Court sanction for scheme of arrangement requires full disclosure, creditor consultation, and fairness in public interest.

Sanction of a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 is supervisory, but the court must be satisfied that mandatory disclosures are made, affected creditors are properly consulted, and the proposal is fair, just, reasonable and in public interest. The scheme was not approved because secured and unsecured creditors other than bondholders were not consulted despite being affected, up-to-date financial and auditor materials were not placed before the court, and the explanatory statement to bondholders did not fairly disclose the erosion of principal, deferred payment and frozen interest. The arrangement was treated as failing the statutory and equitable safeguards for approval.

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Issues: Whether the proposed scheme of arrangement under the Companies Act, 1956 deserved sanction in the light of non-consideration of secured creditors, deficient disclosure to bondholders, lack of satisfaction under the statutory requirements, and the requirement that the scheme be fair, just, reasonable and in public interest.

Analysis: Sanction of a scheme under Sections 391 to 394 of the Companies Act, 1956 is supervisory and not an exercise in commercial substitution, but the Court must still be satisfied that the statutory requirements are complied with, that the persons affected are properly informed, that the scheme is fair to the class on whom it is imposed, and that it is not contrary to public interest. The record showed that meetings or consent of the secured and unsecured creditors, other than bondholders, were not obtained even though their interests were directly affected. The latest financial position and up-to-date auditor's reports were not placed before the Court, defeating the proviso to Section 391(2). The explanatory statement sent to bondholders did not fairly explain the practical effect of the scheme, including the erosion of principal, the postponement of payment, and the freezing of interest. The scheme also operated to the detriment of creditors by postponing repayment while offering only partial consideration to bondholders, and the arrangement appeared to be structured to avoid repayment of legitimate dues rather than to serve a genuine corporate purpose.

Conclusion: The scheme did not satisfy the statutory and equitable requirements for sanction and was therefore not liable to be approved.

Final Conclusion: The company petitions failed because the proposed arrangement was neither fair nor compliant with the mandatory safeguards governing court-sanctioned compromises and arrangements.

Ratio Decidendi: A court will refuse sanction to a scheme of arrangement under the Companies Act, 1956 where mandatory disclosures are not made, affected creditors are not properly consulted, and the scheme is not shown to be fair, just, reasonable and consistent with public interest.

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