1980 (9) TMI 221 - HC - Companies Law

Summary

Issues Involved:
1. Whether Shree Farm Chemicals Private Ltd. (SFC) should be compulsorily wound up.
2. Whether the scheme of compromise or arrangement proposed by SFC should be sanctioned.
3. Compliance with the requirements of sections 391 and 393 of the Companies Act.
4. Representation and bona fides of the creditors.
5. Adequacy and fairness of the proposed scheme.

Detailed Analysis:

1. Compulsory Winding Up of SFC:
The petitions for winding up SFC were based on the company's inability to pay its debts. M/s. Pesticides and Breweries Ltd. and Sri Baburao Tulsiram Sande filed petitions stating that SFC was indebted to them and unable to pay its debts. Another creditor, Central Paints Ltd., also filed a petition for winding up on similar grounds. However, the court concluded that winding up would not benefit the ordinary creditors and that SFC had potential for recovery and profit if allowed to continue operations.

2. Sanctioning the Scheme of Compromise or Arrangement:
The court considered the scheme proposed by SFC under section 391(1) of the Companies Act, which aimed to compromise or arrange with its creditors. The scheme included projected profits and a schedule for repayment of debts. The court found the scheme reasonable and beneficial to both creditors and shareholders, especially considering the significant debts recoverable by SFC. The scheme was supported by the Karnataka Bank, the secured creditor, and a majority of the ordinary creditors.

3. Compliance with Sections 391 and 393:
Objections were raised regarding the compliance of the application with sections 391 and 393. It was argued that the application did not include necessary documents and material facts. The court ruled that the objections could be addressed when sanctioning the scheme under section 391(2). The court found that SFC had disclosed all relevant material facts, including its financial position, list of creditors, and projected profits, thereby complying with the requirements.

4. Representation and Bona Fides of the Creditors:
The court examined whether the creditors, particularly the unsecured creditors, were fairly represented and whether they acted bona fide. The Karnataka Bank, representing a significant portion of the debt, supported the scheme and agreed to a pro rata repayment along with unsecured creditors. The court found no evidence of collusion between the bank and SFC and concluded that the bank's support was in the interest of the company's survival and potential profitability.

5. Adequacy and Fairness of the Proposed Scheme:
The objections included that the scheme was not bona fide, lacked material disclosures, and was not something a reasonable businessman would approve. The court held that the scheme was fair and reasonable, considering the company's potential for profit and the adverse effects of winding up on ordinary creditors. The court emphasized that the scheme should be given a chance to work rather than opting for liquidation.

Conclusion:
The court sanctioned the scheme of compromise or arrangement proposed by SFC, subject to modifications in the schedule of repayment of debts. The winding-up petitions were dismissed. The court exercised its discretion under section 392 to modify the scheme for proper implementation, ensuring the company's continued operation and potential recovery.