Section 391 compromise schemes require prima facie bona fides and feasibility before courts direct meetings of creditors and members.

In proceedings under section 391(1) of the Companies Act, 1956, the HC held that the court is not bound to direct meetings of creditors and members; it has discretion to refuse directions where the proposed compromise is not prima facie genuine or fit for consideration. The proposed scheme was found unworkable because it disclosed no reliable source of funds to meet admitted liabilities, faced opposition from the secured creditor, and lacked material showing feasibility or bona fides. On that basis, the court rejected the application for directions and did not permit the scheme to proceed.

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Issues: (i) Whether, on an application under section 391(1) of the Companies Act, 1956, the court was bound to direct convening of meetings of creditors and members. (ii) Whether the proposed scheme of arrangement was bona fide, feasible and in the interest of the creditors and the company.

Issue (i): Whether, on an application under section 391(1) of the Companies Act, 1956, the court was bound to direct convening of meetings of creditors and members.

Analysis: Rule 67 of the Companies (Court) Rules, 1959 contemplates an ex parte application, but that does not exclude judicial scrutiny. The statutory language of section 391(1), read with rule 69, leaves discretion with the court to refuse directions if the case is not fit for such a course. The court is not a mere post office and must be satisfied, at least prima facie, that the proposed compromise or arrangement is genuine and worthy of consideration.

Conclusion: The court was not bound to direct a meeting and could the summons for directions where the proposed scheme did not disclose a fit case.

Issue (ii): Whether the proposed scheme of arrangement was bona fide, feasible and in the interest of the creditors and the company.

Analysis: The scheme did not disclose any reliable source of funds for payment of the admitted liabilities, the secured creditor opposed the proposal, and the applicant had failed to secure financial assistance despite repeated opportunities. The court also noted the prior conduct of the management, the pendency and dismissal of the appeal against winding up, and the absence of material showing that the proposal was workable. Since section 391(2) requires approval of the requisite statutory majority before sanction can arise, a scheme opposed by the sole secured creditor and shown to be vague and unworkable did not justify convening meetings.

Conclusion: The scheme was held not to be bona fide, genuine or feasible and was found not to be in the interest of the creditors or the company.

Final Conclusion: The application for directions to convene meetings under section 391 was rejected, and the scheme was not permitted to proceed for consideration.

Ratio Decidendi: In proceedings under section 391(1) of the Companies Act, 1956, the court has discretion to refuse directions for convening meetings unless a prima facie bona fide and feasible scheme is shown to be in the interest of the creditors and the company.

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