High Court affirms jurisdiction over scheme of arrangement, upholds creditor classification, sanctions scheme with modifications

The High Court asserted its jurisdiction to sanction a scheme of arrangement despite pending proceedings before the AAIFR under SICA, aligning the scheme with the objectives of SICA. It upheld the classification of creditors, rejecting the argument that a secured creditor formed a separate class. The court deemed the scheme fair and reasonable, offering a viable alternative to winding up the company. After ensuring procedural compliance and creditor approval, the court sanctioned the scheme with modifications, emphasizing fairness and protecting guarantors' liabilities. The decision aimed to revive the company while safeguarding the interests of all stakeholders.

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Issues: (i) Whether the pendency of proceedings before the AAIFR under the sick industrial companies law excluded the High Court's jurisdiction to sanction a scheme of arrangement under section 391 of the Companies Act, 1956; (ii) whether the proposed schemes for the specified secured creditors and specified unsecured creditors were fair, reasonable, and properly classified so as to merit sanction; (iii) whether the scheme could validly provide for absolving the guarantors of liability in respect of the unsecured creditors.

Issue (i): Whether the pendency of proceedings before the AAIFR under the sick industrial companies law excluded the High Court's jurisdiction to sanction a scheme of arrangement under section 391 of the Companies Act, 1956

Analysis: The pendency of proceedings under the sick industrial companies regime did not by itself oust the company court's jurisdiction. The two enactments operated in different spheres, and exclusion of jurisdiction was not to be readily inferred. The scheme before the Court was directed towards revival and rehabilitation by scaling down debts and introducing a strategic partner, and was not inconsistent with the object of rehabilitation under the sick industrial companies law. The Court also rejected the contention that the petitioner was required to elect between two remedies, since the reliefs were not the same.

Conclusion: The High Court retained jurisdiction to entertain and sanction the schemes notwithstanding the pending AAIFR proceedings.

Issue (ii): Whether the proposed schemes for the specified secured creditors and specified unsecured creditors were fair, reasonable, and properly classified so as to merit sanction

Analysis: The schemes had been approved by the requisite statutory majorities in the separate meetings. The objections that one secured creditor and certain unsecured creditors formed separate classes were rejected because the named creditors within each scheme had homogeneous interests and were offered the same terms. The Court held that a scheme approved by the statutory majority should ordinarily be sanctioned if it is fair, reasonable, and not contrary to public interest. The proposed compromise was designed to preserve a living business, bring in funds from Wanbury, and avoid inevitable winding up. The Court found no material to show that the scheme was unfair, unreasonable, or prejudicial to the concerned creditor classes.

Conclusion: The schemes were held to be fair and reasonable and were sanctioned as a compromise arrangement for the specified secured and unsecured creditors.

Issue (iii): Whether the scheme could validly provide for absolving the guarantors of liability in respect of the unsecured creditors

Analysis: The Court held that its power under section 391 extended only to approving the compromise or arrangement between the company and its creditors. That power could not be used to alter or extinguish liabilities arising under an independent guarantee contract without the relevant guarantee documents being before the Court and the parties being heard on that specific question. The liability of a surety is co-extensive with that of the principal debtor unless the contract provides otherwise, and the scheme could not automatically extinguish third-party guarantee obligations.

Conclusion: The scheme was not approved to the extent it purported to absolve the guarantors of liability to the unsecured creditors.

Final Conclusion: The company petitions were substantially allowed and the compromise schemes were sanctioned, but the relief regarding discharge of guarantors was declined.

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