Liquidator must get NCLT nod before starting legal proceedings, but defect can be cured: Bombay HC

The Bombay High Court has ruled that a liquidator must obtain prior approval of the National Company Law Tribunal (NCLT) before initiating legal proceedings on behalf of a company under liquidation, but proceedings started without such approval are not automatically void and can become effective once the approval is subsequently obtained.

The ruling came in a dispute between Tecpro Systems Ltd, which is under liquidation, and Reliance Infrastructure Ltd over an arbitration clause in a 2018 purchase order.

A division of the court held that the requirement under Section 33(5) of the Insolvency and Bankruptcy Code (IBC) for prior approval of the adjudicating authority is mandatory. The liquidator in the case had invoked arbitration against Reliance Infrastructure on March 10, 2022, but obtained NCLT approval only on December 23, 2022.

The court said the word “prior” in Section 33(5) makes it clear that NCLT approval must precede the initiation of legal proceedings. It also held that a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act constitutes commencement of arbitral proceedings.

However, the court drew a distinction between a mandatory requirement and the consequence of failing to comply with it. Unlike Section 28 of the IBC, which expressly makes certain actions taken without the required approval void, Section 33(5) does not prescribe that legal proceedings initiated without prior approval are void ab initio.

The court therefore held that proceedings initiated without prior NCLT permission remain ineffective until the required approval is granted. Once approval is obtained, the proceedings are treated as having commenced from the date of the approval.

In the Tecpro case, the court treated the arbitration notice as having become effective from December 23, 2022, the date on which NCLT approval was granted. It said requiring the liquidator to issue a fresh notice could create limitation issues and would not serve the purpose of Section 33(5).

The court consequently appointed former Kerala High Court Chief Justice Nitin Jamdar as the sole arbitrator to adjudicate the disputes between Tecpro Systems and Reliance Infrastructure arising from their agreement.

The judgment provides an important clarification for companies in liquidation and their creditors: while liquidators cannot bypass the NCLT before pursuing legal claims, a failure to obtain approval beforehand does not necessarily destroy the underlying claim. Instead, the legal process remains ineffective until the tribunal grants the required permission.

Also See: IBBI flags misuse of insolvency process to settle debts, evade liabilities