2012 (6) TMI 613 - HC - Companies Law

Scheme of arrangement - Petitioners herein are the creditors of the Company-in-liquidation - all creditors have approved the scheme of arrangement, but on the other hand, the two shareholders have voted against the scheme - Held that - One of the shareholders of the company in liquidation is the first petitioner in this company petition who has identified the second petitioner to revive the company in liquidation. This clearly shows that he is not the propounder of the scheme of arrangement for revival of the company. The second petitioner is neither a member nor a creditor of the company. He is willing to settle the claims of the creditors of the company with a view to revive the company in liquidation, provided the entire share capital of the company is transferred in his favour and his nominees. In order to attract section 391 it is necessary that a compromise or arrangement between a company and its creditors or any class of them, or between the company or its members or class of them should propose a compromise or arrangement, which was not present here. The petitioners herein are not the actual propounders of the scheme so as to revive the company for the benefit of the company or its members. The petitioners being few among the investors for purchase of flats, thereby having become the creditors as they have not been allotted the flats have lent their names to a propounds who does not qualify under section 391 - Mere settling the outstandings of certain class of persons to the detriment of the company or its members is not the object. In any event, the recovery and disbursement would be done in the process of winding up - prayer made by the petitioners is therefore rejected.

Issues Involved:
1. Sanction of the scheme of arrangement under sections 391 to 394 of the Companies Act, 1956.
2. Validity and bona fides of the scheme of arrangement.
3. Eligibility of the propounder of the scheme under section 391 of the Companies Act.
4. Interests of the creditors and shareholders.
5. Compliance with legal requirements and public policy.

Detailed Analysis:

1. Sanction of the Scheme of Arrangement under Sections 391 to 394 of the Companies Act, 1956.
The petitioners, creditors of M/s Hoysala Building Development Company (P.) Ltd., sought the sanction of a scheme of arrangement for the revival of the company in liquidation. The court had previously ordered the winding up of the company and appointed an Official Liquidator. The scheme was proposed by the first petitioner and Sri Varsha Venkatesh, and a meeting was convened where creditors consented but shareholders opposed the scheme.

2. Validity and Bona Fides of the Scheme of Arrangement
The court emphasized the need to scrutinize the bona fides of the scheme and the eligibility of the propounder. The scheme's validity would be considered only after approval by the shareholders and creditors, as per the precedent set in Rainbow Denim Ltd. v. Rama Petrochemicals Ltd.

3. Eligibility of the Propounder of the Scheme under Section 391 of the Companies Act
The court examined whether the scheme was proposed by persons entitled under section 391. Initially, the scheme was propounded by Sri Varsha Venkatesh, who was neither a shareholder nor a creditor. Later, the petition was amended to include petitioner Nos. 2 to 5, but the scheme still relied on funds from Venkatesh. The court referred to the precedent in Sri Kashinath Dikshit v. Surgicals & Pharmaceuticals Company (Mysore) Limited, which held that only members, creditors, or the Official Liquidator could propose such a scheme.

4. Interests of the Creditors and Shareholders
The court noted that the shareholders, holding 100% of the shares, opposed the scheme, arguing it did not serve the company's interests and was driven by Venkatesh's personal agenda. The court found that the scheme primarily aimed to settle dues with certain creditors without genuinely reviving the company.

5. Compliance with Legal Requirements and Public Policy
The court found that the scheme did not comply with section 391, as it was effectively propounded by an ineligible person (Venkatesh). The court also highlighted the speculative nature of the company's assets and ongoing litigation, which added uncertainty to the company's revival prospects. The court emphasized its duty to ensure that any revival scheme genuinely benefits the company and its members, not just a specific class of creditors.

Conclusion:
The court concluded that the petitioners were not the actual propounders of the scheme and that the scheme was not in compliance with section 391 of the Companies Act. The court dismissed the petition, allowing the petitioners to seek a refund of the amount deposited with the Official Liquidator. The court reiterated that its responsibility in sanctioning a revival scheme is to ensure the overall benefit of the company and its members, not just to settle dues with certain creditors.

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