Compromise scheme meetings: threshold objections and class composition are usually left for the meeting and sanction stages.

At the stage of an application under section 391(1) of the Companies Act, 1956, the High Court ordinarily does not finally determine the merits of the proposed compromise or whether the scheme is mala fide, fraudulent, or otherwise contrary to law; those objections are reserved for consideration at the meeting and sanction stage, so directions to convene meetings were granted. On class composition, the court held that the proposed treatment of debenture holders as a separate class should not be finally resolved at this preliminary stage, and a separate meeting was not directed then. The guiding principle was that refusal at the threshold is justified only where the application is prima facie unsustainable or palpably contrary to law.

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Issues: (i) Whether an application under section 391(1) of the Companies Act, 1956 for convening meetings for a scheme of compromise and arrangement could be rejected at the threshold on allegations that the scheme was mala fide, fraudulent, or contrary to the Act; (ii) whether the debenture holders holding more than 2000 debentures were required to be treated as a separate class for the purpose of convening a separate meeting.

Issue (i): Whether an application under section 391(1) of the Companies Act, 1956 for convening meetings for a scheme of compromise and arrangement could be rejected at the threshold on allegations that the scheme was mala fide, fraudulent, or contrary to the Act.

Analysis: The Court held that the stage of seeking directions to convene meetings is a preliminary stage, and objections going to the merits of the scheme are ordinarily to be considered later when the scheme is placed for sanction. The Court found that it could not prima facie conclude that the application was unsustainable or palpably contrary to the Act so as to refuse directions at the threshold. The objectors would have an opportunity to oppose the scheme at the meeting and again, if necessary, at the sanction stage.

Conclusion: The application was not rejected at the threshold and directions to convene the meeting were granted.

Issue (ii): Whether the debenture holders holding more than 2000 debentures were required to be treated as a separate class for the purpose of convening a separate meeting.

Analysis: The Court noted the established principle that the question of class composition is generally for the company to propose at the meeting-convening stage, and the court does not finally determine the adequacy of class constitution at that point. Although the objectors contended that debenture holders stood apart from term lenders and working capital lenders, the Court held that this question should not be finally decided at the preliminary stage. The proposed classification was therefore not interfered with for the purpose of issuing meeting directions.

Conclusion: A separate meeting for the debenture holders was not directed at this stage.

Final Conclusion: The Court allowed the company to proceed with the convening of the scheme lenders' meeting and declined to accept the objections that would have prevented the process from moving to the next stage.

Ratio Decidendi: At the stage of convening meetings under section 391(1) of the Companies Act, 1956, the Court ordinarily does not finally adjudicate the merits of the scheme or the ultimate correctness of class constitution, unless the application is prima facie unsustainable or palpably contrary to law.

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