The National Company Law Appellate Tribunal, New Delhi (NCLAT), vide judgment dated May 31, 2024 in the matter of Slimline Realty Pvt. Ltd. Vs. Mr. Jigar Bhatt, clarified the applicability of the proviso to section 33(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) vis-a-vis the obligation of the Liquidator to obtain prior approval from the National Company Law Tribunal (Adjudicating Authority) before instituting any proceedings under the given provision.
The present appeal was filed as a consequence of the order of the Ld. Adjudicating Authority whereby the Adjudicating Authority allowed the application filed by the Liquidator seeking ex-post facto approval in respect of Section 7 applications which were filed by the Liquidator against the Appellants, without obtaining any prior approval from the Adjudicating Authority, as mandated by section 33(5) of the IBC.
The NCLAT examined whether the requirement for prior approval by the liquidator to institute proceedings on behalf of the corporate debtor was mandatory or directory and the validity of post facto approval. By way of the present judgment, it has been held that the proviso to section 33(5) is mandatory, and proceedings initiated without prior approval are unauthorized and incompetent. The NCLAT has clarified that the mere fact that no consequences have been provided in the given provision, cannot be a ground to treat the requirement as directory. However, it has been further clarified that post facto approval would not render the proceedings as invalid and shall sustained authorized from the date of such post facto approval. It is to be noted that before granting approval to the liquidator to institute proceedings, it is not necessary to give notice or a hearing to the party against whom the proceedings are to be instituted.
This judgment sets at rest the controversy vis-a-vis whether it is directory or mandatory for the liquidator to seek prior approval to initiate legal proceedings in terms of proviso to Section 33(5). While the judgment brings clarity on the mandatory nature of the given provision, flexibility to initiate proceedings on behalf of a corporate debtor must be given, equally as it’s given to a resolution professional. The mandatory requirement to seek prior approval of the Adjudicating Authority only extends the scope of formal litigation, without actually deriving any benefit to the Corporate Debtor.