1999 (6) TMI 417 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the meeting held.
2. Competence of the company's application for sanction of the scheme.
3. Consideration of changed views of the creditors by the Court.
4. Sanctioning of the modified scheme by the Court.

Issue-wise Detailed Analysis:

1. Validity of the Meeting Held:
The meeting held on 7-4-1998 was not in compliance with the Court's directions. The Court had directed a meeting of a specific class of creditors, excluding subsidiaries and associates of the company. However, subsidiaries and associates participated in the meeting, and the original scheme, which was directed to be considered, was not voted upon. The inclusion of subsidiaries and associates, who had conflicting interests with other creditors, was inappropriate.

2. Competence of the Company's Application for Sanction of the Scheme:
The application for sanction of the scheme was incompetent as the statutory majority required under section 391(2) was not achieved. The scheme was not approved by the requisite majority of creditors either with or without the inclusion of subsidiaries and associates. The statutory requirement is a precondition for the presentation of an application for confirmation of the scheme.

3. Consideration of Changed Views of the Creditors by the Court:
The Court erred in considering the changed views of creditors who had initially opposed the scheme but later signified their consent through affidavits and letters. The process of voting must be completed at the meeting, and subsequent changes in views cannot be entertained. The possibility of manipulation and lack of finality in the process of voting were highlighted.

4. Sanctioning of the Modified Scheme by the Court:
The Court was not competent to sanction the modified scheme as the meeting was not held in accordance with its order, and the statutory majority did not approve the scheme. Additionally, the scheme was speculative and not feasible. The sources of funds proposed by the company were uncertain and insufficient to meet the debts. The inclusion of subsidiaries and associates in the same class as other creditors was inappropriate due to conflicting interests.

Conclusion:
The appeals were allowed, and the application for sanction of the modified scheme was dismissed. The Court emphasized the importance of following statutory requirements and the need for a viable and fair scheme that does not discriminate among creditors. The company's cross-appeal challenging the observations regarding its management was disposed of without any order. The order under section 391(6) for staying proceedings did not survive with the dismissal of the application.