Court approval of reconstruction schemes requires fairness, bona fides, and commercial workability; majority vote alone is not enough.

Under the Indian Companies Act, 1913, majority approval of a reconstruction scheme did not bind the Court; sanction still depended on independent judicial satisfaction that the class was properly represented, the proposal was bona fide, fair and reasonable, and an intelligent member could reasonably approve it. The scheme was refused because the company was hopelessly insolvent, the revival assumptions were commercially unrealistic, the arrangement appeared to protect delinquent management, and material facts about fraud and misfeasance proceedings were not disclosed. The sanction was set aside and winding-up was directed to continue.

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Issues: (i) Whether the Court was bound to sanction a scheme of reconstruction merely because the requisite majority of creditors and shareholders had approved it; (ii) whether the proposed scheme was fit to be sanctioned having regard to the company's insolvency, the practical feasibility of revival, the benefit to creditors, the role of delinquent directors, and the non-disclosure of material facts.

Issue (i): Whether the Court was bound to sanction a scheme of reconstruction merely because the requisite majority of creditors and shareholders had approved it.

Analysis: Section 153(2) of the Indian Companies Act, 1913 made the majority's approval a condition for binding effect only if the Court sanctioned the scheme. The statutory language did not make the Court a mere registrar of the majority's will. The Court had to consider whether the meeting was properly convened, whether the class was fairly represented, whether the majority acted bona fide, and whether the proposal was one that an intelligent and honest member of the class could reasonably approve.

Conclusion: The Court was not bound by the majority's approval and could refuse sanction despite the requisite vote.

Issue (ii): Whether the proposed scheme was fit to be sanctioned having regard to the company's insolvency, the practical feasibility of revival, the benefit to creditors, the role of delinquent directors, and the non-disclosure of material facts.

Analysis: The company was found to be hopelessly insolvent, with liabilities far exceeding assets and no realistic working capital to carry on business. The scheme required unreasonable assumptions about fresh capital, imposed liabilities that would cover the personal debts of the managing director, and depended on sales and borrowings that were commercially unrealistic. It also sought to leave the company under the control of persons whose conduct was under a cloud, while pending misfeasance proceedings and the earlier finding of fraud were not disclosed to the creditors and shareholders. A scheme of reconstruction could not be sanctioned where it was impractical, unfair, and likely to protect delinquent management rather than preserve the legitimate interests of the class concerned.

Conclusion: The scheme was rightly refused sanction.

Final Conclusion: The appeal succeeded, the sanction granted to the reconstruction scheme was set aside, and the winding-up proceedings were directed to continue.

Ratio Decidendi: In sanctioning a scheme under section 153(2) of the Indian Companies Act, 1913, the Court must independently be satisfied that the arrangement is bona fide, fair and reasonable, and commercially workable for the class concerned; majority approval is relevant but not ative, and material non-disclosure or a scheme designed to protect delinquent management justifies refusal of sanction.

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