NCLAT Validates Ex-Post Facto Approval in Liquidator’s S. 7 Applications Under S. 33 of the IBC

Introduction

In a significant ruling in Slimline Realty Private Limited v. Jigar Bhatt[i], the Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) provided substantial clarity on the interpretation of s. 33(5) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The judgment, rendered on appeals against an order by the National Company Law Tribunal, Ahmedabad, highlighted the necessity of prior approval by the Adjudicating Authority (‘AA’) before a liquidator can initiate legal proceedings on behalf of the corporate debtor (‘CD’). This decision is poised to impact the operations of liquidators and CDs, reinforcing the legislative intent behind s. 33(5) of the IBC.

Brief Facts

• The CD, Reliance Marine & Offshore Limited (‘RMOL’), was admitted to the corporate insolvency resolution process (‘CIRP’) on 21.08.2019. The order of liquidation was passed against RMOL on 06.12.2021, and Jigar Bhatt was appointed as the liquidator.

• The liquidator issued a demand notice to the Appellants for payments with respect to non-convertible unsecured bonds subscribed by the CD. When no payments were made, the liquidator filed s. 7 applications against the Appellants in September 2023. Various company petitions were filed against the Appellants, including Slimline Realty (P) Ltd., Avocado Realty (P) Ltd., Replenish Realty (P) Ltd., Budding Mercantile Company (P) Ltd., and Winsome Realty (P) Ltd.

• Thereafter, the liquidator sought ex-post facto approval for the s. 7 applications, which the AA allowed, thereby granting the liquidator approval to continue and proceed with the company petitions. Aggrieved by this grant of ex-post facto approval, the Appellants challenged it, raising questions about the necessity of prior approval and the validity of ex-post facto approvals.

Held

• The NCLAT dismissed all the appeals filed by the Appellants, finding no ground to interfere with the order of the AA. The NCLAT addressed multiple issues in its detailed judgment, holding that the statutory requirement under the proviso to s. 33(5) of the IBC to obtain prior approval of the AA by the liquidator to institute a suit or proceeding on behalf of the CD is mandatory. This conclusion was based on the prohibitory language used in the statute and the legislative intent to protect the liquidation estate from unnecessary expenses.

• The NCLAT determined that proceedings initiated by the liquidator on behalf of the CD without prior approval of the AA were unauthorized and incompetent. However, it clarified that ex-post facto approval by the AA would render such proceedings authorized and competent from the date of such ex-post facto approval.

• The NCLAT also stated that the legislative scheme under s. 33(5) of the IBC does not necessitate giving notice or opportunity to the party against whom proceedings are to be instituted before obtaining approval from the AA. Furthermore, it was found in this particular case that the AA had passed a reasoned order providing adequate justification for granting ex-post facto approval, emphasizing the necessity to maximize the value of the CD’s assets during liquidation.

Our Analysis

The NCLAT’s decision provides a clear interpretation of s. 33(5) of the IBC, emphasizing the mandatory nature of prior approval for initiating proceedings by a liquidator on behalf of the CD. As the NCLAT held, this requirement is designed to protect the assets of the CD during the liquidation process, ensuring that unnecessary legal expenses do not deplete the estate and that the AA maintains judicial control over the liquidator’s actions, thereby safeguarding the interests of stakeholders.

The judgment also addresses the practical implications of non-compliance with the statutory requirement. While proceedings initiated without prior approval are deemed unauthorized, the provision for ex-post facto approval offers a remedial measure to validate such proceedings retrospectively. This ruling highlights the importance of the AA’s role in liquidation proceedings, reinforcing its authority to grant or withhold approval for the institution of suits or proceedings on behalf of the CD.

End Note

[i] 2024 SCC OnLine NCLAT 685, dated: 31.05.2024

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.