Non-Compliance of Section 33(5) of the Insolvency and Bankruptcy Code, 2016 by the Liquidator & Its Consequence – By Kumar Sumit & Chirag Gupta

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Non-Compliance of Section 33(5) of the Insolvency and Bankruptcy Code, 2016 by the Liquidator & Its Consequence

-By Kumar Sumit & Chirag Gupta,
Advocates practising before NCLT’s & NCLAT

The Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’) is evolving with time and every now and then interesting set of jargons come before the Ld. Adjudicating Authority(ies), which require harmonious interpretation to uphold the objective of the code. One such interesting question of law is when a liquidator files an application under section 9 of IBC, 2016 without taking prior approval from the Hon’ble Adjudicating Authority as required under section 33 (5) of IBC, 2016.  This article seeks to examine the intention of the legislature in enacting sub-section (5) of Section 33 and the consequence of inadvertent non-compliance.

It would be pertinent to reproduce the provision i.e. section 33(5) under IBC, 2016 which is as under:

Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with prior approval of the Adjudicating Authority’

The proviso herein provides a mandatory condition for the liquidator to seek prior approval of the Ld. Adjudicating Authority before instituting any legal proceeding and the usage of word ‘shall’ further makes the requirement more fervent. However, if we are to evaluate the consequences of non-compliance, one may appreciate that any such consequence of non-complliance with the requirement of ‘prior approval’ under proviso of section 33(5) is not provided under the insolvency statue.

The Ld. National Company Law Tribunal in Ravi Shankar Devarakonda v. M/s. Bharat Heavy Electricals Limited, dated 16th January, 2020, while examining the possibility of subsequent ratification/regularization or ‘de-facto approval’ allowed the liquidator to proceed with the liquidation process. The Ld. Adjudicating Authority was specifically examining the contours of proviso under section 33(5) which requires a liquidator to seek prior approval of the Adjudicating Authority before instituting proceedings for or against the corporate debtor. The Ld. Adjudicating Authority while upholding the spirit and objective of IBC, 2016 allowed the liquidator to move ahead with the liquidation process, despite of being in non-compliance with the requirement entailed under section 33(5) of IBC, 2016.

One may also appreciate that under section 11 of the IBC, 2016, there is no such restrictions envisaged against the liquidator to initiate proceedings against the debtors of the Corporate Debtor. It is pertinent to mention that the embargo created under section 11 (d) of IBC, 2016, is squarely covered under the second explanation of section 11. The very nomenclature of the second explanation makes it aptly clear that restrictions imposed qua section 11 shall not be applicable in verbatim over the corporate debtor. It becomes empirical to reproduce the second explanation, which is as under:

‘Explanation II- For the purpose of this section, it is hereby clarified that noting in this section shall prevent a corporate debtor referred to in clauses (a) to (d) from initiating corporate insolvency resolution process against another corporate debtor.’

Therefore, it is appropriate to state with stellar confidence that corporate debtor is not barred under IBC, 2016 to pursue or initiate proceedings against any of its debtors. It may be argued that the application of Explanation-II is restricted to only to Chapter-II and, it will not extend to Chapter-III, which essentially contains the provisions related to liquidation proceedings under IBC, 2016. However, without the statue having created any differentia regarding the applicability of explanation of section 11 over Chapter-III, the interpretation should be such that pays allegiance only to the objective of the statute i.e. maximization of value of assets.

The duties of a liquidator are defined under section 35 of IBC, 2016. More specifically, section 35(1) (k) which entails a duty over the liquidator to institute or defend any suit, prosecution or other proceedings civil or criminal, in the name of on behalf of the corporate debtor. The usage of words i.e. ‘Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties’ in section 35 of IBC, 2016 at the very beginning makes the exercise of powers and duties conditional upon the directions of the Adjudicating Authority. However, Ld. National Company Law Tribunal, Kolkata Bench in Nicco Corporation Limited v. Mr. Vinod Kumar Kothari, Liquidator of Corporate Debtor, C.A. No.487 of 2017, while providing clarity to the words mentioned at the very inception of section 35 held that:

…….Under the sub-section (1) of section 35, it is stated that the powers of the Liquidator are subject to the directions of the Adjudicating Authority. It does not mean that for every action, which the Liquidator has to perform should be with the prior permission of the Adjudicating Authority………

Therefore, the intent of the statute becomes aptly clear that the liquidator while exercising his/her powers and duties as enshrined under section 33 of IBC, 2016 may not seek approval of the Adjudicating Authority at every step of the liquidation process. While appreciating the strict time period defined for the liquidation process, it becomes empirical in the interest of the objective of IBC, 2016 that a Liquidator may be given a free hand as far as the duties and powers are concerned under the statue. The intervention of the Adjudicating Authority may be called for only where there is an apparent deviation from the duties of the liquidator envisaged under the code.    

It becomes significant to point out that Regulation 39 of IBBI (Liquidation Process) Regulations, 2016 very categorically bestows a duty upon the liquidator to recover and realize all assets and dues of the corporate debtor. The relevant excerpts of the Regulation are provide below:

Regulation 39: Recovery of monies due: The liquidator shall endeavor to recover and realize all assets of and dues to the corporate debtor in a time bound manner for maximization of value for the stakeholders

The word ‘shall’ again postulates a mandatory condition over the Liquidator. Moreover, the usage of word ‘dues’ encapsulates a duty of the liquidator to make recoveries on behalf of the corporate debtor for the maximization of assets.

One may also pay heed to Regulation 44 of the IBBI (Liquidation Process) Regulations, 2016 which emphasizes upon the strict adherence of the timelines as defined for the liquidation process to be completed. The Regulation categorically states the time period to complete the liquidation process as one year, which may be extended subject to the same being supported with cogent grounds to be recorded by the Adjudicating Authority.

Parting Thoughts:

It would be apposite to hold, that the intention of the legislature in enacting sub-section 5 of Section 33 is not unambiguous as, if the liquidator is to maximize the value of assets of the Corporate Debtor in a time bound manner, the Liquidator ought not to be mandated to seek prior approval of the Hon’ble Adjudicating Authority, which is not the most ideal course of action in a process which is hinged with a running clock.

As has been witnessed since the IBC, 2016 has come in play, there has been long haul delays in achieving resolutions or liquidations owing to large amount of time spent upon litigation from various stakeholders. In our considered view, the provision of sub-section 5 of Section 33 would serve to be another roadblock defeating the objective of realizing the monies of stakeholders within the desired time frame.   

The Hon’ble Adjudicating Authority(ies) orders, as discussed above, have paved a confident trajectory, holding that the liquidators in the interest of justice, may be allowed to proceed with the suits/proceedings that have been instituted without taking prior approval. As the principle of harmonious construction suggests that when two provisions of a legal text seem to come in conflict, they should be interpreted so that each of them have a separate effect and neither is redundant or nullified. Admittedly, sub-section 5 of Section 33 conflicts with the provisions qua the larger perspective of the Code, hence, the same shall not be construed as a mandatory requirement of law.

 

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