M Sai Eswara Swamy Vs Siti Vision Digital Media Pvt. Ltd. (NCLAT Delhi)
Summary: The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, examined whether a director holding 50% shareholding in financial creditor companies could initiate corporate insolvency resolution proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) without a Board Resolution authorising such action. The appellant, M Sai Eswara Swamy, was a director and 50% shareholder of Vision Infotel India Pvt. Ltd. and Vision Infracon India Pvt. Ltd., while the remaining 50% shareholding was held by Mr. K Siva Rama Krishna Kancharla, their Managing Director. The appellant alleged that the Managing Director refused to approve legal proceedings against Siti Vision Digital Media Pvt. Ltd., the corporate debtor, and that his wife held 4% shareholding in the corporate debtor company. Due to this alleged deadlock, the appellant filed a Section 7 application without obtaining Board authorisation. The NCLT dismissed the application as not maintainable because no Board Resolution authorising the appellant to institute proceedings had been submitted. Challenging this decision, the appellant invoked the doctrine of derivative action, arguing that a shareholder could act on behalf of a company where its management prevented necessary legal proceedings. He relied upon Onyx Musicabsolute Com Pvt. Ltd. Vs Yash Raj Films Pvt. Ltd., Star Light Real Estate (Ascot) Mauritius Pvt. Ltd. Vs Jagriti Trade Services Pvt. Ltd., and Dr. Satya Churn Law Vs Rameshwar Prasad Bajoria. The appellant further contended that the corporate debtor had acknowledged the outstanding debt in its balance sheet and that the absence of a Board Resolution approving the loan under Section 186 of the Companies Act, 2013 should not defeat the insolvency application.
The respondent opposed the appeal, relying upon Ministry of Corporate Affairs Notification S.O. 1091(E), dated 27 February 2019, issued under Section 7(1) of the IBC, which identifies the persons authorised to initiate insolvency proceedings on behalf of financial creditors. The respondent submitted that a company could institute such proceedings through a person duly authorised by its Board of Directors and that a shareholder or director could not independently exercise this power without proper authorisation. Reliance was placed upon Palogix Infrastructure Pvt. Ltd. Vs ICICI Bank Ltd., Company Appeal (AT) (Insolvency) No. 30 of 2017. The respondent also questioned the appellant’s standing to maintain an appeal under Section 61 of the IBC. After considering the rival submissions, the NCLAT observed that the absence of a Board Resolution authorising the appellant to file the Section 7 application was undisputed. The Tribunal examined the judicial precedents concerning derivative action and acknowledged that shareholders may, in exceptional circumstances, institute proceedings where wrongdoers controlling a company prevent it from pursuing legal remedies. However, it distinguished those authorities because proceedings under Section 7 are governed by a specific statutory framework prescribing who may initiate insolvency proceedings on behalf of a financial creditor. The Tribunal held that the doctrine of derivative action could not override the express authorisation requirements prescribed under Section 7(1) of the IBC and the Central Government notification. Consequently, the appellant’s position as a director and 50% shareholder, notwithstanding the alleged management deadlock, did not authorise him to institute insolvency proceedings without the requisite Board Resolution.
The NCLAT also considered the separate objection concerning the absence of a Board Resolution approving the advancement of the loan under Section 186 of the Companies Act, 2013. The appellant argued that the corporate debtor’s acknowledgement of the liability in its balance sheet established the debt and made a separate resolution unnecessary. The Tribunal rejected this submission and found no defect in the Adjudicating Authority’s conclusion that the required Board Resolution relating to the loan had not been produced. It therefore affirmed both grounds on which the NCLT had dismissed the insolvency application. The Tribunal concluded that the Section 7 petition was not maintainable and that no interference with the impugned order was warranted. Accordingly, the appeal was dismissed summarily without notice to the respondent, with no order as to costs. The decision clarifies that a director or shareholder cannot rely upon the doctrine of derivative action to bypass the prescribed corporate authorisation requirements for initiating insolvency proceedings under Section 7 of the IBC, even where an equal shareholding structure results in a management deadlock. It further highlights the importance of maintaining appropriate Board approvals for corporate lending transactions under Section 186 of the Companies Act, 2013. The ruling is particularly relevant to financial creditor companies seeking to initiate insolvency proceedings where disputes among directors or shareholders prevent the passing of necessary corporate resolutions.
Cases Discussed
1. Onyx Musicabsolute Com Pvt. Ltd. Vs Yash Raj Films Pvt. Ltd. (Bombay High Court); 2008 SCC OnLine Bom 636. The appellant relied upon this decision in support of the doctrine of derivative action, contending that a shareholder may institute proceedings on behalf of a company where those controlling its affairs prevent the company from pursuing legal remedies. The NCLAT distinguished the judgment because the present dispute concerned an application under Section 7 of the IBC, for which the Central Government had prescribed specific categories of persons authorised to initiate proceedings. The Tribunal held that the general derivative-action principle could not override the statutory authorisation requirement applicable to financial creditor companies.
2. Star Light Real Estate (Ascot) Mauritius Pvt. Ltd. Vs Jagriti Trade Services Pvt. Ltd. (Calcutta High Court); AIR 2018 Cal 173. The appellant cited this decision to establish that the doctrine of derivative action permits a shareholder to maintain proceedings in exceptional circumstances where wrongdoers control the company and prevent it from pursuing an appropriate remedy. The NCLAT acknowledged the general principle reflected in the authorities cited by the appellant but held that the circumstances of the present case were materially different. The Tribunal concluded that a shareholder could not rely upon the doctrine to bypass the specific statutory notification governing persons authorised to initiate corporate insolvency resolution proceedings under Section 7 of the IBC.
3. Dr. Satya Churn Law & Others Vs Rameshwar Prasad Bajoria & Others (Federal Court); Civil Appeal No. LXV of 1949. This decision was cited by the appellant as an authority recognising exceptions to the general rule that a shareholder cannot maintain proceedings on behalf of a company. The appellant argued that the refusal of the other 50% shareholder and Managing Director to authorise proceedings justified derivative action. The NCLAT distinguished the cited authority, observing that the statutory framework under Section 7 of the IBC and the Central Government notification prescribing authorised applicants governed the maintainability of the insolvency application.
4. Palogix Infrastructure Pvt. Ltd. Vs ICICI Bank Ltd. (NCLAT New Delhi); Company Appeal (AT) (Insolvency) No. 30 of 2017. The respondent relied upon this decision for the proposition that an application under Section 7 of the IBC must be instituted by a person duly authorised to act on behalf of the financial creditor. The NCLAT considered this authority in conjunction with Notification S.O. 1091(E), dated 27 February 2019, issued under Section 7(1) of the IBC. The Tribunal held that the appellant’s status as a director and shareholder did not dispense with the requirement of corporate authorisation. The decision supported the respondent’s objection that the insolvency application was not maintainable without a Board Resolution authorising its institution.
FULL TEXT OF THE ORDER OF NCLAT NEW DELHI
09.09.2021: Heard Ld. Sr. Counsel for the Appellant. He submits that the Appellant is a Director and 50% Shareholder of both the Financial Creditor Companies i.e. Vision Infotel India Pvt. Ltd. and Vision Infracon India Pvt. Ltd. There is a deadlock in the Financial Creditor Company Mr. K Siva Rama Krishna Kancharla who holds remaining 50% share of the Financial Creditors Companies is a Managing Director and his wife holds 4% shareholding in the Respondent Company (Corporate Debtor). The Appellant has requested several times to Mr. K Siva Rama Krishna Kancharla to sign the board resolution to initiate legal proceedings against the Respondent Company but he refused to sign the Board Resolution. Ld. Adjudicating Authority has dismissed the Application under Section 7 of the IBC on the ground that no board resolution authorizing the Petitioner (Appellant herein) to file the Petition is filed alongwith the Petition. In this regard, it is submitted that Shareholder/Director of the Company can initiate action on behalf of the Company if the same is in the interest of the Company and the Board is not pursuing the same. As per doctrine of derivative action the Appellant being 50% shareholder and director of the Petitioner Company can maintain the Petition under Section 7 of the IBC. For this purpose, he placed reliance on the Judgment of Hon’ble Bombay High Court in the case of Onyx Musicabsolute Com Pvt. Ltd. Vs. Yash Raj Films Pvt. Ltd. 2008 SCC Online Bom 636, Judgment of Hon’ble Calcutta High Court in the case of Star Light Real e-State (Ascot) Morisus Pvt. Ltd. Vs. Jagriti Trade Services Pvt. Ltd. AIR 2018 Cal 173 and Federal Court Reports Dr. Satya Churn Law and Others Vs. Rameshwar Prasad Bajoria and Others, Civil Appeal No. LXV of 1949
2. Ld. Sr. Counsel for the Appellant submits that Ld. Adjudicating Authority has dismissed the Petition under Section 7 of the IBC on the other ground that no Board Resolution was passed to advance loan under Section 186 of the Companies Act, 2013. It is submitted that such board resolution is not required when the Corporate Debtor in his balance sheet acknowledging the debt. Thus, Ld. Adjudicating Authority has erroneously dismissed the Petition as not maintainable.
3. Ld. Sr. Counsel for the Respondent on advance notice vehemently opposes the admission and supports the impugned order. He submits that the Central Government (Ministry of Corporate Affairs) vide notification dated 27.02.2019 S. O. 1091 (E). Exercising power under sub-Section 1 of Section 7 of the IBC notified the persons who may file an application for initiating CIRP against a Corporate Debtor. In the notification at serial No. (iv) a person duly authorized by the Board of Directors of a Company is competent to file Petition under Section 7 of the IBC on behalf of the Financial Creditor. Ld. Sr. Counsel for the Respondent cited the Judgment of this Appellate Tribunal in the case of Palogix Infrastructure Pvt. Ltd. Vs. ICICI Bank Ltd. CA (AT) (Ins) No. 30 of 2017 in which this Tribunal has categorically held that a person duly authorized by the Company can file the Petition under Section 7 of the IBC.
4. Ld. Sr. Counsel for the Respondent also submits that the Appeal is not maintainable as the Appeal is filed by the Shareholder of the Financial Creditor Company. Such person does not come within the definition of aggrieved person under Section 61 of the IBC. Therefore, the Appeal is not maintainable.
5. After hearing Ld. Sr. Counsels for the parties, we have considered the submissions, undisputedly there is no board resolution authorizing the appellant to file the petition under Section 7 of the IBC and filed this Appeal as there is deadlock in the Financial Creditors Company.
6. Now, we have considered whether Director and Shareholder of the Company can file the Petition under Section 7 of the IBC on the doctrine of derivative action. We have gone through aforesaid citations relied upon by the Appellant. The facts of the cited cases are quite different and in theses citations it is held that a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a shareholder can show that the wrong doers are in control of the defendant company and hence the company would be unable to maintain the action. So far as the Petition under Section 7 of the IBC is concerned, there is a specific notification by the Central Government under sub-section (1) of Section 7 of the IBC that on behalf of the Financial Creditor a guardian, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the board of directors of a company may file Application for initiation of CIRP against the Corporate Debtor. In such situation, doctrine of derivative action cannot be applied in Petition under Section 7 of the IBC. Thus, we are affirmed the findings of Ld. Adjudicating Authority that there is no Board Resolution authorizing the petitioner to file the Petition. Therefore, the Petition is not maintainable.
7. Ld. Adjudicating Authority has also held that no Board Resolution was filed in regard to advance loan to Corporate Debtor Company as required under Section 186 of the Companies Act, 2013. In this regard, Ld. Sr. Counsel for the Appellant submitted that the Corporate Debtor Company in his balance sheet acknowledged the debt. Therefore, such resolution is not required to maintain the petition under Section 7 of the IBC. We are not convinced with this argument. We found no flaw in the findings of Ld. Adjudicating Authority.
8. With the aforesaid, we are of the view that Ld. Adjudicating Authority has rightly held that the Petition is not maintainable. Therefore, no interference is called for in the impugned order.
Thus, the Appeal is dismissed summarily without notice to the Respondent. No order as to costs.
