2001 (11) TMI 912 - HC - Companies Law

Company's Compromise Scheme Application Dismissed for Financial Disclosures Failure

The court dismissed the company's application for a scheme of compromise/arrangement under Section 391(1) of the Companies Act, 1956, due to the company's ... Compromise and arrangement Issues Involved:1. Application for a scheme of compromise/arrangement under Section 391(1) of the Companies Act, 1956.2. Pending creditors' winding-up petitions and compliance with court orders.3. Financial difficulties and liquidity issues faced by the company.4. Scheme of compromise/arrangement proposed by the company.5. Objections raised by creditors.6. Company's delay in proceedings and non-disclosure of accurate financial information.Issue-wise Detailed Analysis:1. Application for a Scheme of Compromise/Arrangement:The company filed an application under Section 391(1) of the Companies Act, 1956, seeking a Judge's summons to call a meeting of creditors to consider a scheme of compromise/arrangement. The court directed that this application be listed along with pending creditors' winding-up petitions. Objections were filed by various creditors, and the company responded with a rejoinder affidavit.2. Pending Creditors' Winding-Up Petitions and Compliance with Court Orders:While the application under Section 391(1) was pending, the court ordered the company to deposit Rs. 10,00,000 in two equal installments in a creditors' winding-up petition. The company failed to comply with this order, leading to objections from creditors who argued that the company's proposed compromise scheme was not feasible or credible.3. Financial Difficulties and Liquidity Issues:The company cited financial difficulties due to false assurances from its bankers regarding working capital enhancement. This led to reliance on short-term private borrowings at high-interest rates, resulting in a debt trap and liquidity crunch. The company faced numerous criminal complaints under Section 138 of the Negotiable Instruments Act for dishonored cheques and several winding-up petitions and suits from creditors.4. Scheme of Compromise/Arrangement Proposed by the Company:The scheme defined creditors and claims, proposing a staggered repayment plan based on the amount of claims. It included expected recoveries from sundry debtors and plans to replace short-term borrowings with enhanced bank finance. The company also mentioned holding significant equity shares in another company expected to generate dividends.5. Objections Raised by Creditors:Creditors raised several objections, including doubts about the company's bona fides and the feasibility of the scheme. They pointed out discrepancies in the company's financial statements, lack of concrete payment sources, and understated liabilities. The objections highlighted that the company's balance-sheet did not account for significant interest liabilities and that the company's assets were overvalued.6. Company's Delay in Proceedings and Non-Disclosure of Accurate Financial Information:The court noted that the company repeatedly sought adjournments, delaying the proceedings from 1999 to 2001. The company failed to update its financial information and did not disclose the current status of significant suits. The court found that the company's financial disclosures were inaccurate and that the scheme did not inspire confidence. The auditors' report indicated overstated profits and understated liabilities, further undermining the scheme's credibility.Conclusion:The court concluded that the company had not disclosed its true financial position and that the proposed scheme was unfair and incapable of being implemented. Consequently, the application under Section 391(1) and the related application under Section 391(6) of the Companies Act, 1956, were dismissed.