NCLAT answers to the question, whether Section 33(5) of the IB Code Mandates Prior Approval for a Liquidator to Initiate Proceedings: Mandatory or Directory?
National Company Lsaw Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) was hearing an appeal and held that while Section 33(5) of the IBC mandates prior approval for initiating proceedings by a liquidator, ex-post facto approval by the Adjudicating Authority can validate such actions if no prejudice ensues, emphasizing procedural regularity in insolvency proceedings. The NCLAT ruled that under Section 33(5) of the IBC, prior approval from the Adjudicating Authority is necessary for a liquidator to initiate proceedings. However, it clarified that retrospective approval by the Authority could legitimize these actions if there is no resulting prejudice, thereby stressing procedural compliance in insolvency cases.
In the NCLAT judgment arising from appeals against an order of the Adjudicating Authority (NCLT Ahmedabad), the primary issue concerned the retrospective approval granted for Section 7 applications initiated by the Liquidator of Reliance Marine & Offshore Limited (RMOL). RMOL entered the Corporate Insolvency Resolution Process (CIRP) in August 2019 and subsequently went into liquidation in December 2021.
Jigar Bhatt, appointed as Liquidator, filed Section 7 applications in September 2023 against several companies including Slimline Realty Pvt. Ltd., Avocado Realty Pvt. Ltd., Replenish Realty Pvt. Ltd., Budding Mercantile Company Pvt. Ltd., and Winsome Realty Pvt. Ltd. These applications pertained to non-repayment issues concerning Non-Convertible Unsecured Bonds subscribed by RMOL.
The appellants contested these applications on the grounds that they lacked prior approval from the Adjudicating Authority, as required under Section 33(5) of the Insolvency and Bankruptcy Code (IBC). The Adjudicating Authority, however, granted ex-post facto approval, prompting the consolidated appeals.
During the appeals process, the NCLAT deliberated on whether Section 33(5) mandated prior approval or if such approval could be considered a directory. The appellants argued for a strict interpretation, highlighting the mandatory nature of the provision to safeguard against procedural flaws. In contrast, the Liquidator argued for a more flexible interpretation, pointing out the absence of explicit penalties for non-compliance.
The NCLAT's judgment referenced several legal precedents, including decisions from the Supreme Court, to ascertain whether the requirement for prior approval under Section 33(5) should be strictly enforced. These precedents underscored the importance of interpreting statutory provisions in line with legislative intent and the need for procedural regularity in insolvency proceedings.
Ultimately, the NCLAT ruled that while Section 33(5) indeed mandates prior approval, the absence of such approval did not invalidate proceedings initiated by the Liquidator. The judgment emphasized that ex-post facto approval by the Adjudicating Authority could regularize proceedings, provided there was no prejudice caused to the affected parties.
In conclusion, the NCLAT dismissed the appeals and affirmed the Adjudicating Authority's order, reinforcing the importance of procedural adherence under the IBC while endorsing the validity of ex-post facto approvals under appropriate circumstances. This decision aimed to clarify the legal status of proceedings initiated without prior approval and provided guidance on the interpretation of statutory provisions within the framework of insolvency law.
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