1991 (1) TMI 377 - HC - Companies Law

Summary

Issues Involved:
1. Sanction of a compromise or arrangement under Section 391(2) of the Companies Act, 1956.
2. Financial and operational status of the company in liquidation.
3. Approval of the scheme by the creditors and members.
4. Legal objections raised by dissenting unsecured creditors.
5. Court's jurisdiction and discretion in sanctioning the scheme.

Detailed Analysis:

1. Sanction of a Compromise or Arrangement under Section 391(2) of the Companies Act, 1956:
The petitioner, S. M. Holding Finance Private Limited, sought court sanction for a compromise or arrangement to discharge the debts of Mysore Machinery Manufacturers Limited (in liquidation) and repay the shareholders. The scheme aimed to generate requisite finance for payment of labour, secured/unsecured creditors, statutory liabilities, and members.

2. Financial and Operational Status of the Company in Liquidation:
The company, incorporated in 1946, had accumulated losses of Rs. 61.52 lakhs by 1982, against a paid-up capital and free reserves of Rs. 9.10 lakhs. Despite efforts for rehabilitation and revival, including fresh investments and modernisation, the company faced several hurdles such as increased raw material costs, low productivity, and adverse changes in the textile policy. Consequently, the company suspended manufacturing activities in November 1986 and was ordered to wind up in June 1987.

3. Approval of the Scheme by the Creditors and Members:
The scheme proposed the realisation of assets and development of a group housing project to clear liabilities. Meetings were convened for secured creditors, preferential statutory creditors, unsecured creditors, and members. The secured creditors eventually consented to the scheme, and the preferential statutory creditors and members approved it. However, the unsecured creditors initially did not meet the 3/4ths majority requirement in the meeting but later consented through individual affidavits.

4. Legal Objections Raised by Dissenting Unsecured Creditors:
One unsecured creditor, Karam Chand Thapar and Bros. (Coal Sales) Ltd., opposed the scheme, arguing that it did not receive the required 3/4ths majority approval in the meeting and that subsequent affidavits did not meet the statutory requirement. The objector also questioned the valuation process and the fairness of the scheme for unsecured creditors.

5. Court's Jurisdiction and Discretion in Sanctioning the Scheme:
The court examined whether the scheme complied with Section 391(2) and if it was fair and reasonable. The court noted that Section 391(2) is directory rather than mandatory, allowing for substantial compliance. The court found the scheme to be beneficial, providing early relief to all concerned and infusing life into a sick company. The court exercised its discretion to sanction the scheme, subject to modifications to protect the dissenting unsecured creditor.

Conclusion:
The court sanctioned the scheme, with the modification that the payment of 60% of the amount due to the unsecured creditor would not bind the dissenting creditor, Karam Chand Thapar and Bros. (Coal Sales) Ltd. The dissenting creditor would be paid the entire amount due within two years with interest. The winding-up order was rescinded, and the company was taken out of liquidation proceedings. The official liquidator was directed to hand over possession of the company's assets to the petitioner, and all winding-up expenses were to be borne by the company. The court reserved liberty for all concerned to apply if there were any difficulties in implementing the directions.