1998 (12) TMI 641 - HC - Companies Law

Summary

Issues:
1. Validity of the scheme proposed for the revival of a sick industrial company under sections 391 and 392 of the Companies Act, 1956.
2. Whether the court can approve a scheme affecting creditors who were not parties to any meeting.
3. The necessity of creditor approval and court scrutiny before sanctioning a scheme under section 391(1) of the Companies Act.
4. The impact of non-compliance with meeting requirements on the validity of the scheme.
5. The court's obligation to independently assess the validity of the scheme based on disclosed material facts.

Analysis:
1. The case involved a sick industrial company directed to be wound up by the Board of Industrial Finance & Reconstruction (BIFR), with subsequent appeals dismissed by higher authorities. An application for the company's revival scheme was made under sections 391 and 392 of the Companies Act, proposing modifications affecting secured creditors and statutory creditors. The court sanctioned the scheme, emphasizing potential benefits to all creditors and workmen if the company was revived.

2. The central issue was whether the bank and other creditors not part of any meeting could be bound by the scheme's terms. The court clarified that a scheme can only bind creditors who were part of a meeting where 3/4th in value of the creditors agreed to the compromise. In this case, as no meeting of secured creditors was held, the scheme approved by unsecured creditors alone could not bind secured creditors.

3. Section 391 of the Companies Act mandates creditor approval for a scheme to be binding, emphasizing the need for a meeting directed by the court. The court cannot sanction a scheme affecting a class of creditors without their approval, even if they were heard during court proceedings. The court must ensure all material facts are disclosed and independently assess the scheme's validity.

4. Non-compliance with meeting requirements, such as not holding a meeting of secured creditors or providing notice to all relevant creditors, renders the scheme invalid for those classes of creditors. The court cannot entertain or sanction a scheme affecting a class of creditors without their approval as per statutory provisions.

5. The court must conduct an independent assessment of the scheme's viability, considering disclosed material facts and ensuring compliance with legal requirements. The judgment highlighted the importance of assessing the scheme's potential benefits, commercial morality, and compliance with statutory duties before approving it. Failure to assess the scheme's viability may lead to the scheme being deemed invalid.

In conclusion, the court allowed the appeal, setting aside the order sanctioning the scheme due to non-compliance with meeting requirements and lack of approval from all relevant creditors. The court emphasized the need for creditor approval, proper disclosure of material facts, and independent scrutiny of the scheme's viability before sanctioning it under the Companies Act.