Valid Authorization Key to Security Trustee's Power to File Section 7 Application: NCLAT

Valid Authorization Key to Security Trustee's Power to File Section 7 Application: NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member-Technical), has held that a security trustee can file a Section 1 application seeking initiation of the Corporate Insolvency Resolution Process (CIRP) if there is a valid authorization from the assignee of the debt.

Factual Background

The present appeal was filed by the suspended director challenging the impugned order passed by the NCLT, Mumbai, admitting the Section 7 application filed by IDBI Trusteeship. The main issue before the NCLAT was whether IDBI Trusteeship had valid authorization to initiate CIRP against the corporate debtor.

Procedural Background

The NCLT Mumbai had admitted the Section 7 application filed by IDBI Trusteeship, and the Appellant challenged this order before the NCLAT. The Appellant argued that IDBI Trusteeship lacked valid authorization from the assignee of the loan to file the CIRP application.

Issues

The primary issue before the NCLAT was whether IDBI Trusteeship had valid authorization to initiate CIRP against the corporate debtor.

Contentions of the Parties

Appellant: The Appellant argued that IDBI Trusteeship lacked valid authorization from the assignee of the loan to file the CIRP application.

Respondent: The Respondent submitted that it had taken the assignment from the original lender and had received email instructions to initiate Section 7 proceedings.

Reasoning and Analysis

The NCLAT observed that the instructions dated 15.03.2023 and 23.03.2023 clearly authorized IDBI Trusteeship to initiate the CIRP proceedings. The tribunal held that the security trustee agreement remained valid as the assignee stepped into the shoes of the original lender, and IDBI Trusteeship continued to act in its authorized capacity.

The NCLAT distinguished the cases relied on by the Appellant, holding that in those cases, no valid authorization was proved. In contrast, the authorization in the present case was pleaded and rightly proved. The tribunal also noted that the initiation of CIRP against the principal borrower had already been upheld, and therefore, there was no infirmity in the initiation of CIRP against the corporate guarantors.

Implications

This judgment clarifies that a security trustee can file a Section 7 application with valid authorization from the assignee of the debt. The ruling emphasizes the importance of valid authorization in insolvency proceedings.

In this case the appellant was represented by Mr. Ajesh K. Shankar, Mr. Rohit Jolley and Mr. Raghav Sachdev, Advocates. Meanwhile the respondent was represented by Ms. Honey Satpal, Advocate for RP along with Mr. Abhishek Anand, Mr. Karan Kohli, Ms. Palak Kalra and Mr. Kunal Kochar, Advocates.