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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 ..... t 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. - Company Appeal (AT) (Insolvency) No. 137 of 2017 - - - Dated:- 19-7-2018 - Mr. S.J. Mukhopadhaya, Chairperson And Mr. Bansi Lal Bhat, Member (Judicial) For The Appellant : Mr. Sudipto Sarkar, Senior Advocate assisted by Mr. Abhijee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person having control and supervisions of the financial affairs of the Corporate Debtor or the persons who is in charge of managing the operations of the Corporate Debtor . Any application under Section 10 made on behalf of the Corporate Debtor on the basis of the resolution of the Board of Directors, would be nothing but usurping the powers/ entitlement of the shareholders. According to him, Section 5(5) itself contemplates that a shareholders and other persons can be a Corporate Applicant . Moreover, Section 5(5) (b) refers to the constitutional document of the company thereby indicates the Articles of Association of the Company which is relevant. 6. It was further submitted that the shareholders are the persons with financial stake whose rights will be seriously impaired. In the present case, the Appellants stake of equity share in the Company is 32% of the entire paid up capital. It is also material that the Financial Creditors have also opposed the application filed by the Board of Directors under Section 10. 7. Referring to the objective of the Articles of Association of the Company, it was submitted that the said Articles of Association provided cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondents further submitted that the preamble of the enactment and the intent and object of the I B Code is maximization of value of assets of a Corporate Debtor by first attempting a resolution, failing which liquidation of the Company. The Board of Directors of a Company are the best judge of the financial health of the company and are alone capable of taking an informed decision to maximize value of assets of the company. Such matters cannot be subjected to shareholders approval in order to trigger the resolution process, since the entire purpose of expeditious attempt towards resolution may stand defeated. 12. It was further submitted that the Corporate Insolvency Resolution Process is a statutory process and completely governed and guided by rigors of Section 10 of the I B Code . If the Adjudicating Authority, on examination of application under Section 10, finds that there has been a default in payment of debt and that the application is in conformity with the provisions of Section 10 of the I B Code and other applicable rules and forms and that the Corporate Applicant is not otherwise ineligible under Section 11 of the I B Code , it must admit the application s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly provides for a shareholders resolution, no such imposition exists for a Corporate Insolvency Resolution Process . 20. It was further submitted that the Corporate Insolvency Resolution Process is encapsulated in Chapter II whereas liquidation process is provided for in Chapter III of the I B Code . Further, the provisions of Voluntary Liquidation of Insolvency Code is provided under Chapter V of the I B Code . Pertinently, specific Rules/Regulations have been notified in the I B Code governing each such process. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and Application to Adjudicating Authority Rules, 2016 would govern the Corporate Insolvency Resolution Process . The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 would govern the liquidation process under Chapter III and the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) regulations, 2017 would govern the voluntary liquidation process under Chapter V of the I B Code . 21. In regard to Article 9.1, it was submitted that the said Article is to be read with the definition clause of Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any Encumbrance on the Assets of the Company over and above an aggregate amount exceeding ₹ 25,00,000/- (Rupees Twenty Five Lacs only); ( m) Creation of any lien on the Shares held by the Promoters, or any assets of the Company valued in excess of 5% of the net worth of the Company; ( n) Sale or disposal of the Company s assets which during the financial year of the Company have a fair market value of more than ₹ 50,00,000/-; (o) Capital expenditure exceeding ₹ 5,00,00,000/- (Rupees Five Crores only) in any financial year other than as approved in the business plan; ( p) Approval of the annual financial statements, distribution of profits and coverage of losses of the Company; ( q) Amalgamation or re-organization or consolidation of the Company; ( r) A liquidation, dissolution or winding-up of the Company or any of its subsidiaries; ( s) Filing of all offering materials to be utilized in connection with any public offering of shares of the company; ( t) Any alteration of any rights attached to any share capital of the Company. 26. From clause (r) of Article 1.1.3 of the Articles of Association it is clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile an application for Corporate Insolvency Resolution Process under Section 10 which may result into liquidation of Company itself in absence of proper Resolution Plan . This is apparent from the relevant provision of Section 179 as quoted below: 179. Powers of Board. ─ ( 1) The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do: Provided that in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting: Provided further that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. ( 2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit or other accounts by means of which the arrangement so made is actually availed of. (4) Nothing in this section shall be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in this section. 32. On initiation of Corporate Insolvency Resolution Process , the Board of Directors are suspended, it cannot exercise its power during the period of Moratorium . If sub-section (4) of Section 179 is seen, it will be evident that the said Section 179 shall not be deemed to affect the right of the Company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in the said Section. Therefore, 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. 33. In John Tinson Co. Pvt. Ltd. Ors. V/s. Surjeet Malhan (Mrs) and Anr. (1997) 9 SCC 651 , the Hon ble Supreme Court held that it is now a well-settled legal position that Articles of Association of a private company is a contract between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like the Government), they will exercise as much control over the Parliament as that exercises over them. Although it would be constitutionally possible for the company in general meeting to exercise all the powers of the company, it clearly would not be practicable (except in the case of one or two - man - companies) for dayto- day administration to be undertaken by such a cumbersome piece of machinery. So the modern practice is to confer on the Directors the right to exercise all the company's powers except such as general law expressly provides must be exercised in general meeting. Gower's Principles of Modern Company Law. Of course, powers which are strictly legislative are not affected by the conferment of powers on the Directors as section 31 of the Companies Act provides that an alteration of an article would require a special resolution of the company in general meeting. But a perusal of the provisions of the Companies Act itself makes it clear that in many ways the position of the directorate visa- vis the company is more powerful than that of the Government vis-a-vis the Parliament. The strict theory of Parliamentary sovereignty would not apply by analogy to a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be equated with application under Section 10. On filing an application under Section 7 or Section 9, the Board of Directors may take steps for Corporate Insolvency Resolution Process against other Corporate Debtor but not against its own Company. 38. In the present case, as we find that no decision has been taken by the Shareholders in their Extra Ordinary General Meeting , we hold the application under Section 10 filed by the person authorized by the Board of Directors, was not maintainable. 39. For the reasons aforesaid, we set aside the impugned order dated 11th July, 2017 passed by the Adjudicating Authority in CP/509/(IB)/CB/2017 and allow the appeal. 40. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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