Appeal Restores Creditor's Section 7 IBC Case; Non-Consideration of Board Resolution under Section 60(5) Held Unfair

The NCLAT allowed the appeal and set aside the NCLT's order rejecting the creditor's Section 7 IBC application on the ground of lack of authority of its representative. It held that, after the matter had been reserved for orders, the NCLT could not entertain an oral objection on the representative's competence and ignore the subsequently filed board resolution placed on record through an IA under Section 60(5) IBC. Such procedure deprived the creditor of a fair opportunity and amounted to non-consideration of relevant material. The matter was remitted to NCLT, Hyderabad Bench, for fresh adjudication on all issues, including authority, on merits.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the Adjudicating Authority, after reserving orders in an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, could entertain a fresh oral objection by the corporate debtor regarding the competence and authority of the financial creditor's representative to institute the proceedings.

1.2 Whether the Adjudicating Authority acted in accordance with procedural propriety in directing written submissions and entertaining a new foundational objection at the stage fixed for pronouncement of orders, after arguments had been concluded and orders reserved.

1.3 Whether the Adjudicating Authority was justified in rejecting, without adequate reasons, the interlocutory application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, seeking to place on record a Board Resolution authorising initiation of the Section 7 proceedings, and in simultaneously dismissing the main Section 7 application on the ground of lack of authority.

1.4 Whether the process adopted by the Adjudicating Authority amounted to a denial of effective opportunity and a failure to adjudicate the lis on merits, warranting quashing of the impugned order and remand.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Entertaining a fresh oral objection on authority after reservation of orders

Interpretation and reasoning

2.1.1 The Court noted that pleadings had been exchanged before the Adjudicating Authority, arguments were concluded, and orders were reserved on 08.01.2024 for pronouncement on 13.02.2024, later deferred to 16.02.2024. It was specifically recorded that, in the pleadings and arguments before the Adjudicating Authority, no preliminary objection had been taken by the corporate debtor regarding the competence or authority of the person representing the financial creditor to initiate Section 7 proceedings.

2.1.2 On 16.02.2024, when the matter was listed solely for pronouncement of orders, the Adjudicating Authority entertained an oral objection from the corporate debtor concerning the power of attorney / authority of the signatory to the Section 7 application, asserting absence of a Board Resolution and consequent vitiation of proceedings.

2.1.3 The Court held that an objection going to the very foundation of the proceedings, such as the competence of the person instituting the application, ought to have been raised at the first available opportunity, at least in the written statement/counter or, at minimum, in written submissions before conclusion of arguments. Allowing such a foundational objection to be raised orally at the stage fixed for pronouncement of judgment, after the matter had been heard and reserved, was characterised as an "unreckoned procedural process of law" and contrary to recognised procedural norms.

2.1.4 The Court observed that there is "no such concept of oral objection being raised" at a stage when the trial is to be decided on merits after full opportunity to contest has been given, and once orders have been reserved, the Adjudicating Authority is required to decide the controversy on the material and pleadings already on record.

Conclusions

2.1.5 The Adjudicating Authority could not properly permit a new oral objection regarding the authority of the financial creditor's representative to be raised on 16.02.2024, after reserving orders. Entertaining such an objection at that matured stage was procedurally improper.

2.2 Direction for written submissions and reopening issues after reservation of judgment

Interpretation and reasoning

2.2.1 Upon entertaining the oral objection on 16.02.2024, the Adjudicating Authority directed both sides to appear post-lunch and subsequently granted five days' time to file written submissions with case law confined to the newly raised points, and fixed the matter for "orders" on 26.02.2024.

2.2.2 The Court criticised this "very peculiar pattern of adjudication", holding that after reserving orders, the Adjudicating Authority was duty-bound to decide the Section 7 application on the existing record and pleadings, and not to invite further submissions on fresh foundational issues.

2.2.3 The Court further observed that "written submission" is not a concept available under the procedural law for adjudicating a lis on merits before a court of first instance in the manner adopted, as the foundation of adjudication must rest on material already on record and duly controverted on merits.

2.2.4 The Court emphasised that if, despite the lateness of stage, such an objection was to be entertained, procedural propriety demanded that the financial creditor be afforded an effective opportunity to controvert the objection within a regular procedural framework, not through ad hoc post-reservation directions.

Conclusions

2.2.5 The Adjudicating Authority's act of re-opening the matter after reserving judgment, inviting written submissions on a new jurisdictional/foundational objection, and proceeding in this manner was procedurally defective and inconsistent with proper adjudicatory process.

2.3 Rejection of the interlocutory application under Section 60(5) IBC and non-consideration of Board Resolution

Legal framework (as discussed)

2.3.1 The Court noted that the financial creditor filed IA No. 491/2024 under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, placing on record a Board Resolution dated 23.08.2017, conferring authority to initiate proceedings, in order to meet the objection raised on 16.02.2024 as to the competence of the representative who had instituted the Section 7 application.

Interpretation and reasoning

2.3.2 The Court recorded that no separate order was passed on the interlocutory application prior to final adjudication, and that IA No. 491/2024 was rejected simultaneously with the dismissal of the Section 7 application on 05.03.2024, without assigning cogent reasons for refusing to take the Board Resolution on record.

2.3.3 The Court held that, even if the late-stage oral objection on authority was to be entertained, the financial creditor ought to have been granted an opportunity to substantiate its competence through the interlocutory application. Procedural propriety demanded an independent, reasoned order on IA No. 491/2024 before deciding the main Company Petition.

2.3.4 The Court found that the logic and conclusion of the Adjudicating Authority were based on non-consideration of the material on record, particularly the Board Resolution placed through IA No. 491/2024, rendering the decision procedurally defective.

Conclusions

2.3.5 The rejection of IA No. 491/2024 without adequate reasoning, and the simultaneous dismissal of the Section 7 application on the ground of lack of authority, without properly considering the Board Resolution, was held to be improper and in violation of procedural propriety.

2.4 Denial of adjudication on merits and necessity of remand

Interpretation and reasoning

2.4.1 The Court held that the process adopted by the Adjudicating Authority did not amount to an adjudication of the lis on merits. By entertaining a belated oral objection after reservation of orders, failing to provide a fair opportunity to the financial creditor to respond effectively, and rejecting the interlocutory application without reasons, the Adjudicating Authority effectively deprived the financial creditor of an opportunity to substantiate its case on the core issue on which the petition was rejected.

2.4.2 The Court characterised the impugned order as suffering from "non-consideration of the material on record" and as "procedurally defective", thereby vitiating the dismissal of the Section 7 application.

Conclusions

2.4.3 The impugned order dated 05.03.2024 was quashed.

2.4.4 The matter was remitted to the Adjudicating Authority to decide the Section 7 company petition afresh on merits, after providing an effective opportunity to all parties on: (i) the question of competence and authority of the financial creditor's representative, as orally raised by the corporate debtor; and (ii) all other issues on merits.

2.4.5 All pending interlocutory applications were directed to stand closed in view of the remand, and the appeal was allowed to the extent indicated.

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