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2012 (8) TMI 1123 - HC - Companies LawPower of Tribunal - Seeking to recall the order sanctioning of a compromise or an arrangement - prejudicial Of the interest - HELD THAT - The power of the Court to enforce the compromise and arrangement which is sanctioned under Section 391 of the Companies Act is prescribed/set out u/s 392 of the Companies Act. It has clearly empowered the Court to give directions and allow modifications in the compromise or arrangement but has not given any powers to the Court to recall/rescind/cancel the order sanctioning the compromise or arrangement. If at all the Court is satisfied that the compromise or arrangement sanctioned u/s 391 cannot be worked satisfactorily with or without modifications, the Court can suo motu or on the Application of any person interested in the affairs of the Company make an order winding up the Petition. In fact, in view of the decision of the Hon'ble Supreme Court in Meghal Homes (P.) Ltd. 2007 (8) TMI 447 - SUPREME COURT , it is now well settled that if a Company desires to modify a sanctioned scheme despite the same not being necessary for the proper working thereof, the Company cannot do so under any other provisions except by following the required procedure prescribed u/s 391 of the Companies Act. As submitted on behalf of the Regional Director, even on facts no case is made out for recalling of the order sanctioning the scheme. The reason cited by the Company for seeking to recall the order sanctioning the scheme is essentially that the Scheme is not workable and is adversely affecting the interests of the Companies. Apart from the fact that this can hardly be a ground for seeking cancellation of the scheme at this stage, not a single piece of evidence is produced before this Court to show that the contracts already entered into by the Demerged Company with their clients have been cancelled by the said clients or that they have refused to allow the Resulting Company to execute and complete the said contracts. There is nothing produced on record to even show that any of the proposed clients have refused to deal with the Resulting Company because the name of the Resulting Company does not include anything about the Facility Management Services or because the proposed clients are revaluating the entire process of the Resulting Company in terms of net worth, technical know how, qualification, ability to perform such contracts etc. In any event, all these factors were surely considered by the applicants before proposing the scheme of arrangement and inter alia stating therein on oath that the said scheme is in the interest of the Company and its shareholders. Again, in any event if the scheme is not workable then the Company can certainly seek directions or modifications to the scheme in order to make it workable. It cannot cancel the scheme on this ground. However, if the Applicants are determined to have the scheme rescinded/cancelled, in view of the facts and law set out hereinabove, they will have to follow the procedure prescribed u/s 391 of the Companies Act and revert back to status quo ante. Thus, both the Applications are dismissed.
Issues Involved:
1. Recall and/or setting aside of the order sanctioning the Company Scheme. 2. Workability and advantages of the sanctioned Scheme. 3. Legal powers of the Court under Section 392 of the Companies Act. 4. Jurisdiction and inherent powers of the Court to recall a sanctioned Scheme. 5. Principles analogous to Order 23 of the Code of Civil Procedure. 6. Evidence supporting the claim that the Scheme is not workable. Detailed Analysis: 1. Recall and/or Setting Aside of the Order Sanctioning the Company Scheme: The Applicants sought to recall and/or set aside the order dated 25.06.2010, which sanctioned the Company Scheme, arguing that the Scheme did not yield the anticipated benefits and was prejudicial to shareholders and creditors. They requested the restoration of the original status of the Resulting Company and the Demerged Company prior to the Scheme's approval. 2. Workability and Advantages of the Sanctioned Scheme: The Applicants contended that the Scheme, which aimed at consolidating Facility Service Business and pooling resources, was not workable. They highlighted several reasons, including the loss of market reputation, confusion due to the Resulting Company's name, and the division of Net Worth affecting contract acquisition. They argued that the Scheme was prejudicial and failed to deliver the expected advantages. 3. Legal Powers of the Court under Section 392 of the Companies Act: The Court examined Section 392, which empowers it to supervise and modify a sanctioned Scheme for its proper working but does not authorize the recall or cancellation of the Scheme. The Court can only intervene to ensure the Scheme's proper functioning or order the winding up of the company if the Scheme cannot be worked satisfactorily. 4. Jurisdiction and Inherent Powers of the Court to Recall a Sanctioned Scheme: The Court emphasized that it lacks the jurisdiction to recall or rescind a sanctioned Scheme under Section 391 and/or 394 of the Companies Act. The Court referred to the Supreme Court's rulings in S.K. Gupta v. K.P. Jain and Reliance Natural Resources Ltd. v. Reliance Industries Ltd., which clarified that modifications should not alter the "basic fabric" of the Scheme and that substantial changes require following the procedure under Section 391. 5. Principles Analogous to Order 23 of the Code of Civil Procedure: The Court agreed with the Regional Director's submission that recalling the order sanctioning the Scheme is analogous to Order 23 of the Code of Civil Procedure, which restricts the withdrawal of a suit after rights have vested under a decree. The Court cited R. Rathinavel Chettiar v. V. Sivaraman, emphasizing that vested rights cannot be nullified without strong reasons. 6. Evidence Supporting the Claim that the Scheme is Not Workable: The Court found that the Applicants failed to produce evidence showing that existing contracts were canceled or that clients refused to deal with the Resulting Company due to the Scheme. The Court noted that the Applicants had previously asserted the Scheme's benefits under oath. The Court concluded that if the Scheme is unworkable, the Applicants should seek directions or modifications rather than cancellation. Conclusion: The Court dismissed both Applications, stating that it does not have the power to recall or cancel a sanctioned Scheme once it has become effective. The Applicants must follow the procedure under Section 391 of the Companies Act if they wish to revert to the original status. The Court emphasized that the Scheme's workability issues should be addressed through modifications rather than cancellation.
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