Interpretation of proviso of Section 33(5) of Insolvency and Bankruptcy Code (IBC) 2016
CS Nutan Rajendra Thakkar
Director at Rajendra M Thakkar (Ravasia) and Sons Pvt. Ltd.
Once Liquidation order has been passed whether requirement to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement or only a directory requirement?
Pursuant to proviso of Section 33(5) of Insolvency and Bankruptcy Code (IBC) 2016, Liquidator needs to obtain prior approval of Adjudicating Authority to institute a suit or proceeding on behalf of the Corporate Debtor. Following is extract of Section 33(5) of IBC 2016;
“33(5) 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 the prior approval of the Adjudicating Authority.”
There were similar provisions in Companies Act, 1913 as well as Companies Act, 1956 which provides that after winding up order of the Company no suit or other legal proceeding can be instituted by or against a Corporate Debtor without leave of the court.
Extract of Section 171 of the Companies Act, 1913 is as follows:
“171. When a winding up order has been made, no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the Court, and subject to such terms as the Court may impose.”
Extract of Section 446 of the Companies Act, 1956 is as follows:
“446. SUITS STAYED ON WINDING UP ORDER
(1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Tribunal and subject to such terms as the Tribunal may impose.
Now here we need to examine whether proviso of Section 33(5) of IBC 2016 is a mandatory requirement or only a directory requirement.
Recently in the case of M/s Slimline Realty Private Limited and others v/s Mr. Jigar Bhatt (Liquidator of RMOL Engineering and Offshore Ltd.), Hon’ble National Company Law Appellate Tribunal (NCLAT), New Delhi has examined the same question that whether proviso of Section 33(5) of IBC 2016 is a mandatory requirement or only a directory requirement
Following detailed analysis of aforesaid judgement passed by Hon’ble NCLAT, New Delhi vide its order dated 31 May 2024
The expression used in Section 33 Sub-section (5), Section 33(5) provides that when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor. The provision begins with a negative injunction with regard to suit or legal proceeding by or against the Corporate Debtor after an order of liquidation has been passed. The object of such provision is not far to seek. When a liquidation order has been passed, the estate of the Corporate Debtor has to be protected, hence, there is an embargo on initiating any suit or legal proceeding against the Corporate Debtor. The moratorium as enforced under Section 14 after commencement of insolvency is also with the same objective of protecting the assets of the Corporate Debtor.
Proviso to Sub-section (5) contains an exception to the prohibition i.e. a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.
The question to be answered is as to whether requirement of prior approval of the Adjudicating Authority for instituting a suit or proceeding by the Liquidator is a mandatory requirement or a directory requirement.
Various judgments of Hon’ble Supreme Court of India and Hon’ble NCLAT on statutory interpretation, which need to be briefly noticed as under.
Hon’ble Supreme Court of India in “AIR 1956 SC 1296, State of Rajasthan vs. Leela Jain” had occasion to consider the provisions of Jaipur Municipal Act, 1943. The Hon’ble Supreme Court of India in the above case has laid down that it is not permissible to omit or delete words from the operative part of an enactment, which have meaning and significance. Following observations were made in Para 11 of the judgment:
“11. With due respect to the learned Judges we do not find it possible to agree that it is permissible to omit or delete words from the operative part of an enactment, which have meaning and significance in their normal connotation merely on the ground that according to the view of the Court it is inconsistent with the spirit underlying the enactment. Unless the words are unmeaning or absurd, it would not be in accord with any sound principle of construction to refuse to give effect to the provisions of a statute on the very elusive ground that to give them their ordinary meaning leads to consequences which are not in accord with the notions of propriety or justice entertained by the Court.”
Further in the case of “Gurudevdatta Vksss Maryadit and Others vs. State of Maharashtra and Others, (2001) 4 SCC 534, Hon’ble Supreme Court of India laid down that it is cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense. Following observations were made in Para 26 of the judgment:
“26. Further we wish to clarify that it is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences. It is said that the words themselves best declare the intention of the lawgiver. The courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the legislature and it is not a sound principle of construction to brush aside words in a statute as being inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute.”
Hon’ble Supreme Court of India in “(1976) 2 SCC 953, Lachmi Narain Etc. Etc. vs. Union of India & Ors.” held that if the provision is couched in prohibitive or negative language, it can rarely be directory. Para 68 of the judgment is as follows:
“68. Section 6(2), as it stood immediately before the impugned notification, requires the State Government to give by notification in the Official Gazette “not less than 3 months’ notice” of its intention to add to or omit from or otherwise amend the Second Schedule. The primary key to the problem whether a statutory provision is mandatory or directory, is the intention of the law-maker as expressed in the law, itself. The reason behind the provision may be a further aid to the ascertainment of that intention. If the legislative intent is expressed clearly and strongly in imperative words, such as the use of “must” instead of “shall”, that will itself be sufficient to hold the provision to be mandatory, and it will not be necessary to pursue the enquiry further. If the provision is couched in prohibitive or negative language, it can rarely be directory, the use of peremptory language in a negative form is per se indicative of the intent that the provision is to be mandatory. (Crawford, The Construction of Statutes, pp. 523-24). Here the language of sub-section (2) of Section 6 is emphatically prohibitive, it commands the Government in unambiguous negative terms that the period of the requisite notice must not be less than three months.”
Another judgment of Hon’ble Supreme Court in “(2011) 6 SCC 358, Rangku Dutta v. State of Assam”, where the Hon’ble Supreme Court noticing express provision under Section 20 Sub-section (a) of Terrorist and Disruptive Activities (Prevention) Act, 1987 held that whenever the intent of a statute is mandatory, it is clothed with a negative command. In Para 18 of the judgment following has been laid down:
“18. It is obvious that Section 20-A(1) is a mandatory requirement of law. First, it starts with an overriding clause and, thereafter, to emphasise its mandatory nature, it uses the expression “No” after the overriding clause. Whenever the intent of a statute is mandatory, it is clothed with a negative command. Reference in this connection can be made to G.P. Singh’s Principles of Statutory Interpretation, 12th Edn., at pp. 404-05, the learned author has stated:
“… As stated by CRAWFORD: ‘Prohibitive or negative words can rarely, if ever, be directory. And this is so even though the statute provides no penalty for disobedience.’ As observed by SUBBARAO, J.: ‘Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statute imperative.’ Section 80 and Section 87-B of the Code of Civil Procedure, 1908; Section 77 of the Railways Act, 1890; Section 15 of the Bombay Rent Act, 1947; Section 213 of the Succession Act, 1925; Section 5-A of the Prevention of Corruption Act, 1947; Section 7 of the Stamp Act, 1899; Section 108 of the Companies Act, 1956; Section 20(1) of the Prevention of Food Adulteration Act, 1954; Section 55 of the Wild Life (Protection) Act, 1972; the proviso to Section 33(2)(b) of the Industrial Disputes Act, 1947 (as amended in 1956); Section 10-A of the Medical Council Act, 1956 (as amended in 1993), and similar other provisions have therefore, been construed as mandatory. A provision requiring ‘not less than three months’ notice’ is also for the same reason mandatory.”
We are in respectful agreement with the aforesaid statement of law made by the learned author.”
Another judgment to be noticed of Hon’ble Supreme Court is “(2017) 14 SCC 663, Mukund Dewangan vs. Oriental Insurance Company Limited”, where it was held that every word and expression which the legislature uses has to be given its proper and effective meaning, as the legislature uses no expression without purpose and meaning. In Para 35 following was laid down:
“35. The conclusion that the language used by the legislature is plain or ambiguous can only be arrived at by studying the statute as a whole. Every word and expression which the legislature uses has to be given its proper and effective meaning, as the legislature uses no expression without purpose and meaning. The principle that the statute must be read as a whole is equally applicable to different parts of the same section. The section must be construed as a whole whether or not one of the parts is a saving clause or a proviso. It is not permissible to omit any part of it, the whole section should be read together as held in State of Bihar v. Hira Lal Kejriwal.”
The constituent bench of Hon’ble Supreme Court in “(2020) 5 SCC 757, New India Assurance Co. Ltd. vs. Hilli Multipurpose Cold Storage Pvt. Ltd.” had occasion to consider the provisions of Consumer Protection Act, 1986, Section 13 which provides for limitation for filing reply/response. The question was as to whether the time provided for filing of reply is a mandatory provision or the provision is discretionary to extend the period prescribed. The Hon’ble Supreme Court held that in the said case that hardship cannot be a ground for changing the mandatory nature of the statute and that law prevails over equity, as equity can only supplement the law, and not supplant it. In para no 26 and 27 following has been laid down;
- This Court, in Laxminarayan R. Bhattad v. State of Maharashtra, has observed that “when there is a conflict between law and equity the former shall prevail”. In P.M. Latha v. State of Kerala, this Court held that “Equity and law are twin brothers and law should be applied and interpreted equitably, but equity cannot override written or settled law”. In Nasiruddin v. Sita Ram Agarwal, this Court observed that : (SCC p. 588, para 35)
“35. In a case where the statutory provision is plain and unambiguous, the court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom”. In E. Palanisamy v. Palanisamy, it was held that “Equitable considerations have no place where the statute contained express provisions”. Further, in India House v. Kishan N. Lalwani, this Court held that “The period of limitation statutorily prescribed has to be strictly adhered to and cannot be relaxed or departed from for equitable considerations”.
- It is thus settled law that where the provision of the Act is clear and unambiguous, it has no scope for any interpretation on equitable ground.”
Hon’ble NCLAT in “Company Appeal (AT) (Ins.) No.292 of 2022, Amit Jain vs. Siemens Financial Services Pvt. Ltd.” held that when a word of statute is clear, plan and unambiguous the courts are bound to give effect to that meaning irrespective of consequences.
Hon’ble Supreme Court of India in the case of SCC 451, Rohitash Kumar & Ors. vs. Om Prakash Sharma and Others”, reiterated the principles for interpretation of a proviso. In Para 20 and 21 following was laid down:
“Interpretation of the proviso
- The normal function of a proviso is generally to provide for an exception i.e. exception of something that is outside the ambit of the usual intention of the enactment, or to qualify something enacted therein, which, but for the proviso would be within the purview of such enactment. Thus, its purpose is to exclude something which would otherwise fall squarely within the general language of the main enactment. Usually, a proviso cannot be interpreted as a general rule that has been provided for. Nor it can be interpreted in a manner that would nullify the enactment, or take away in entirety, a right that has been conferred by the statute. In case the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude by implication, what clearly falls within its expressed terms. If, upon plain and fair construction, the main provision is clear, a proviso cannot expand or limit its ambit and scope. [Vide CIT v. Indo Mercantile Bank Ltd. [AIR 1959 SC 713], Kush Saigal v. M.C. Mitter [(2000) 4 SCC 526 : AIR 2000 SC 1390] , Haryana State Coop. Land Development Bank Ltd. v. Employees Union [(2004) 1 SCC 574 : 2004 SCC (L&S) 257], Nagar Palika Nigam v. Krishi Upaj Mandi Samiti [(2008) 12 SCC 364 : AIR 2009 SC 187] and State of Kerala v. B. Six Holiday Resorts (P) Ltd. [(2010) 5 SCC 186]
- The proviso to a particular provision of a statute, only embraces the field which is covered by the main provision, by carving out an exception to the said main provision. (Vide Ram Narain Sons Ltd. v. CST [AIR 1955 SC 765], AIR p. 769, para 10 and A.N. Sehgal v. Raje Ram Sheoran [1992 Supp (1) SCC 304 : 1993 SCC (L&S) 675 : (1993) 4 ATC 559 : AIR 1991 SC 1406] , SCC p. 315, para 14.)”
Now reverting to Section 33 Sub-section (5) of the IBC Code, it is clear that Section 33 Sub-section (5) uses a negative expression and contains an injunction that no suit or other legal proceeding shall be instituted by or against the Corporate Debtor, when the liquidation order has been passed. The legislative intendment of the said provision is clear i.e. that no suit or proceeding be instituted by or against the Corporate Debtor to protect the liquidation estate. Further, institution of proceeding by the Corporate Debtor has also prohibited so as to save the liquidation estate from unnecessary expenses. There is an exception to the above injunction i.e. legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority. The proviso is an exception to the main provision of Section 33(5). In event, if prior approval of the Adjudicating Authority is directory, the Liquidator will be free to initiate proceedings against any entity without obtaining prior approval of the Adjudicating Authority, which cannot be the intendment of the provision of Section 33(5).
The legislative scheme as occurring in Section 33(5) is clear and categorical and the legislative intendment is clear that after the liquidation order is passed, no suit or legal proceeding is instituted by or against the Corporate Debtor with only one exception that suit or legal proceeding on behalf of the Corporate Debtor can be instituted with the prior approval of the Adjudicating Authority.
Therefore, the requirement of prior approval by the Adjudicating Authority for instituting any suit or proceeding is mandatory and cannot be held to be directory.
As noticed above the judgments of Hon’ble Supreme Court of India that every word used in a statute has to be given its proper and effective meaning, as the legislature does not use any word without any purpose and object. Use of prohibitory and negative language, even if no consequences are provided, is treated as mandatory requirement.
Accordingly, statutory requirement under proviso of Section 33(5) of IBC 2016 to obtain prior approval of the Adjudicating Authority by the Liquidator to institute a suit or proceeding on behalf of the Corporate Debtor is a mandatory requirement.
From the above analysis it is also cleared that when a word of any statute is clear, plan and unambiguous, the courts are bound to give effect to that meaning irrespective of consequences.
