Case Laws on Section 33 (5) of Insolvency and Bankruptcy Code,2016,clarifying as to whether suit which has been filed prior to liquidation order, is maintainable after passing of liquidation order

(High Court of Judicature at Bombay) | 19-05-2020

In this case, learned counsel for Mr. Prathamesh Kamat contended that even if liquidation is ordered there is no bar in proceedings against the vessel in rem as section 33(5) of the IBC does not bar any suit or in rem proceedings initiated against the assets of the company nor does it bar continuation of any proceedings initiated prior to Corporate Insolvency Resolution Process (CIRP).

On perusal of contentions by the counsel, High court of Bombay observed that if the CIRP is not successful and the company is ordered to be liquidated, the security provided for Plaintiff’s claim will inure to the benefit of Plaintiff alone. Consequently, upon an order of liquidation being made and a liquidator being appointed, the Suit will proceed in personam under the Admiralty Act and Plaintiff will be entitled to realise its security. It will be open to the Liquidator to defend the suit which right is available to him as provided in Section 35(1) (k) of the IBC.

Relevant para is as follows:-

“If a Plaintiff has commenced Admiralty proceedings in rem and obtained an order of arrest of a ship from an Admiralty Court, subsequent to which insolvency proceedings are filed against the owner of the vessel and the adjudicating authority declares a moratorium under Section 14 of the IBC.

If in such a situation security has been provided to the Admiralty Court for release of the vessel prior to the declaration of moratorium then the Suit is no longer an action in rem. It is in personam against the corporate debtor who has furnished security. The Suit will not proceed against the corporate debtor in the light of Section 14(1)(a) of the IBC. However, Plaintiff will be considered to be a secured creditor having obtained security in respect of his claim. That security will be exclusively for Plaintiff’s claim.

If the CIRP is successful and a Resolution Plan is approved, then the claim of Plaintiff for which he has obtained security, will be determined in accordance with the resolution plan approved by the COC and the adjudicating authority. Plaintiff’s status as a secured creditor who is entitled exclusively to the security provided for release of the vessel will be considered by the COC / Adjudicating Authority (AA) in determining the entitlement of Plaintiff. In such a situation Plaintiff should ordinarily be entitled to realise his claim to the full extent of the security provided. To this extent the Admiralty Court will protect the interest of Plaintiff and its right to the security provided to the Admiralty Court for release of the ship.

If the CIRP is not successful and the company is ordered to be liquidated, the security provided for Plaintiff’s claim will inure to the benefit of Plaintiff alone. In such a case Plaintiff will be a secured creditor in liquidation and will be entitled to realise its security interest as provided in Section 52(4) of the IBC which provides “A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.” The law as applicable would be the Admiralty Act. Consequently, upon an order of liquidation being made and a liquidator being appointed, the Suit will proceed in personam under the Admiralty Act and Plaintiff will be entitled to realise its security. It will be open to the Liquidator to defend the suit which right is available to him as provided in Section 35(1) (k) of the IBC.”

¹ https://www.legitquest.com/case/raj-shipping-agencies-and-another-v-barge-madhwa-and-another/1AD245

2. M/s. Chennai Metro Rail Limited v. M/s. Lanco Infratech Limited And Ors²

(High Court of Judicature at Madras) | 05-09-2011

In this case, High court of madras noticed that Section 33(5) of IBC also indicate that when the liquidation order has been passed, no suit or other legal proceedings shall be instituted by or against the corporate debtor. However proviso provides for institution of the suit or other proceedings by Liquidator on behalf of the Corporate Debtor, with approval of Adjudicating Authority. In the entire Section 33(5) the word “Continuance of the Proceedings” is absent.

Relevant Para is as follows:-

“27. Section 446 of the Company Act 1956 Act prohibited the commencement of any suit or legal proceeding when a winding up order is made. It also applied for the pending proceeding and the leave was required. Section 279 of the Companies Act 2013 also deals with the word ‘pendency’and this word is conspicuously absent in the main part of Section 33(5) and in the proviso of the IBC2016.

28. Comparison between Section 446 of the 2013 Act and 279 of 1956 Act. Seeking of leave under Section 33(5) for pending cases was obviously omitted as the case before the other authority might have progressed until the declaration of moratorium. In such circumstances, it would be imprudent to transfer the case to the file of the Adjudicating Authority and try from that stage. Whereas, in cases of fresh commencement, it could commence before the Adjudicating Authority without any delay. A power to grant leave also includes power to reject the same. A rejection of the leave necessarily entails in the authority taking over the case in conducting the same. The Legislature in its wisdom thought that in cases coming in respect of inability to pay debts and where the resolution plan has failed, there should be no further delay in the procedural aspects while dealing with the pending cases. That is why Section 33(5) omitted to consider the case of pending matters. Therefore, no analogy or support can be drawn from Section 279 in interpret Section 33(5) of the IBC2016.”

² https://www.legitquest.com/case/ms-chennai-metro-rail-limited-v-ms-lanco-infratech-limited-and-ors/1F9FE5