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

Seeking ex-post facto approval in respect of Section 7 applications - statutory requirement under Section 35 Sub-section (5) proviso to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement or only a directory requirement - consequences and status of the proceedings instituted by the Liquidator on behalf of the Corporate Debtor without prior approval of the Adjudicating Authority - approval under Section 33(5) to the Liquidator to institute proceeding on behalf of the Corporate Debtor the party against whom proceedings are to be instituted has to be given an opportunity. Whether the statutory requirement under Section 35 Sub-section (5) proviso to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement or only a directory requirement? - HELD THAT - The legislative scheme as occurring in Section 33(5) is clear and categorical and the legislative intendment is clear that after the liquidation order is passed no suit or legal proceeding is instituted by or against the Corporate Debtor with only one exception that suit or legal proceeding on behalf of the Corporate Debtor can be instituted with the prior approval of the Adjudicating Authority - looking to the statutory scheme in use of the prohibitory word in Section 33(5) are satisfied that the requirement of prior approval by the Adjudicating Authority 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. The statutory requirement under Section 35 Sub-section (5) proviso to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement. What are the consequences and status of the proceedings instituted by the Liquidator on behalf of the Corporate Debtor without prior approval of the Adjudicating Authority? - Whether a post facto approval granted by the Adjudicating Authority of proceedings instituted by the Liquidator without obtaining prior approval shall make the proceedings authorized/ competent? - HELD THAT - On looking into the provision of Section 171 and Section 446 it is clear that leave of the Court has to be prior to the instituting any proceeding. Thus the expression leave of the Court and prior approval denotes same meaning i.e. leave of the Court/ prior approval before any proceeding is instituted by the Liquidator. The legislative scheme which was earlier operating in the Companies Act 1913 and Companies Act 1956 has been carried forward by the IBC in so far as requirement under Section 33(5) are concerned. The consequence of the proceedings instituted by the Liquidator on behalf of the Corporate Debtor without prior approval of the Adjudicating Authority under Section 33(5) is unauthorized and incompetent - Post facto approval granted by the Adjudicating Authority with regard to continuation of proceedings already instituted by the Liquidator which were instituted without obtaining prior approval shall make the proceedings authorized and competent from the date when post facto approval is granted. Whether before approval under Section 33(5) to the Liquidator to institute proceeding on behalf of the Corporate Debtor the party against whom proceedings are to be instituted has to be given an opportunity? - HELD THAT - The scheme delineated under Section 33(5) does not indicate that the Liquidator has to give any opportunity or notice to the party against whom approval is sought to initiate proceedings. The provision of Section 33(5) is that the Adjudicating Authority should keep control over estate in the liquidation proceeding so that no proceeding can be initiated by the Liquidator so as to expose the Corporate Debtor to unnecessary expenses. Hence the approval of the Adjudicating Authority is required to institute proceeding. For approval by the Adjudicating Authority the legislative scheme does not indicate any notice or opportunity to the party against whom proceedings are to be instituted - Before granting approval under Section 33(5) proviso to institute proceedings by the Liquidator on behalf of the Corporate Debtor the party against whom proceedings are to be instituted is not to be given a notice or hearing necessarily. Whether the impugned order dated 07.02.2024 passed by the Adjudicating Authority is unsustainable and deserves to be set aside? - HELD THAT - The adequate reasons were given by the Adjudicating Authority for granting ex-post factor approval. The prayer made before the Adjudicating Authority was prayer to permit the Liquidator to continue and proceed with the Section 7 proceedings which having been granted the Liquidator was entitled to proceed with the Section 7 proceedings - the order of the Adjudicating Authority is not unsustainable. There are no ground to interfere with the order of the Adjudicating Authority - appeal dismissed.

Summary

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 IBC
The 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 Approval
The 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 Authority
The 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 Order
The 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.