NCLT granted post-facto approval to the liquidator to initiate legal proceedings on behalf of the corporate Debtor. An application was filed by the liquidator before NCLT under section 60(5) of Insolvency and Bankruptcy code, 2016 and Rule 11 of NCLT rules, seeking post-facto approval of the adjudicatory body to initiate legal proceedings on behalf of the corporate debtor, M/s. Coastal Projects Limited.
The respondent herein, the Bharat Heavy Electricals Ltd, had engaged the corporate debtor, M/s. Coastal Projects Limited in two of its projects namely, Yeramarus in Karnataka and Visakhapatnam in Andhra Pradesh. A dispute aroused between BHEL and the corporate debtor. Hence as per their agreement, arbitration proceedings were initiated before the sole Arbitrator, Hon’ble retired Judge Patel. During the pendency of the arbitration proceedings the petitioner company, the corporate debtor herein went under liquidation as per the order passed by the NCLT, Kolkata on 6th December 2018.
On 30th December 2018, the arbitrator passed an award decreeing partly in favor of the corporate debtor and rejected the other part of the claim. Aggrieved by the order of the arbitrator, both the petitioner and the respondent preferred an appeal under section 34 of the Arbitration and conciliation act, 1996 before the City Civil Court, Bangalore.
As per section 33(5) of the Insolvency and Bankruptcy Code, 2016, prior approval should be obtained from the adjudicatory body to initiate legal proceedings by or against the company under liquidation. BHEL, the respondent herein had duly obtained the approval of NCLT before filing its appeal before the City Civil Court, Bangalore. However, the liquidator proceeded to file an appeal against the award passed in arbitration proceedings without obtaining prior approval from NCLT. Subsequently, the liquidator filed an application invoking Rule 11 of NCLT and 60(5) of insolvency and Bankruptcy code, 2016 seeking approval as mandated by the code.
The respondent vehemently opposed the application stating it as unsustainable. It was further stated that the prior approval of the adjudicatory body is condition precedent to the filing of any proceedings. Having failed to fulfill this condition the application is liable to be dismissed. Whereas the petitioner defended saying that obtaining prior approval is a merely formal act failing which is only an irregularity and renders the petition ineffective until obtaining the approval
The court while considering the application filed by the liquidator dealt with the following issues:-
1. Does the adjudicatory body have the power to ratify the act of the liquidator when the act has specifically stated that ‘prior approval’ is required before initiating legal proceedings?
2. If yes, at what stage the adjudicatory body can grant its approval and its effect on the already filed appeal?
3. Can Rule 11 of NCLT be invoked for obtaining prior approval when there is a specific provision under that act that provides for the same as the inherent powers of the court can be invoked when there is no specific provision in the statute or there is a vacuum in the statute?
4. Can Rule 11 of NCLT rules, 2016 set aside the irregularity in the application?
The petitioner relied on the judgment of the Bombay High Court passed in the year 1972 while dealing with Vyasa Bank vs. Official Liquidator, Shreeniwas cotton mills ltd. It was held that “The suit or proceeding instituted without leave of the Court, in our judgment, be regarded as ineffective until leave is obtained, but once leave is obtained the proceeding will be deemed instituted on the date of granting leave.” The court while considering the effect of not obtaining leave, further held that suit filed without leave would be regarded as ineffective unless it is activated by leave.
Thus the court in the interest of justice, allowed the application filed by the liquidator considering the above judgment and keeping in mind the spirit of IBC and the focus of the company in liquidation ‘ maximization of assets’.
Edited by J. Madonna Jephi
Approved & Published – Sakshi Raje
1. Misc. A. No. 60/CTB/ 20l9 connected with CP (IB) No. 593/KB/2017, NCLT, Cuttack Bench, Cuttack, Judgment dated 16th January 2020, https://images.assettype.com/barandbench/2020-01/a7708427-aa6f-4550-9d28-297a7df52d6e/Liquidator__Coastal_Projects_vs_BHEL.pdf (last visited on 28th January 2020)
2. Bar and Bench, NCLT grants post-facto approval to Liquidator under IBC to initiate legal proceeding on behalf of Corporate Debtor https://www.barandbench.com/news/litigation/nclt-grants-post-facto-approval-to-liquidator-under-ibc-to-initiate-legal-proceeding-on-behalf-of-corporate-debtor (last visited on 28th January, 2020)