1985 (8) TMI 274 - HC - Companies Law

Court Dismisses Companies Act Application Due to Lack of Creditor Approval

MM Sehgal Versus Sehgal Papers Ltd.

MM Sehgal Versus Sehgal Papers Ltd. - [1986] 60 COMP. CAS. 510 (PUNJ. & HAR.) Issues Involved:1. Competency to file an application under Section 391 of the Companies Act for a company in liquidation.2. Requirement of approval by the requisite majority under Section 391(2) of the Companies Act.3. Allegation of mala fide and arbitrary withholding of consent by secured creditors.4. Jurisdiction of the company judge to sanction the scheme or mandate reconsideration by the secured creditors.5. Powers of the court under Section 392 of the Companies Act to modify the scheme.Detailed Analysis:1. Competency to File an Application under Section 391 of the Companies Act for a Company in Liquidation:The preliminary objection raised was that only the official liquidator could file an application under Section 391 for a company in liquidation. The court overruled this objection, clarifying that Section 391(1) allows any creditor, member, or the liquidator to move an application. The court cited the Supreme Court and the Travancore Cochin High Court, emphasizing that the provision is enabling rather than exclusive, allowing multiple parties to apply.2. Requirement of Approval by the Requisite Majority under Section 391(2) of the Companies Act:The court emphasized that for an application under Rule 79 for sanction of a proposed compromise or arrangement, it must be approved by a requisite majority as per Section 391(2). The court noted that the proposed scheme had not been approved by the requisite majority of all creditors, particularly the secured creditors. The court rejected the argument that the absence of opposition implied approval, stating that Section 391(2) requires a conscious act of approval by the requisite majority.3. Allegation of Mala Fide and Arbitrary Withholding of Consent by Secured Creditors:The petitioner contended that the secured creditors withheld consent arbitrarily and mala fide, arguing that public institutions must act rationally. The court rejected this contention, stating that it lacked jurisdiction to probe into the motives behind the withholding of consent. The court cited the Madras High Court, affirming that without approval by the requisite majority, the court cannot sanction the scheme or mandate reconsideration.4. Jurisdiction of the Company Judge to Sanction the Scheme or Mandate Reconsideration by the Secured Creditors:The court held that it had no jurisdiction to sanction the scheme or issue a mandate to the secured creditors to reconsider the scheme if it was not approved by the requisite majority. The court noted that any remedy for alleged arbitrary withholding of consent could only be sought under Article 226 of the Constitution, not under the Companies Act. The court referenced the Bombay High Court decision in Escorts Ltd. v. Union of India, which was rendered under Article 226 and not the Companies Act.5. Powers of the Court under Section 392 of the Companies Act to Modify the Scheme:The petitioner argued that the court could modify the scheme under Section 392 to make it workable. The court rejected this argument, stating that Section 392 powers can only be exercised when a compromise or arrangement is already sanctioned under Section 391. Without a valid arrangement approved by the requisite majority, the court cannot exercise powers under Section 392 to modify the scheme.Conclusion:The court dismissed the application with costs, concluding that the proposed scheme could not be sanctioned due to the lack of approval by the requisite majority of creditors, particularly the secured creditors. The court also affirmed its lack of jurisdiction to probe the motives behind the withholding of consent or to modify the scheme under Section 392.