The Court rules that arbitration proceedings without prior NCLT approval remain ineffective until approval is granted.
In a significant ruling, the Bombay High Court, presided over by Justice Arun R. Pedneker, has emphasized the mandatory requirement for obtaining prior approval from the National Company Law Tribunal (NCLT) before initiating legal proceedings on behalf of a corporate debtor undergoing liquidation. The case, Tecpro Systems Limited (In Liquidation) versus Reliance Infrastructure Limited, revolved around the appointment of an arbitrator for disputes arising from a Purchase Order executed between the parties.
The crux of the case lay in whether the liquidator of Tecpro Systems could initiate arbitration proceedings against Reliance Infrastructure without first obtaining the NCLT's approval as mandated under Section 33(5) of the Insolvency and Bankruptcy Code, 2016 (IBC). The liquidator had issued a notice invoking arbitration on March 10, 2022, without obtaining prior NCLT approval, which was only granted on December 23, 2022. This led to the filing of an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator.
The respondent, Reliance Infrastructure, challenged the application, arguing that the arbitration notice was void ab initio as it lacked the mandatory prior approval. However, the Court, while acknowledging the mandatory nature of prior approval, clarified that proceedings initiated without it are not void ab initio but remain ineffective until such approval is granted.
In its judgment, the Court held that the arbitration proceedings are deemed to have commenced only from the date when the NCLT approval was granted, thereby allowing the application for the appointment of an arbitrator. Justice Pedneker appointed Mr. Nitin Jamdar, Former Chief Justice of Kerala High Court, as the sole arbitrator to adjudicate the disputes between the parties.
The ruling underscores the importance of adhering to procedural requirements under the IBC, emphasizing that legal proceedings initiated on behalf of a corporate debtor in liquidation must be backed by prior approval from the NCLT to ensure their effectiveness.
Bottom line:-
The prior approval of the Adjudicating Authority under Section 33(5) of the Insolvency and Bankruptcy Code, 2016, is mandatory before initiating legal proceedings on behalf of the corporate debtor. However, proceedings initiated without such approval are not void ab initio but remain ineffective until the requisite approval is granted.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Sections 11, 21; Insolvency and Bankruptcy Code, 2016 Sections 28, 33(5).
