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TMI Blog2018 (8) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "I&B Code") has been admitted, the order of 'Moratorium has been passed and the 'Insolvency Resolution Professional' has been appointed with certain directions. 2. The questions arise for consideration in this appeal are: i. 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 ? and; ii. Whether the decision of the 'Board of Directors' to file application under Section 10 of the 'I&B Code' for initiation of 'Corporate Insolvency Resolution Process' 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? 3. According to the Appellants, the application preferred by the person authorized by the 'Board of Directors' filed application under Section 10 of the 'I&B Code' is not maintainable for want of approval of the Shareholders'. 4. Learned Senior Counsel appearing on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the purported decision of the 'Board of Directors' to file the application under Section 10 of the 'I&B Code' is contrary to the Articles of Association of the Respondent and is invalid and non-est. 9. Referring to Article 1.1.3 (d, e, h, i, n, q, r, t) of the Articles of Association, it was contended that the purported decision to file the application is squarely covered by affirmative vote matters for which, as per Article 9.1, prior written consent of the Appellants was mandatory. The Articles of Association of the Company were amended to reflect the provisions of the share subscription and shareholders' agreement dated 31st May, 2010 inter alia, executed amongst the Appellants and the Respondents, pursuant to which, the Appellants had invested sum of Rs. 1,25,00,00,000/- in the Respondents and the holding of the Appellants constitute 32% of the entire paid up share capital of the Company. 10. Learned Senior Counsel appearing on behalf of the Respondents submitted that the appeal has been preferred by minority equity shareholder along with preferential shareholders. According to him, the 'Corporate Debtor' having committed defaults in terms of Section 3(12), the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as- Articles of Association or shareholders' agreement is required only for the 'Corporate Applicant' to submit. The application having been preferred by the 'Corporate Debtor' itself, through Sh. M. Natarajan, CEO, who has been duly authorized by the Board of Directors resolution dated 13th May, 2017, the application under Section 10 is maintainable. 16. According to him, a Company acts through its 'Board of Directors' and in terms of Section 179 of the Companies Act, 2013, the Board of Directors of a Company is entitled to exercise all such powers, and to do all acts and things, as the Company is authorized to exercise to do. 17. Reliance was placed on the clarification issued by the Ministry of Corporate Affairs dated 25th October, 2017, with regard to the requirement of approval of shareholders for a 'Resolution Plan' qua the 'Insolvent Corporate Debtor'. 18. Further, according to Respondent, clause 1.1.3 and in particular sub-clause (r) of the definitions clause in the Articles of Association of the company and clause 9.1 of the Articles of Association, is entirely misplaced and is devoid of any merit, as what the Article seeks to do is to provide a reserved matter in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company, its shareholders as well as creditors of the company by seeking to invoke 'Corporate Insolvency Resolution Process'. 22. It was submitted that the right to invoke a statutory remedy cannot be curtailed in the manner contemplated or asserted by the Appellant. Reliance was placed on "Surendra Kumar Dhawan and Anr. V/s. R. Vir and Ors.─ (1977) Vol 47 Company Cases 276" and "O.P Gupta V/s. Shiv General Finance (P) Limited & Ors.─ (1977) Vol. 47 Company Cases 279". 23. According to the Respondents, application under Section 10 of the 'I&B Code' being complete in all respects, was supported by a valid resolution of the Board of Directors of the Company, it was rightly admitted. 24. We have heard learned counsel for the parties and perused the record and relevant provisions. 25. Article 1.1.3 of Articles of Association defines "Affirmative Vote Matters", relevant of which reads as follows: "1.1.3 "Affirmative Vote Matters" means the following matters listed below whether proposed to be decided upon at the Board and/or at the Shareholders' meeting or in any other manner: (a) Any strategic alliance/ joint venture proposal to be entered into by the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e thereof, or any of the employees, officers or managers or the Target Companies, in respect of any Affirmative Vote Matter save and except with the prior written consent of the Investors. For this purpose, any connected contracts or transactions shall be combined to determine the applicability of the limits specified in the Affirmative Vote Matters." 28. From the aforesaid provisions, it is clear that no action or decision can be taken and/or no resolution can be adopted at a Board meeting or a Shareholders meeting any committee thereof, or any of the employees, officers or managers or the Target Companies, in respect of any 'Affirmative Vote Matter' save and except with the prior written consent of the Investors. 29. Article 9.2 mandate that the 'affirmative vote matters' specified in Article 9.1 shall be taken by the Company only at a 'general meeting', as quoted below: "9.2 In the event the provisions of Article 9.1 hereof are rendered unenforceable under law, all decision in relation to any of the Affirmative Vote Matters specified in Article 9.1 shall be taken by the Company only at a general meeting." 30. From the aforesaid provision, it is clear that for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to grant loans or give guarantee or provide security in respect of loans; (g) to approve financial statement and the Board's report; (h) to diversify the business of the company; (i) to approve amalgamation, merger or reconstruction; (j) to take over a company or acquire a controlling or substantial stake in another company; (k) any other matter which may be prescribed: Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify: Provided further that the acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a making of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so establish a contract between the Company and the members and between the members inter se. the contract governs the ordinary rights and obligations incidental to membership in the Company. In the absence of any provisions contained in the Indian Companies Act which prohibit a Company from forfeiting a share for failure on the part of the member to carry out an undertaking or an engagement the Articles of a Company which provide that in certain events membership rights of the shareholder including his right to the share will be forfeited are binding. The Articles of Association of the Exchange expressly provide that in the event of the member failing to carry out the engagement and in the conditions specified therein his share shall stand forfeited. Articles 22, 24, 26, 27 and 29 of the Exchange relating to forfeiture of shares in certain events are therefore valid." 35. The Hon'ble Supreme Court in "Life Insurance Corporation of India V/s. Escorts Ltd. and Others. ─ (1986) 1 SCC 264" held: "A Company is, in some respects, an institution like as State functioning under its 'basis Constitution' consisting of the Companies Act and the memorandum of Association. Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Federal and the State Legislature under a Federal Constitution." As already noticed, the only effective way the members in general meeting can exercise their control over the Directorate in a democratic manner is to alter the articles so as to restrict the powers of the Directors for the future or to dismiss the Directorate and appoint others in their place. The holders of the majority of the stock of a corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. And, an injunction cannot be granted to restrain the holding of a general meeting to remove a director and appoint another." 36. In view of the aforesaid decision of the Hon'ble Supreme Court and other Hon'ble Courts, we hold that the Article 1.1.3; 9.1 and 9.2 are binding on all the 'shareholders' as also on the 'Board of Directors' as also on 'the Company'. We have already held that 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 Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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