Section 7 IBC Petition Can't Be Filed By Power Of Attorney Holder Unless Authorized By Board Resolution: NCLT Hyderabad

Brief Facts:

A petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed by Axis Bank Limited (“Financial Creditor”) against M/s. Karvy Forde Search Pvt Ltd (“Corporate Debtor”), for initiation of Corporate Insolvency Resolution Process (“CIRP”). The Financial Creditor alleged that the Corporate Debtor availed credit facilities amounting to Rs. 15,00,00,000/- and defaulted in payment, with an outstanding amount of Rs. 16,22,02,417.07 as of May 31, 2022.

The petition was filed by the holder of a Power of Attorney without backing from a Board Resolution, making the maintainability of the petition a central issue. The Corporate debtor argued that without a resolution, the signatory is not competent to apply on behalf of the Financial Creditor.

Contentions of the Corporate Debtor/Respondent:

The Corporate Debtor argued that the Insolvency and Bankruptcy Code (“IBC”) is a comprehensive statute on its own, and the provisions of the Power of Attorney Act, of 1882 cannot override the specific provisions of the IBC. They contended that the IBC requires certain acts to be done in a particular manner as prescribed by the statute.

It further asserted that a Power of Attorney holder is not competent to apply on behalf of a Financial Creditor, Operational Creditor, or Corporate Applicant. This lack of competency is evidenced by Section 65 of the IBC, which deals with fraudulent and malicious initiation of proceedings. According to the Corporate Debtor, if insolvency proceedings are initiated fraudulently or with malicious intent, the Adjudicating Authority can impose penalties.

Additionally, the Corporate Debtor referred to a notification issued by the Central Government under Section 7(1) of the IBC, which specified the persons authorized to apply on behalf of a financial creditor. The notification included guardians, executors, administrators, trustees, and persons duly authorized by the Board of Directors of a company. Therefore, the Corporate Debtor argued that since the Financial Creditor lacked such authorization, the petition was not maintainable.

Observations by the Tribunal:

The NCLT by relying on the Supreme Court in the case of Innoventive Industries Limited v. ICICI Bank and Anr, where it was held that as long as a debt is due and payable by the corporate debtor and not interdicted by any law, a petition under Section 7 of the IBC can be initiated. It referred to Section 7(5)(a) and (b) of the IBC, which outline the conditions under which the Adjudicating Authority may admit or reject a petition filed under Section 7. It was noted that the authority can either admit or reject the application but cannot dismiss it.

The NCLT then examined the requirements for applying Section 7(2) of the IBC and referred to Form-1 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Entries in the form mandate submission of the name and address of the authorized person to apply on behalf of the financial creditor, along with an authorization letter. However, the form does not explicitly mention a 'power of attorney holder'.

The NCLT also perused the notification issued by the Central Government under Section 7(1) of the IBC, specifying persons authorized to apply on behalf of a financial creditor, which did not include 'power of attorney holders'.

The tribunal referred to a ruling by the NCLAT in Palogix Infrastructure Private Limited vs ICICI Bank Limited, stating that the authorization given by a bank through a power of attorney pursuant to a resolution passed by the bank's Board of Directors would not impair an individual's authority to apply to Section 7 of the IBC. However, they noted that a Board Resolution authorizing the execution of the power of attorney was a mandatory legal requirement. Since no such resolution was provided, the petition was deemed not maintainable.

Regarding the contention about the record of default, the NCLT observed that the Financial Creditor failed to rectify the defect of not filing the record of default within the specified time. No amendment was made to the pleadings to rectify this defect.

The NCLT concluded that since the petition was not maintainable due to the lack of a Board Resolution authorizing the power of attorney holder, it refrained from discussing the merits of the matter. It clarified that the Financial Creditor was not precluded from filing a fresh Company Petition under Section 7 of the I&B Code against the Corporate Debtor, provided they fulfil all legal requirements. As a result, the NCLT rejected the Company petition without costs.

Case Title: Axis Bank Limited vs Karvy Forde Search Pvt. Ltd.

Case No.: CP(IB) No. 249/7/HDB/2022

Advocate for the Petitioner: Mr V.V.S.N. Raju and Mr Srikanth Rathi

Advocate for the Respondent: Ms Kopal Shareef

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