Creditor class approval and judicial scrutiny are essential before sanctioning a compromise or arrangement under company law.

A scheme of compromise or arrangement under section 391 of the Companies Act, 1956 binds only the creditor class for which notice is given, a meeting is duly convened, and approval is obtained by the prescribed majority; secured and statutory creditors are separate classes, so a scheme approved only by unsecured creditors cannot affect them. The court must also independently satisfy itself that material facts have been fully disclosed and that the arrangement is bona fide and commercially viable; creditor support alone is insufficient. Because no notice or meeting was held for the affected creditor classes and no proper judicial satisfaction on disclosure or viability was recorded, sanction of the scheme was unsustainable.

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Issues: (i) Whether a scheme of compromise or arrangement under section 391 of the Companies Act, 1956 could be sanctioned when no notice was given and no meeting was held of the secured and statutory creditors whose rights were affected; (ii) whether the court, while sanctioning such a scheme, was required to independently satisfy itself about disclosure of material facts and the viability of the scheme.

Issue (i): Whether a scheme of compromise or arrangement under section 391 of the Companies Act, 1956 could be sanctioned when no notice was given and no meeting was held of the secured and statutory creditors whose rights were affected.

Analysis: Section 391 contemplates a compromise or arrangement between a company and its creditors or a class of them, and a scheme becomes binding only on the class of creditors for whom a meeting has been convened and who approve it by the prescribed majority in value. Secured creditors and statutory creditors constitute separate classes. Where no meeting was held for such class and no notice was served, a scheme approved only by unsecured creditors cannot bind the affected classes. The court cannot sanction a scheme affecting a class of creditors unless that class has been properly brought within the statutory process and has approved it.

Conclusion: The scheme could not validly be sanctioned insofar as it affected secured and statutory creditors who had received no notice and whose class had held no meeting; the objection succeeded in favour of the appellant.

Issue (ii): Whether the court, while sanctioning such a scheme, was required to independently satisfy itself about disclosure of material facts and the viability of the scheme.

Analysis: Sanction under section 391 is not automatic upon creditor approval. The court must be satisfied, on affidavit or otherwise, that all material facts have been disclosed, and it must independently assess whether the proposed arrangement is bona fide and commercially viable. Mere creditor support does not dispense with judicial scrutiny of the scheme's feasibility and its consonance with commercial morality and the interests of those affected. No such finding of viability or adequate disclosure was recorded in the order under appeal.

Conclusion: The sanction order was unsustainable because the necessary independent judicial satisfaction regarding disclosure and viability was absent.

Final Conclusion: The order sanctioning the scheme was set aside because the statutory procedure under section 391 was not complied with as to affected creditor classes, and the scheme had not been independently found viable or properly disclosed.

Ratio Decidendi: A scheme under section 391 of the Companies Act, 1956 can bind only the creditor class for which a meeting has been duly convened and approved by the requisite majority, and the court must independently satisfy itself as to full disclosure and the bona fides and viability of the arrangement before granting sanction.

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