[Srujan SangaiIII Year B.A. LLBNational Law School of India University, Bengaluru]
Introduction
The Corporate Insolvency Resolution Process (“CIRP”) is a critical mechanism under the Insolvency and Bankruptcy Code (“IBC”) in India, designed to address the insolvency of corporate entities efficiently. This article delves into the intricate question of who can and should be permitted to initiate the CIRP process. It seeks to critique the recent judgement of the National Company Law Tribunal (“NLCT”) in Axis Bank v. Karvy, the existing statutes and case law developed which ultimately give rise to contradictions and ambiguities within various statutory instruments and the law. To that end, the structure of the paper is as follows: First, it argues that only an FC or an authorised person is permitted to initiate the CIRP process u/s. 9 of IBC and questions the Board of Director’s (“BoD”) role in the same. Second, it contends that while the BoD possesses the authority to grant authorization, this power should not be exercised without limitations, and authorization should not be indiscriminately granted to anyone. Third, it argues that PoA holders cannot be permitted to initiate the CIRP process.
Who Holds the Keys? Initiation of CIRP
The IBC defines a Financial Creditor (“FC”) under Section 5(7) as any person to whom a financial debt is owed. FCs can initiate the CIRP process under S.7(1) of the Code, either by itself or jointly with other FCs or any other person on behalf of the FC as notified by the government. The government via Notification S.O. 1091(E) has notified the persons who may file an application to initiate the process. Point (iv) of Notification permits the board to authorise any person to file an application to initiate CIRP. However, the same conflicts with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 deals with Application by FC and read as “A financial creditor, either by itself or jointly, shall make an application”. They do not envision any application by other persons but rather only by an FC. Entries 5 & 6 of Part I of Form-1 under these rules envisage an ‘authorised person’ and it has been held in ICICI Bank v. Palogix Infrastructure that “FC being a juristic person can only act through an "Authorised Representative"” However, here it is not required that the person be authorised by the Board of Directors which is a requirement in the Notification. There is no statutory backing exists where the permission of BoD is required to authorise a person.
Additionally, the Notification says that an executor, guardian, or trustee may not require any authorization from either the BoD or the FC. The apparent effect here is that the status of FC itself is being transferred to the notified persons. The definition of FC u/s 5(7) r/w S.5(8) suggests the nature of financial debt and emphasizes the intrinsic financial stake and the time value of money. This ensures that those initiating CIRP have a direct financial interest since they participate later in the proceedings as per S.16 onwards and are genuinely affected by the debtor's insolvency. The notification also fails to distinguish between FC as a natural person and FC as a corporate entity. The purpose of the notification is to clearly assume the FC to be a natural person since a corporate entity cannot have an executor or a guardian. Failure to distinguish can lead to confusion and application of the notification to corporate entities which is not a legal possibility. For the remainder of this article, it is assuming FC as a corporate entity. Thus, initiating an insolvency process is an entitlement of FC only which cannot be transferred unless the BoD authorises them subjected to limitations discussed in the next section.
Voices in the Room: Restrictions on Board Authorization
S.179 of the Companies Act, empowers the BoD to do all such acts that a company is authorized to do so. Thus, the “company being a juristic person is capable of initiating and defending legal proceedings, therefore, the Board of Directors … may duly empower 'Authorised Representative' to do so on its behalf”. Thus, although the BoD has the power to authorise, the author argues that the same cannot be unhindered and would be subject to restrictions.
Reference can be made to Regulation 4A of Insolvency Resolution Process for Corporate Persons Regulations, 2016 which deals with the ‘Choice of authorised representatives’ in Committee of Creditors (“CoC”) meetings. According to Regulation 4A(2)(b), only those persons eligible to become resolution professionals are permitted to be authorized representatives for such meetings. No such requirement is present for the ‘authorised representative’ who initiates the CIRP process. It is peculiar that assuming a person who is ineligible to sit in the CoC meetings would be permitted to initiate the CIRP process if he falls within the notified persons or is authorized by the BoD. The Notification is thus ignoring the original intent of these sections which sought to limit the initiation process to FCs. It may increase the probability of fraudulent cases being filed and the only remedy then is with the AA under S.65 of the Code. Interestingly, no similar procedure of ‘authorisation’ has been proposed for Operational Creditors u/s. 9 of the Code; only OCs can initiate CIRP. Recent case laws suggest that FCs have initiated insolvency processes through PoAs which have led to issues of maintainability of such petitions. The next section argues why PoA holders should not be permitted to initiate such proceedings.
The Edge of Authority: Legal and Practical Challenges for PoA
The first question that arises is who is a Power of Attorney (“PoA”) holder. The Power of Attorney Act, 1882’s S.2, defines it as something that “includes any instrument empowering a specified person to act for and in the name of the person executing it.” In simpler terms, A PoA is an authorization by a ‘principal’ to its ‘agent’ to do an act. In a series of cases, the issue of Power of Attorney holders initiating the CIRP process has arisen.
The NLCT in Axis Bank v. Karvy Forde Search dealt with the question of whether a “petition filed under section 7 I&B Code, 2016 by the holder of a Power of Attorney not backed by Board Resolution is not maintainable?” In Rajendra Narottamdas Sheth v. Chandra Prakash Jain case, the Court held that a Power of Attorney holder can initiate the CIRP process when the same has been authorized by the BoD. Thus, it envisages the Notification where the PoA holder would be assumed to be a person authorized by the BoD. The article argues that a Power of Attorney cannot be given the responsibility of initiating the CIRP process. In the case of Axis Bank, the Section 7 petition was filed by the Power of Attorney holder on behalf of the financial creditor without a Board Resolution. The resolution of BoD is of the FC. It was argued that in the absence of the board resolution, the petition itself is not maintainable.
The author argues that first, a PoA holder lacks the direct financial exposure and involvement necessary to act as an FC under the IBC’s stringent requirements. The agent here is assuming the role of FC without the rights and entitlement of an FC. Further, Palogix Infrastructure clearly holds that only an “authorised person" as distinct from a "Power of Attorney Holder" can make an application under section 7”
Second, the status and rights of an FC are non-transferable to a PoA holder. In Axis Bank, the Court assesses if any malicious or fraudulent application is made under S.7 which is punishable u/s.65; would the PoA holder be liable for the same? It is settled law that the PoA holder represents the principal and any actions taken by him are construed to be the actions of the assignor. Thus, it is sufficiently clear that the PoA holder cannot be punished even though S.65 uses the phrase ‘any person’, any is not a sufficient reason to state that he cannot make an application under S.7 or S.9 of IBC.
Third, it is settled law that the authorisation is limited to the principal’s knowledge and if the principal himself is unaware of the eventuality, then the authorisation cannot be extended to it. Thus, if insolvency proceedings are not an eventuality, then the authorisation for the same cannot be granted. The Supreme Court in A.C. Narayanan v. State of Maharashtra has held that the “agent of the grantor and the initiation is by the grantor represented by his attorney holder in his personal capacity”, meaning all acts of the agent are the personal acts of the principal limited to the agreement. However, the Court has also held in T.C. Mathal v. District & Sessions Judge, Thiruvananthapuram, Kerala that “Section 2 of the Power of Attorney Act, 1882 cannot override the specific provision of a statute which requires that a particular act should be done by a party-in-person” Thus, since The IBC is a complete code, intending to regulate insolvency and bankruptcy matters comprehensively. This doctrine implies that the IBC provides a holistic and self-sufficient framework, which should be interpreted and applied as a whole, without importing extraneous principles that could disrupt its coherence.
Conclusion
In conclusion, the initiation of the CIRP process under the IBC is a pivotal step in resolving corporate insolvencies, necessitating stringent adherence to statutory provisions and clear guidelines. The analysis reveals significant inconsistencies between the statute, governmental notifications, and judicial interpretations, particularly concerning the roles of financial creditors, authorized representatives, and power of attorney holders. These discrepancies underscore the necessity for legislative clarity to ensure that only those with a direct financial stake and appropriate authorization can initiate insolvency proceedings. Such measures would safeguard the integrity of the insolvency process, prevent fraudulent practices, and align with the IBC's overarching objective of fostering a robust and predictable insolvency regime. The article advocates for amendments to harmonize the relevant provisions, ensuring that the initiation process remains transparent, equitable, and reflective of the original legislative intent.
[The author would like to thank Archit Sinha for his comments and help with this article]
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