Section 391, read with sections 392, 433 and 464, of the Companies Act, 1956 - Compromise and arrangement

Court :
SUPREME COURT OF INDIA

Brief :
Section 391, read with sections 392, 433 and 464, of the Companies Act, 1956 - Compromise and arrangement - Whether section 391 would apply even in a case where an order of winding up has been made and a liquidator had been appointed and nothing stands in way of Company Court, before ultimate step is taken or before assets of company in liquidation are disposed of, to accept a scheme or proposal for revival of company, if there is a genuine attempt to revive company that has gone into liquidation, and such revival is in public interest and conforms to commercial morality - Held, yes - Whether section 392 only gives power to Court to make such modifications in compromise or arrangement; as it may consider necessary for proper working of compromise or arrangement - It cannot be understood as a power to make substantial modifications in scheme approved by members in a meeting called in terms of section 391- Held, yes - Whether a modification in arrangement that may be considered necessary for proper working of compromise or arrangement cannot be taken as same as a modification in compromise or arrangement itself and any such modification in scheme or arrangement or an essential term thereof must go back to general meeting in terms of section 391 and a fresh approval must be obtained therefor - Held, yes - Whether fact that no member or creditor opposed it in Court can be considered as a substitute for following requirements of section 391 for approval of compromise or arrangement as modified or proposed to be modified - Held, no INTERPRETATION OF STATUTE Rule of harmonious construction FACTS One textile company ‘S’ was ordered to be wound up under section 433 by the Company Court on 25-7-1984. A decade thereafter, when the Official Liquidator (OL), who took charge of its affairs, issued a public notice inviting offers for the revival of the mill, a contributory filed an application seeking for directions of the Company Court for holding meetings of interested persons to consider scheme proposed by him. The application was allowed by the Company Court by order dated 1-9-1994. Said order of the Company Court was challenged in appeal by the workers’ union and some of the parties, who had submitted their offers in response to the advertisement issued by the OL. Despite that, a meeting as directed by the Company Court, was held and the scheme was approved by the creditors, contributories and workers. Consequently, an application for sanctioning the scheme was filed. However, before the same could be considered by the Company Court, the Division Bench of the High Court set aside the Company Court’s order dated 1-9-1994 and, consequently, the application for sanctioning the said scheme was also dismissed. On direction of the Division Bench of the High Court, the Company Court assigned the task of preparing the feasibility report on the revival of the company to an expert body, which made its recommendations to the effect that it was not possible to restart the entire mill and only a section of its spinning division could be restarted and operated as viable. Subsequently, a memorandum of understanding (MOU) was executed between the shareholders, the ‘S’ group, which was the majority shareholders of the company, and one builder company ‘L’, whereby it was, inter alia, agreed between the parties that ‘L’ would pay Rs.97.50 crores in consideration of getting the right to develop the company’s properties ; and that if any additional funds were required for settling the company’s affairs, the same would have to be brought in by the company itself. Based on that MOU, some members of ‘S’ group filed application seeking directions from the Company Court for convening a meeting to consider the amended scheme. The application was allowed and the amended scheme was approved at the meeting. On petition seeking sanction of the scheme, the Company Court dismissed the same on the ground that the scheme presented was not a scheme for revival, but it was, in substance, a disposal of the company’s assets which vested in the official liquidator. On appeal, the Division Bench of the High Court set aside the order of the Company Court and sanctioned the scheme with certain modifications. Aggrieved against said decision, the appellant, who had made offers pursuant to the Company Court’s direction, along with one of the members of ‘S’ group, filed the instant appeals before the Supreme Court challenging the modifications and contending that sections 391 to 394A were procedural provisions and when once a company was under liquidation, the Chapter dealing with winding up applied and the only provision or substantive provision conferring power of stopping the winding up was conferred on the Court by section 466, and unless the Court is satisfied that the company is being taken out of liquidation by way of revival and that it will sub-serve public interest and will conform to commercial morality, the Court cannot accept a scheme proposed under section 391. The respondents, on the other hand, took an objection to the maintainability of the appeal on the ground, inter alia, that the appellants had no locus standi inasmuch as neither of those appellants were creditors, contributories or debenture holders and they had nothing to do with the proposal and acceptance of the scheme under section 391, read with sections 392 and 393.

Citation :
Meghal Homes (P.) Ltd. v. Shree Niwas Girni K.K.Samiti