Arbitration Initiated by Liquidator Without Prior NCLT Approval Isn't Void: Bombay High Court

The Bombay High Court has recently held that while prior approval of the National Company Law Tribunal (NCLT) is mandatory before a liquidator initiates legal proceedings on behalf of a company in liquidation, commencing arbitration without such approval does not render the proceedings void.

Instead, such proceedings merely remain legally ineffective until the NCLT grants the requisite permission, from which date the arbitration notice becomes operative.

Delivering the ruling in an application filed by Tecpro Systems Limited (In Liquidation), Justice Arun R. Pedneker appointed former Chief Justice of the Kerala High Court, Justice Nitin Jamdar, as the sole arbitrator to adjudicate disputes and differences arising out of and in connection with the purchase order executed between the parties.

The court observed, "This Court is, therefore, of the view that while prior permission under Section 33(5) is mandatory, the absence of such prior permission before the initiation of the legal proceedings, does not render the proceedings void ab initio. Instead, the commencement of such proceedings remains ineffective until the date on which the required permission is granted by the Adjudicating Authority."

The dispute arose out of a purchase order dated January 17, 2018, under which Tecpro Systems Limited agreed to supply goods to Reliance Infrastructure Limited. Clause 17 of the agreement provided that disputes arising out of the contract would be referred to arbitration, with Mumbai as the venue.

The National Company Law Tribunal (NCLT) ordered the liquidation of Tecpro Systems Limited on January 16, 2020, and appointed a liquidator. The liquidator invoked arbitration against Reliance Infrastructure Limited on March 10, 2022, but obtained approval under the proviso to Section 33(5) of the Insolvency and Bankruptcy Code, 2016, only on December 23, 2022.

After Reliance Infrastructure did not respond to the arbitration notice, Tecpro Systems approached the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator.

Opposing the application, Reliance argued that the arbitration notice, having been issued before obtaining NCLT approval under Section 33(5), was unauthorized, incompetent, and void ab initio and that no valid arbitral proceedings had commenced.

Tecpro Systems Limited countered that while prior approval is mandatory, proceedings initiated without such approval are not void. It argued that the arbitration notice remained legally ineffective until the NCLT granted approval, from which date it became legally effective.

The High Court agreed that prior approval under Section 33(5) is mandatory. It, however, accepted Tecpro's contention that proceedings initiated without such approval are not void.

The issue before the Court was whether an arbitration notice issued without prior approval under Section 33(5) was void ab initio or merely remained ineffective until approval was granted, and what legal consequence would follow from post facto approval.

The court held that, unlike Section 28(4) of the Insolvency and Bankruptcy Code, Section 33(5) does not prescribe that proceedings initiated without prior approval are void.

It further held that requiring the liquidator to issue a fresh arbitration notice after obtaining approval would not serve the purpose of Section 33(5) and could create issues relating to limitation on account of the time lost during the intervening period.

It also held that proceedings initiated without prior approval become effective only upon the grant of permission and are treated as having commenced from that date.

"A purposive interpretation of Section 33(5) requires that proceedings initiated without prior permission remain ineffective for all purposes until such permission is obtained, and that the proceedings shall be treated as having commenced from the date of grant of permission," the high court ruled.

Holding that the arbitration notice issued on March 10, 2022, became legally effective on December 23, 2022, the court found no legal impediment to allowing the application. It then appointed Justice Nitin Jamdar, former Chief Justice of the Kerala High Court, as the sole arbitrator.

The court directed that the seat and venue of arbitration would be governed by the parties' agreement and kept all contentions of the parties open for determination before the arbitral tribunal.

For Applicant (Tecpro Systems Limited (In Liquidation): Advocates Akash Loya, Vishal N. Nevshe and Abhishek Bhaduri.

For Respondent (Reliance Infrastructure Limited): Advocates Tushad Kakalia and Kartik Hede, instructed by Shivshankar Prajapati.