the liquidation estate to prevent unnecessary exposure to costs; the text of the proviso does not prescribe any pre-approval notice or hearing to the party against whom proceedings are proposed. The Court therefore held that the statutory framework does not mandate giving the proposed defendant notice or a hearing as a precondition to the Adjudicating Authority's grant of approval. [Paras 45]The party against whom proceedings are to be instituted need not be given prior notice or hearing as a statutory requirement before approval under Section 33(5).Maximisation of liquidation estate - post facto approval - The Adjudicating Authority's grant of ex post facto approval in the present case was supported by reasons and is sustainable; the appeals are dismissed. - HELD THAT: - The Adjudicating Authority had earlier recorded the liquidation facts, the only material asset being bonds held by five entities, and had extended the liquidation period after noting steps taken by the liquidator to realise those assets. The impugned order granting post facto approval expressly relied on the interest of the corporate debtor and the objective of maximising value in liquidation; these constitute adequate reasons rather than a mechanical or non speaking endorsement. Applying the statutory interpretation and validation principle above, and having found no legal error in the Adjudicating Authority's exercise of discretion, the Tribunal found no ground to interfere and dismissed the appeals. [Paras 49, 51]The Adjudicating Authority's ex post facto approval was adequately reasoned and is upheld; the appeals are dismissed.Final Conclusion: The Tribunal held that the proviso to Section 33(5) requires mandatory prior approval of the Adjudicating Authority before the liquidator institutes proceedings; proceedings initiated without such approval are unauthorised but may be validated by subsequent (post facto) approval which renders them competent from the date of that approval; no statutory pre hearing or notice to the proposed defendant is required before such approval; applying these principles to the facts, the Adjudicating Authority's grant of ex post facto approval was sustained and the appeals were dismissed. Issues Involved:1. Mandatory vs. Directory Requirement of Prior Approval u/s 33(5) of IBC.2. Consequences of Proceedings Instituted by Liquidator Without Prior Approval.3. Validity of Post Facto Approval by Adjudicating Authority.4. Necessity of Notice to Opposite Party Before Granting Approval u/s 33(5).5. Adequacy of Reasons in Adjudicating Authority's Order.Summary:Issue 1: Mandatory vs. Directory Requirement of Prior Approval u/s 33(5) of IBCThe Tribunal examined whether the statutory requirement under Section 33(5) proviso for the Liquidator to obtain prior approval of the Adjudicating Authority to institute a suit or proceeding on behalf of the Corporate Debtor is mandatory or directory. The Tribunal concluded that the requirement is mandatory, emphasizing that the legislative intent is clear in using prohibitory language, making it imperative for the Liquidator to seek prior approval before initiating any proceeding.Issue 2: Consequences of Proceedings Instituted by Liquidator Without Prior ApprovalThe Tribunal held that proceedings instituted by the Liquidator without prior approval of the Adjudicating Authority are unauthorized and incompetent. However, such proceedings are not null and void but are considered ineffective until the necessary approval is obtained.Issue 3: Validity of Post Facto Approval by Adjudicating AuthorityThe Tribunal determined that post facto approval granted by the Adjudicating Authority for proceedings initiated without prior approval renders those proceedings authorized and competent from the date the post facto approval is granted. This means that the proceedings are validated retrospectively from the date of approval.Issue 4: Necessity of Notice to Opposite Party Before Granting Approval u/s 33(5)The Tribunal clarified that the legislative scheme under Section 33(5) does not require the Liquidator to give notice or an opportunity to the party against whom proceedings are to be instituted before seeking approval from the Adjudicating Authority. The purpose of the provision is to ensure control over the liquidation estate, not to provide a hearing to the opposite party at this stage.Issue 5: Adequacy of Reasons in Adjudicating Authority's OrderThe Tribunal found that the Adjudicating Authority had provided adequate reasons for granting ex-post facto approval. The order referenced earlier proceedings and the necessity to maximize the value of the Corporate Debtor's assets during liquidation. The Tribunal concluded that the order was not unsustainable and did not require interference.Conclusion:The Appeals were dismissed, upholding the Adjudicating Authority's order granting ex-post facto approval to the Liquidator to continue with the proceedings initiated without prior approval.