Scheme of arrangement fairness test allows sanction with modifications to protect a dissenting secured creditor.

In considering sanction of a compromise and arrangement under the Companies Act, the Court held that majority approval is not conclusive and the scheme must still be fair, just, reasonable, lawful, and supported by bona fide class voting. The objections to the assignee creditor's status, the adequacy of the assignment consideration, and the need for a separate class meeting were not accepted as grounds to refuse sanction. However, the treatment of the dissenting secured creditor was found unfair, so the scheme was sanctioned with modifications to revise the outstanding amount, provide interest, and adjust repayment and conversion terms to protect that creditor.

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Issues: Whether the modified scheme of compromise and arrangement deserved sanction under section 391 of the Companies Act, 1956, and whether the objections of the dissenting secured creditor required the scheme to be rejected or modified.

Analysis: The scheme had been approved by the requisite statutory majority of secured lenders and equity shareholders after the meetings were convened in accordance with the statutory procedure. The Court applied the settled principle that sanction of a scheme is not automatic on majority approval, but the Court must satisfy itself that the scheme is fair, just, reasonable, and not contrary to law or public policy, and that the class voting acted bona fide. The objections raised to the status and voting capacity of the assignee creditor, the alleged inadequacy of consideration for assignment, and the claim that a separate class meeting was required were not accepted as grounds to reject the scheme outright. However, the Court found substance in the objections to the treatment of the dissenting secured creditor and considered that fairness required the scheme to be adjusted so that the creditor was not unfairly bound by the original terms.

Conclusion: The scheme was sanctioned, but only with modifications protecting the objecting secured creditor, including revision of the outstanding amount, provision for interest, and alteration of the repayment and conversion terms. The objections were thus rejected only to the extent they sought outright refusal of sanction, but accepted to the extent they warranted modification.

Final Conclusion: The compromise and arrangement was upheld in substance and given effect as a sanctioned scheme, while being tailored to ensure fairness to the dissenting secured creditor.

Ratio Decidendi: In sanctioning a scheme of arrangement, the Court must independently test statutory compliance and substantive fairness, and may sanction the scheme with appropriate modifications where necessary to protect a dissenting creditor while preserving the commercial scheme approved by the statutory majority.

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