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2018 (8) TMI 1270 - AT - Insolvency and BankruptcyCorporate Insolvency Resolution Process - Whether it is mandatory for the Board of Directors to place the proposal before the shareholders in the Extra Ordinary General Meeting (EoGM) before moving an application under Section 10 of the I&B Code for initiation of Corporate Insolvency Resolution Process against the Company itself - violation of the provisions of the Articles of Association of the Company and other provisions of law. Held that - the Company has right in the general meeting to impose restrictions and conditions which will prevail over the powers of the Board as specified in sub-section (3) of Section 179. the Board of Directors of a Company is not empowered to file an application under Section 10 for its own liquidation or dissolution or Corporate Insolvency Resolution Process . For the said reason, the application under Section 10 filed by the Board of Directors was not maintainable. The argument that Section 59 of the I&B Code is the only provision for liquidation, cannot be accepted as initiation of Corporate Insolvency Resolution Process by the Company ( Corporate Debtor ) against itself under Section 10 may result into its own liquidation. If the Resolution Process starts and ultimately fails because of non-approval of the Resolution Plan , at that stage provisions of Articles of Association cannot be given effect nor the approval of the shareholders can be taken. In effect, order (s), passed by the Adjudicating Authority appointing any Interim Resolution Professional , declaring moratorium, freezing of account, and all other order (s) passed by the Adjudicating Authority pursuant to impugned order and action, if any, taken by the Interim Resolution Professional , including the advertisement, if any, published in the newspaper calling for applications all such orders and actions are declared illegal and are set aside. The application preferred under Section 10 of the I&B Code, 2016 is dismissed.
Issues Involved:
1. Whether it is mandatory for the Board of Directors to place the proposal before the shareholders in the Extraordinary General Meeting (EoGM) before moving an application under Section 10 of the Insolvency and Bankruptcy Code (I&B Code) for initiation of Corporate Insolvency Resolution Process (CIRP) against the Company itself. 2. Whether the decision of the Board of Directors to file an application under Section 10 of the I&B Code for initiation of CIRP against the Company without approval of the EoGM is against the provisions of the Articles of Association of the Company and other provisions of law. Issue-wise Detailed Analysis: 1. Mandatory Shareholders' Approval Before Section 10 Application: The Appellants argued that the application filed by the person authorized by the Board of Directors under Section 10 of the I&B Code is not maintainable due to the lack of shareholders' approval. They contended that the decision to file such an application should be vested with the shareholders, and the Board's action without their approval contravenes the Articles of Association and the Companies Act. The Respondents countered that the application under Section 10 is maintainable as the Corporate Debtor committed defaults in terms of Section 3(12) of the I&B Code. They emphasized that the Board of Directors is competent to make such decisions without shareholders' approval, aiming to resolve insolvency and avoid liquidation, which aligns with the I&B Code's objectives. The Tribunal examined Article 1.1.3 and Article 9.1 of the Articles of Association, which define "Affirmative Vote Matters" requiring shareholders' consent. It concluded that liquidation, dissolution, or winding-up of the Company must be decided upon at a general meeting with shareholders' affirmative vote. 2. Board of Directors' Decision and Articles of Association: The Tribunal noted that the Articles of Association and the Companies Act restrict the Board's powers, requiring shareholders' approval for significant decisions like filing for CIRP under Section 10. It referred to Section 179 of the Companies Act, which limits the Board's powers to act on behalf of the Company without shareholders' approval for certain matters. The Tribunal held that the Board of Directors is not empowered to file an application under Section 10 for its own liquidation, dissolution, or CIRP without shareholders' consent. The Articles of Association, being a contract between the parties, are binding on the shareholders, Board of Directors, and the Company. Conclusion: The Tribunal concluded that the application under Section 10 filed by the Board of Directors was not maintainable due to the lack of shareholders' approval in an EoGM. It set aside the impugned order dated 11th July 2017, passed by the Adjudicating Authority, and allowed the appeal. All actions taken pursuant to the impugned order, including the appointment of the Interim Resolution Professional and the declaration of moratorium, were declared illegal and set aside. The Corporate Debtor was released from all the rigour of law and allowed to function independently through its Board of Directors. The Tribunal directed the Adjudicating Authority to fix the fee of the Resolution Professional, which the Corporate Debtor would pay for the period he functioned. The appeal was allowed with no order as to costs.
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