India: Insolvency Resolution Process: Who Is Authorized To Initiate?

A question arises as to who can file application under the Code on behalf of the Companies or Corporate Persons as they are juristic entities. The law with respect to this has been discussed by the Hon'ble Bench of NCLAT in Tirupati Infra Project Pvt. Ltd. v. Bank of India,1 and Palogix Infrastructure Pvt. Ltd. v. ICICI Bank Ltd.2

In the former case, in response to the objection raised by Corporate Debtor, the Hon'ble Bench noted that the person who has filed the application under Section 7, is an officer of Bank of India (Financial Creditor) and was authorized by the Board of Directors to do so. Thus, it was held that the application brought before the Adjudicating Authority was in a legal manner and rightly admitted. It is to be noted here that in this case, the person was appointed to act as Senior Manager by power of attorney dated 05.01.2017, in respect of necessary matters including insolvency and bankruptcy.

The law with respect to the same was then discussed in detail in Palogix Infrastructure. The facts from which the dispute arose were that a general power of attorney was given in favour of one legal manager of the bank on 20.10.2014. The said power of attorney authorized the holder to commence and institute any proceedings before any Court of Law including National Company Law Tribunal. Acting under this power of attorney, an application was filed under section 7 of the Code against Palogix Infrastructure for default on a payment of a loan. Since the power of attorney was awarded before the Code came into existence, the question arose if the power so granted can be contemplated to include the power to take actions under the Code.

The case originally arose before the Kolkata Bench of NCLT, wherein two members, gave divergent opinions. While the learned Technical Member did not find any fault in the attorney holder's initiation of a proceeding under section 7 of the Code; the learned Judicial Member held that there should be specific authorization to initiate CIRP. In view of divided opinion of the Bench, the Hon'ble President of NCLT constituted a special bench to give a rest to the controversy.

By majority judgment, the Adjudicating Authority held that there should be specific authorization to the power of attorney holder to initiate CIRP under the Code. It was observed that the provisions under the Companies Act, 1956 regarding winding up proceedings differ from the provisions under the Code regarding insolvency process and the power given generally to initiate winding up, can never be stretched to embrace the power to initiate a corporate insolvency resolution proceeding under section 7 of the Code. Thus, the petitioner bank was directed, vide order dated 12.04.2017, to rectify the defect accordingly within 7 days. It was in appeal to this order that the NCLAT bench delivered its order on 20.09.2017.

The Hon'ble Bench of NCLAT categorically ruled that a 'Power of Attorney Holder' is not competent to file an application on behalf of a 'Financial Creditor' or 'Operational Creditor' or 'Corporate Applicant'. It was held that in terms of Rule 23(1) of NCLT Rules, 2016 and Form 1 of I&B (Application to Adjudicating Authority) Rules, 2016, a 'Financial Creditor' being a juristic person can only act through an 'Authorized Representative'. It is to be noted that Rule 23 of NCLT Rules, 2016 is applicable to application filed under section 7, 9 and 10 of the Code as per Rule 10 of the Adjudicating Authority Rules. The relevant rule 23(1) states as follows:

'(1) Every petition, application, caveat, interlocutory application, documents and appeal shall be presented in triplicate by the appellant or applicant or petitioner or respondent, as the case may be, in person or by his duly authorized representative or by an advocate duly appointed in this behalf in the prescribed form with stipulated fee at the filing counter and non-compliance of this may constitute a valid ground to refuse to entertain the same.'

This 'Authorized Representative' is distinct from the 'Power of Attorney Holder'. The court said that the I&B Code is a complete code in itself. The provision of the Power of Attorney Act, 1882 cannot override the specific provision of the Code, which requires that a particular act should be done by a person in the manner as prescribed there under. The Bench referred to Section 2 of the Power of Attorney Act, 1882 which is reproduced below:

'2. Execution under Power-of-Attorney: The donee of a power-of-attorney may, if he thinks fit, execute or do any instrument or thing in and with his own name and signature, and his own seal, where sealing is required, by the authority of the donor of the power; and every instrument and thing so executed and done, shall be as effectual in law as if it had been executed or done by the donee of the power in the name, and with the signature and seal, of the donor thereof. This section applies to powers-of-attorney created by instruments executed either before or after this Act comes into force.'

Thus, upholding the order of the NCLT, the Appellate Tribunal held that a specific authorization is required to initiate process under the Code. Entry 5 of Form 1 requires the 'name and address of the person authorized to submit application in its behalf, and hence a general power of attorney in someone's favour to initiate legal proceedings is not sufficient authorization under the Code. Furthermore, an observation was made by the court, that if an officer of a bank has been authorized to grant loan or for recovery of loan, it is sufficient authorization to initiate CIRP under the Code. And it cannot be pleaded that no specific grant has been made to initiate CIRP.

The law, thus, stands clarified that a general power of attorney holder cannot act on behalf of the Financial Creditor/Operational Creditor/Corporate Applicant under the Code. An insolvency resolution process can and may have adverse consequences on the welfare of the company, hence it becomes imperative that it is initiated by someone who is duly authorized. The Authorized Person can be authorized for specific operations under the Code or if he has been given power to grant a loan then he has the capacity to recover the same on a default.

Footnotes

1. Company Appeal (AT) (Insolvency) No. 99 of 2017.

2. Company Appeal (AT) (Insolvency) No. 30 of 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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