2018 (7) TMI 871 - HC - Companies Law

Approval of a Scheme of Compromise and Arrangement between the applicant and a class of its creditors - Held that - There are serious doubts about the manner in which the ex-directors have conducted their business. There are grave allegations about the ex-directors having sold immovable properties and received proceeds in their own accounts. They have also failed to hand over possession of all the flats/properties, vehicles, plant & machinery and cash in hand belonging to the company in liquidation to the OL. Clearly, the scheme lacks bona fide. It cannot be termed to be just, fair and reasonable. There is no cogent mechanism on record to show how the dues of the unsecured creditors is to be paid off. In fact the scheme cannot be even said to be a scheme as it fails to define a proper class of creditors. I accordingly dismiss the present application.

Issues Involved:
1. Approval of a Scheme of Compromise and Arrangement under Section 391 of the Companies Act, 1956.
2. Classification of creditors and the legality of the scheme.
3. Bona fide and good faith of the proposed scheme.
4. Past conduct of the ex-directors and their management of the company's finances and assets.
5. Objections from various stakeholders including secured creditors, minority shareholders, and the Official Liquidator (OL).

Issue-wise Detailed Analysis:

1. Approval of a Scheme of Compromise and Arrangement under Section 391 of the Companies Act, 1956:
The ex-management of the respondent company filed an application under Section 391 seeking approval of a Scheme of Compromise and Arrangement. The court had earlier admitted the main petition and appointed the OL as the provisional liquidator. The ex-management proposed a scheme to settle dues with creditors by infusing ?5 crores from personal resources and generating funds from ongoing projects. The scheme aimed to prioritize certain creditors, particularly those who had initiated legal proceedings against the company.

2. Classification of creditors and the legality of the scheme:
The proposed scheme primarily targeted unsecured creditors who had filed litigations. The court noted that such a classification could not be termed a "class" within the meaning of Section 391. The scheme failed to include all unsecured creditors, thus creating an unjust subclass. The court referenced the judgment in Spice Jet Ltd. & Ors. vs. Malanpur Steel Ltd. & Anr., emphasizing that unsecured creditors who have filed suits or obtained favorable orders cannot be deemed a different class from other unsecured creditors.

3. Bona fide and good faith of the proposed scheme:
The court found the scheme lacked bona fide and good faith. The primary proposal was the infusion of ?5 crores by the ex-management, with other funds expected from the completion of pending projects and the sale of a mortgaged property. The court doubted the ex-management's ability to complete the projects and recover dues, given their past failures. The scheme also lacked clarity on the outstanding dues payable to unsecured creditors and did not adequately address the dues of secured creditors.

4. Past conduct of the ex-directors and their management of the company's finances and assets:
The court highlighted the ex-directors' past conduct, including allegations of selling immovable properties and misappropriating proceeds, failing to hand over possession of company assets to the OL, and other financial irregularities. The Division Bench and earlier orders had raised serious doubts about the ex-directors' management, suggesting possible diversion of funds and improper handling of company affairs.

5. Objections from various stakeholders including secured creditors, minority shareholders, and the Official Liquidator (OL):
The scheme faced opposition from secured creditors, who argued it did not comply with Section 391 and Company (Court) Rules, 1959. They also highlighted that the scheme did not include all creditors and failed to follow the required process. The OL opposed the scheme, pointing out that it favored certain creditors over others and that the ex-directors' statement of affairs was defective. Minority shareholders also opposed the scheme, citing large statutory dues not reflected in the proposal.

Conclusion:
The court concluded that the scheme lacked bona fide and was not in good faith. It failed to propose a proper compromise or arrangement between the company and a class of creditors, as required under Section 391. The scheme was deemed unworkable, unjust, and unreasonable. Consequently, the application for the scheme's approval was dismissed. The court also directed the SFIO to carry out an enquiry into the company's accounts expeditiously.

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