ORDER
PER SHRI L. N. GUPTA, MEMBER (T)
The present Petition is filed under the Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity, 'IBC, 2016') read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by Jambudwip Exports and Imports Limited, through its Authorised Representative Mr. Zia Abbas Zaidi (for brevity, the 'Applicant/Financial Creditor'), with a prayer to initiate the Corporate Insolvency process against U P Bone Mills Private Limited (for brevity, the 'Corporate Debtor').
2. The Financial Creditor namely, Jambudwip Exports and Imports Limited is a Company incorporated on 04.09.2002 under the provisions of erstwhile Companies Act, 1956 with CIN U70102UP 2002PLC026902, having its registered office at Sujru Chungi, Opp. PNB Bank Shah Times Building, Meerut Road, Muzaffarnagar, Uttar Pradesh 251003.
3. The Authorized Share Capital of the Applicant Company is Rs.25,00,000/- and Paid-up Share Capital of the Company is Rs.7,70,000/- as per the Master Data annexed with the Application.
4. The Corporate Debtor namely, U P Bone Mills Private Limited is a Company incorporated on 11.05.1999 under the provisions of erstwhile Companies Act, 1956 with CIN U74899DL1999PTC099721,
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having its registered office at Pratap Bhawan, Bahadur Shah Zafar Marg, New Delhi-110002, which is within the jurisdiction of this Tribunal.
5. The Authorized Share Capital of the Corporate Debtor Company is Rs. 3,00,00,000/- and Paid-up Share Capital of the Company is Rs. 2,56,98,250/- as per the Master Data annexed with the Application.
6. That in order to prove the existence of the Financial Debt as claimed, the Applicant has averred the following in its application:
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7. That the particulars of the Financial Debt amounting to Rs.24,64,73,602/- claimed and the date of default as furnished by the Applicant in the Part IV of its application, are reproduced below :
8. That in response, the Corporate Debtor has averred the following in its reply (scanned copy) :
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9. From perusal of the pleadings, it is evident that the Corporate Debtor has admitted its debt and accepted all the submissions made by the Applicant. It is added by the Corporate Debtor that it had filed form DPT-3 as required under the Companies Act, 2013, wherein it has shown the transaction as an Inter-Corporate Loan amounting to Rs.20,52,67,107/-.
10. That before proceeding further, we would like to examine the transaction entered by and between the Applicant/Financial Creditor and the Corporate Debtor.
11. That from perusal of the pleadings, it can be observed that an amount of Rs.18,96,57,538/- was given as an advance by the Applicant to the Corporate Debtor for purchase of MS Ingots (goods) and subsequently, the said advance was converted into an Inter- Corporate loan by executing a Memorandum of Understanding (MOU) dated 10.05.2019 by the parties.
12. Since the aforesaid transaction has been projected as an Inter- Corporate Loan, we would like to examine "Whether the conversion of the advance given towards purchase of goods into the inter- corporate loan is in accordance with the law ?"
13. At this juncture, we would like to refer to Section 186 of the Companies Act 2013, which stipulates the provision relating to loan and investment by a Company. The contents of Section 186 of the Companies Act, 2013 are reproduced overleaf :
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"186. Loan and investment by company.— (1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:
Provided that the provisions of this sub-section shall not affect,—
(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.
(2) No company shall directly or indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate
exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.
(3) Where the giving of any loan or guarantee or providing any security or the acquisition under subsection (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.
(4) The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the
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loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.
(5) No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:" Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. …..
(Emphasis Supplied)
14. That from perusal of the contents of Section 186(2) of Companies Act 2013, it can be observed that a Company can grant loan to any person or other body corporate up to sixty per cent of its paid- up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is higher.
15. That the Applicant has placed on record its Audited Balance Sheet for the Financial Year 2019-20, the period during which the advance was converted into inter-corporate loan. In order to examine whether the loan has been granted within the limits specified under Section 186(2) of Companies Act 2013, it is necessary to find out the
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Paid-up Share Capital, Free reserves and Security Premium Account of the Applicant Company. Therefore, for this purpose, we refer to the relevant page of the Balance Sheet of the Applicant Company for the Financial Year 2019-20 annexed, the scanned copy of which is reproduced below :
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16. That from perusal of the relevant extract of the Balance Sheet of the Applicant Company above, it is observed that the Paid-Up Share Capital of the Applicant Company is Rs.7,70,000/- only and the Reserves & Surplus and Security Premium totals to Rs.8,85,71,343.75/-.
17. That in terms of the provision contained in Section 186(2) of the Companies Act, 2013, the calculation sheet/limit, to which the Applicant Company herein can grant loan, is given below :
| 60 % of the Paid-Up share Capital, Reserves and Surplus and Security Premium Amount | 100% of Reserves and Surplus and Security Premium Amount |
| (i) Rs.7,70,000 + 8,85,71,343.75 = 89341343.75 (ii) Rs.89341343.75 X 60/100 = Rs. 5,36,04,806.25 | Rs. 8,85,71,343.75 |
18. That from the aforesaid calculation, it is observed that the Applicant Company can give loan to any person or body corporate upto Rs.8,85,71,343.75/- in terms of Section 186(2) of Companies Act, 2013,
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whereas from the records we find that an amount of Rs.18,96,57,538 given originally as an "advance to purchase goods" has been converted into an "Inter-corporate Loan" by virtue of an MOU dated 10.05.2019 entered by and between the parties, which is in breach of the limit specified under Section 186(2) of the Companies Act 2013.
19. That further, from perusal of the contents of Section 186(3) of the Companies Act 2013, it can be observed that when a Company has given a loan exceeding the limits specified under Section 186(2) then, prior approval by means of a Special Resolution passed at a general meeting (EGM) shall be required. Further, the Section 186(5) of Companies Act 2013 makes it mandatory to pass a Board Resolution with the consent of all the Directors present at the meeting and the prior approval of the public financial institution concerned, where any term loan is subsisting.
20. That the Applicant Company has failed to produce or bring on record any such Board Resolution passed in terms of Section 186(5) of Companies Act 2013 and Special Resolution of Members passed at an EGM in terms of Section 186(3) of the Companies Act, 2013.
21. At this juncture, we would like to refer to the Section 179 of the Companies Act 2013.
"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:
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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 there under, 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 that regulation had not been made.
(3) The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:-
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
……….
(Emphasis supplied)
22. That from perusal of the contents of Section 179(3) of the Companies Act 2013, it can be observed that in both the situations i.e., at the time of granting loan as well as availing loan, a Board Resolution
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is required to be passed. However, both the Corporate Debtor and Applicant have failed to produce or place on record any such Board Resolution.
23. Here, it is worthwhile referring to the Judgement of Hon'ble Principal Bench of this Tribunal in the matter of M/s UKG Steel Pvt. Ltd. Vs M/s Erotic Buildcon Pvt. Ltd. dated 31.05.2021 (IB)- 1050/PB/2020. The relevant para is reproduced below :
"12. To calculate whether the Petitioner-financial creditor has given loan in terms of Section 186 of Companies Act 2013 we refer to Page 50 of the Petition, wherein the Balance Sheet of the Financial Creditor has annexed which depicts that the Paid-Up Share Capital of the Petitioner-financial creditor company is of Rs. 97,75,020 and Reserves and Surplus are of Rs 66,58,072. The information of Security Premium Account has not been separately provided in the Balance Sheet. That the aggregate of Paid-Up Share Capital and Reserves and Surplus amounts to Rs. 1,64,33,092 and 60% of that amount is Rs 98,59,855.2. If we compare both the amounts, then we observe that the loan amount disbursed by the Financial Creditor is more than 3 Crore which is much more than 60% of aggregate of Paid-up Share Capital and Reserve and Surplus.
13. That the Petitioner has neither made the disclosure of such Inter Corporate Loan in its Balance Sheet nor it had produced the Special Resolution passed in the EGM of Shareholders for the purpose of compliance of Section 186(3) of Companies Act 2013.
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Further, the Loan Agreement does not speak about any such resolution passed by the shareholders.
14. Therefore, the material available on the record suggest that the borrowing given by the Petitioner is contrary to the limit prescribed under Companies Act 2013 which amounts to an ultra vires act committed by the Petitioner. Hence the loan advanced by the Petitioner is not a legally enforceable debt."
24. In view of the aforesaid discussion, we conclude that the amount advanced by the Applicant Company to the Corporate Debtor for purchase of certain goods was neither disbursed as loan per se nor the conversion of the said advance into an Inter- Corporate Loan through the instrument of an MoU is in accordance with the law. Further, it is observed that by executing the MOU dated 10.05.2019, the parties have cleverly attempted to convert an Operational Debt into a Financial Debt.
25. The Application is accordingly, Dismissed.
Sd/- Sd/-
(L. N. GUPTA) (ABNI RANJAN KUMAR SINHA)
MEMBER (T) MEMBER (J)
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