The Bombay High Court has clarified that proviso to Section 33(5) of the IBC mandates prior approval of the Adjudicating Authority before a Liquidator institutes legal proceedings on behalf of a corporate debtor in liquidation. However, the absence of such prior approval does not render the proceedings void ab initio, as Section 33, unlike Section 28(4), does not expressly provide for that consequence. Proceedings initiated without prior permission remain ineffective until the date the NCLT grants approval, and are deemed to have commenced from that date. This interpretation serves the statutory object of maximisation of liquidation value while avoiding unnecessary procedural reiteration and limitation pitfalls.
A Single Judge Bench of Justice Arun R. Pedneker examined the proviso to Section 33(5) of the IBC, which employs the expression “prior approval,” and noted that admittedly no prior approval was obtained before issuance of the Section 21 notice. The Court then analysed the Supreme Court’s decision in Erach Boman Khavar V. Tukaram Shridhar Bhat [(2013) 15 SCC 655], where the Court considered the expression “leave of the Court” under the Companies Act provisions. The Supreme Court had held that grant of leave of the winding-up court is not a condition precedent for initiation of civil action or legal proceedings, because the section does not expressly provide for annulment of a proceeding undertaken without leave. Leave could be obtained even after initiation of the proceeding, and the seminal object behind the provision was to safeguard the interest of the company so that it does not face deprivation of its rights and claims being adjudicated without the knowledge of the Company Court.
The Court then examined Bajaj Hindustan Limited v. State of Uttar Pradesh [(2016) 12 SCC 613], where the Supreme Court drew a distinction between “approval” and “permission”. In the case of approval, the action holds good until it is disapproved, whereas in the case of permission, the action does not become effective until permission is obtained. The Supreme Court further observed that where prior approval is specifically required, the expression “prior” must be expressly used in the particular provision. The Court noted that in the proviso to Section 33(5) of the IBC, the word “prior” is indeed used, signifying that the approval must precede the initiation of proceedings in point of time.
The Court observed that a notice issued for invocation of arbitration under Section 21 constitutes the commencement of arbitral proceedings, and in the present case it was admitted that the Section 21 notice was issued without obtaining prior permission from the NCLT. However, the record showed that such permission was subsequently granted before the filing of the Section 11 application.
On the question of consequence, the Court noted that Section 28(4) of the IBC expressly provides that actions taken by the Resolution Professional without prior approval of the Committee of Creditors would be void. However, Section 33 of the IBC does not contain any express provision rendering legal proceedings initiated by the Liquidator without prior permission of the Adjudicating Authority as void. The Court held that while prior permission under Section 33(5) is mandatory, the absence of such prior permission before initiation of legal proceedings does not render the proceedings void ab initio. Instead, the commencement of such proceedings remains ineffective until the date on which the required permission is granted by the Adjudicating Authority.
The Court further observed that relegating the parties to issue a fresh notice would not serve the purpose of the proviso to Section 33(5), as it may also create issues relating to limitation on account of the time lost during the intervening period. A purposive interpretation of Section 33(5) requires that proceedings initiated without prior permission remain ineffective for all purposes until such permission is obtained, and that the proceedings shall be treated as having commenced from the date of grant of permission.
Briefly, Tecpro Systems Limited, a company undergoing liquidation, filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an Arbitrator in terms of a Purchase Order dated 17th January 2018 executed between the parties. The Purchase Order contained an arbitration clause providing for reference of disputes to arbitration under the Indian Arbitration and Conciliation Act, 1996, with the venue of arbitration at Mumbai. The clause required parties to first endeavour to reach an amicable settlement within fifteen days, failing which the dispute would be referred to arbitration. The award was to be a reasoned award, final and binding on both parties, and not subject to appeal. The Courts at Mumbai were conferred exclusive jurisdiction over all matters arising under the Purchase Order.
The Applicant Company was under liquidation, with the NCLT, New Delhi, having passed a liquidation order on 16th January 2020 and appointed a Liquidator to administer the liquidation proceedings. The Liquidator issued a notice dated 10th March 2022 to the Respondent invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996. This invocation notice was not replied to by the Respondent. Thereafter, on 23rd December 2022, the NCLT granted post facto approval under Section 33(5) of the Insolvency and Bankruptcy Code, 2016, for the initiation of arbitration proceedings against the Respondent. The present application under Section 11 was subsequently filed on 10th January 2024.
