NCLT Kolkata: Corporate Debtor Can't Take Shelter U/S 186 Of Companies Act To Avoid CIRP When Loan Has Been Advanced In Breach Of Section 186(2) Of Companies Act

Background Facts:

An application to initiate a CIRP under Section 7 of IBC was filed by Urban Infraprojects Private Limited (Financial Creditor) against EDCL Infrastructure Ltd. (Corporate Debtor).

The Corporate Debtor has challenged the maintainability of the said application with one of the grounds being that the debt is legally not enforceable since there is a violation of Section 186 of the Companies Act, 2013 by the Financial Creditor.

NCLT Verdict:

The NCLT Kolkata dismissed the application and held that the Corporate Debtor cannot take shelter under Section 186 of the Companies Act, 2013 to avoid CIRP u/s 7 of IBC wherein the Financial Creditor has advanced loan in breach of Section 186(2) to the Corporate Debtor.

The Tribunal placed reliance on Section 186(2) of the Companies Act, 2013 which is as read below:

186. Loan and investment by company.—

(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 percent. of its paid-up share capital, free reserves, and securities premium account or one hundred percent. of its free reserves and securities premium account, whichever is more.

The provision provides that when the aggregate of the loan, investment, guarantee or security already made together with the loan, investment, guarantee or security proposed to be made exceeds the limit specified u/s 186(2), prior approval by means of a special resolution is necessary. The limit under this section is higher of – 60% of (paid-up share capital + free reserves + securities premium) or 100% of (free reserves + securities premium).

It observed that the said provision serves as a safeguard for the shareholders/stakeholders of the Company, presently the Financial Creditor, ensuring that those managing the company cannot and do not exceed prescribed loan limits which would be in excess of their capacity and could lead the company into significant trouble in case of default. Thus, Section 186 of the Companies Act, 2013, mandates that if a company intends to provide a loan beyond the specified limits, it requires approval from shareholders through a special resolution.

The Tribunal noted that in the event of a violation under Section 186(2) of the Companies Act, 2013, the affected parties would include the shareholders/stakeholders of the Financial Creditor and regulatory authorities. The Corporate Debtor cannot use such violations as a defense to refuse repayment of borrowed funds.

NCLT pointed out that even if arbitration proceedings are initiated, the NCLT must independently assess the application under Section 7 of the IBC and decide on admission or rejection. The outcome of this decision will affect the proceedings under the Arbitration and Conciliation Act, of 1996. Presently, the financial creditor has initiated the CIRP proceedings, and there have been no proceedings initiated by the Respondent under the Arbitration and Conciliation Act, 1996.

In conclusion, NCLT noted that if any proceedings are initiated under the Arbitration and Conciliation Act, 1996 by the Respondent or any other party, the same would be treated as distinct and independent, with no influence or impact on each other.

Case Title: EDCL Infrastructure Ltd. vs. Urban Infraprojects Pvt. Ltd.

Case No.: I.A. (IB) No. 2105/KB/2023 in Company Petition (IB) No. 106/KB/2023

Counsel for Applicant: Mr. Bikash Ranjan Bhattacharya, Sr. Adv. Mr. Swatarup Banerjee, Adv. Mr. Avishek Guha, Adv. Mr. Nirmalya Dasgupta, Adv. Mr. Sariful Haque, Adv. Ms. Arunika Dutta, Adv. Mr. Kaustov De Sarkar, Adv.

Counsel for Respondent: Dr. Mamta Binani, Adv. (PCS). Mr. Rohit Sharma, Adv.

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