1991 (11) TMI 213 - HC - Companies Law

Summary

Issues Involved:
1. Classification of unsecured creditors.
2. Validity of the meeting and voting process.
3. Objections raised by creditors regarding the scheme.
4. Compliance with Section 391 of the Companies Act.

Issue-wise Detailed Analysis:

1. Classification of Unsecured Creditors:
The primary issue in this appeal is whether the unsecured creditors were legally classified as one group, and if there was compliance with Section 391 of the Companies Act in accepting the compromise for the revival of the company. The court-appointed chairman conducted a meeting of unsecured creditors, where a resolution was passed with a 72.55% majority in number and 78.66% in value. However, objections were raised about the classification of creditors into broad categories of secured and unsecured, and within unsecured creditors, further distinctions were made between fixed deposit holders, loan receipt holders, and others. The objectors argued that this classification was incorrect and led to unfair treatment of different types of unsecured creditors.

2. Validity of the Meeting and Voting Process:
Objections were raised regarding the conduct of the meeting, alleging that it continued for an excessively long time, causing many creditors to leave without voting. There were also allegations of undue influence and coercion by company employees to secure proxies. The chairman, who was also a director of the company, was accused of using proxies to influence the outcome of the vote, which was seen as a conflict of interest. The court noted that proxies, by their nature, are meant to carry out the instructions of the shareholders and found no substantial evidence of improper exercise of proxies.

3. Objections Raised by Creditors Regarding the Scheme:
Specific objections were raised about the scheme's fairness, particularly the differential treatment of creditors. For instance, Osaki Electric Co. Ltd., a foreign creditor, was to be paid in full without any sacrifice, while other creditors had to make significant sacrifices. The objectors argued that this differential treatment was unfair and discriminatory. The scheme proposed different concessions for fixed deposit holders and other unsecured creditors, which was seen as arbitrary and improper.

4. Compliance with Section 391 of the Companies Act:
The court analyzed whether the scheme met the requirements of Section 391 of the Companies Act, which mandates that creditors or classes of creditors must be properly classified and treated equitably. The court referred to the judgment in Manechchoivk and Ahmedabad Mfg. Co. Ltd., which emphasized that a class must consist of creditors with similar rights and interests. The court found that the classification of unsecured creditors in this case was artificial and did not meet the criteria for forming a homogeneous group with common interests. Consequently, the scheme did not fulfill the requirements of Section 391(1) of the Act.

Conclusion:
The appeal was allowed, and the impugned judgment was set aside. The case was remitted to the trial court for rehearing and, if necessary, for holding a meeting of different classes of unsecured creditors to obtain their consent in accordance with the law. The court emphasized the need for proper classification of creditors to ensure fair and equitable treatment, as required by Section 391 of the Companies Act. There was no order as to costs.