Compromise scheme in liquidation must be bona fide and feasible; otherwise private sale may better protect creditors and the estate.

A contributory of a company in liquidation may maintain an application to convene meetings for a compromise or arrangement, but the court must first be satisfied that the proposal is bona fide and prima facie feasible. Where the scheme gives no realistic basis for discharge of liabilities, omits material financial details, and appears designed to delay winding up, the court may refuse to convene meetings. The text also recognises that in liquidation a private sale of the undertaking may be ordered if it secures a reasonable price and better protects the creditors and estate; on the facts, the mill, land and buildings were directed to be sold privately on court-fixed terms.

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Issues: (i) Whether a contributory of a company in liquidation can maintain an application under section 391(1) of the Companies Act, 1956 for convening meetings of creditors and members; (ii) Whether the proposed compromise or arrangement was bona fide and prima facie feasible so as to justify convening meetings under section 391(1); (iii) Whether, on the facts, the company in liquidation should be sold as a running unit to the appellant by private sale and on what terms.

Issue (i): Whether a contributory of a company in liquidation can maintain an application under section 391(1) of the Companies Act, 1956 for convening meetings of creditors and members.

Analysis: Section 391(1) permits an application by the company, any creditor or member, and in the case of a company being wound up, also by the liquidator. The relevant rules requiring notice to the liquidator where the company is in liquidation indicate that the liquidator is an additional applicant and not the only one. The court treated the statutory scheme as preserving the right of a member or creditor to initiate the process even after winding up, subject to the court's scrutiny under the rules and the proviso to section 391(2).

Conclusion: The application by the contributory was maintainable in law.

Issue (ii): Whether the proposed compromise or arrangement was bona fide and prima facie feasible so as to justify convening meetings under section 391(1).

Analysis: The court held that an order convening meetings is not a mere formality. At that stage, the court must be satisfied that the proposal is genuine, bona fide, and prima facie in the interest of the creditors and the company. On the materials, the proposed scheme did not disclose how the liabilities, including interest and later claims, were to be discharged, did not explain the financial capacity of the persons proposing to fund the revival, ignored relevant liabilities connected with the lessee's additions and alterations, and appeared to be aimed at delaying the winding up.

Conclusion: The scheme was not bona fide or prima facie feasible, and the direction to convene meetings could not stand.

Issue (iii): Whether, on the facts, the company in liquidation should be sold as a running unit to the appellant by private sale and on what terms.

Analysis: The court considered the long pendency of the winding up, the age and condition of the mill, the valuation materials, the outstanding liabilities, the claims under process, and the practical difficulties that a public auction and removal of the appellant's installed machinery would create. It accepted that a private sale is permissible where a reasonable price is obtained and public auction is not necessary in every case. In the circumstances, a sale to the appellant was found to be in the interest of the estate and creditors, with payment structured in instalments and the mill charged for the unpaid balance.

Conclusion: The mill, land and buildings were directed to be sold to the appellant by private sale on the terms fixed by the court.

Final Conclusion: The challenge to the compromise proposal succeeded, and the court substituted a private-sale-based liquidation course for the proposed revival arrangement, while regulating payment of the purchase price to protect the estate.

Ratio Decidendi: In an application under section 391(1) for a company in liquidation, the court must be satisfied at the threshold that the proposed compromise or arrangement is bona fide and prima facie feasible, and may refuse to convene meetings where the proposal is unsupported by a realistic financial basis; in liquidation, a private sale of the undertaking may be ordered if it secures a reasonable price and better serves the interests of the creditors and the estate.

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