Company compromise schemes face refusal where BIFR rehabilitation is pending and the proposal is unfair to secured creditors.

A compromise scheme under section 391 of the Companies Act, 1956 was considered unsuitable where the company was already under BIFR rehabilitation proceedings under the Sick Industrial Companies framework. The Court treated its role as supervisory, but regarded the pending sickness reference, declaration of sickness, appointment of an operating agency, and lack of realistic revival prospects as factors militating against sanction. It also found the scheme oppressive and unreasonable for secured creditors, including dissenters, because the proposed sacrifice was too severe to satisfy the standard of fairness and equity required for class binding approval.

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Issues: (i) Whether the Company Court should sanction the scheme of compromise under section 391(2) of the Companies Act, 1956 when the company was already before the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. (ii) Whether the proposed scheme was fair, just and equitable to the secured creditors, including the dissenting creditors.

Issue (i): Whether the Company Court should sanction the scheme of compromise under section 391(2) of the Companies Act, 1956 when the company was already before the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985.

Analysis: The Court treated the jurisdiction under section 391 as supervisory and not appellate, but held that the pending BIFR proceedings, the declaration of the company as sick, the appointment of an operating agency, and the absence of a realistic revival prospect were material factors against exercise of discretion in favour of sanction. It distinguished the line of cases permitting company court scrutiny of compromise schemes and relied on the primacy of the sick company framework where rehabilitation was already under BIFR consideration.

Conclusion: The Company Court declined to sanction the scheme on the ground that it ought not to interfere in the rehabilitation process of the sick company pending before BIFR.

Issue (ii): Whether the proposed scheme was fair, just and equitable to the secured creditors, including the dissenting creditors.

Analysis: The Court found that the objector faced a highly adverse sacrifice under the options offered, which made the proposal oppressive and unreasonable from the standpoint of a prudent commercial man. On that basis, the scheme was held not to satisfy the standard of fairness and equity expected of a compromise binding on the class of secured creditors.

Conclusion: The scheme was held not to be just, fair and equitable to all the secured creditors.

Final Conclusion: The petition for sanction of the compromise scheme failed because the Court refused to exercise its discretion in favour of approval in the context of pending sickness proceedings and the unfair impact of the scheme on the dissenting creditors.

Ratio Decidendi: A compromise scheme under section 391 can be sanctioned only if statutory requirements are met and the arrangement is fair and equitable; where the company is already under BIFR rehabilitation and the proposal is oppressive to dissenting creditors, the Court may refuse sanction in exercise of its supervisory jurisdiction.

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