Scheme of arrangement failed where it required an ultra vires lease and could not be materially rewritten by the court.
A scheme for payment of company debts could not be sanctioned where it depended on the Industrial Finance Corporation leasing the company's assets, because the statute gave the Corporation only management, sale, and realisation powers and no express or implied lease power. The court also could not materially rewrite the scheme to reconcile inconsistent creditor conditions, as the Companies Act provision allowed sanction or rejection of the scheme as presented and did not confer a general power to redesign it. Because the proposed arrangement was ultra vires and no workable sanctioned scheme existed, the compromise application failed.
Issues: (i) Whether the proposed scheme for payment of debts could be sanctioned when it contemplated a lease of the company's assets by the Industrial Finance Corporation, and (ii) whether the court could modify the scheme to reconcile the conflicting conditions imposed by the different classes of creditors so as to produce a workable arrangement.
Issue (i): Whether the proposed scheme for payment of debts could be sanctioned when it contemplated a lease of the company's assets by the Industrial Finance Corporation.
Analysis: The scheme depended on the Corporation leasing the company's assets, but the powers conferred on it by the Industrial Finance Corporation Act, 1948 were limited to taking over management or selling and realising the secured property. The power to grant a lease was not expressed, and it could not be implied as incidental to the power of lending or recovering the loan. The mortgage deed also did not confer such a power. A court cannot sanction a scheme that necessarily requires an act beyond the statutory competence of a participating body.
Conclusion: The scheme was ultra vires the Corporation and could not be sanctioned.
Issue (ii): Whether the court could modify the scheme to reconcile the conflicting conditions imposed by the different classes of creditors so as to produce a workable arrangement.
Analysis: The creditor bodies had approved the scheme only on conditions that were mutually inconsistent and, in the case of the unsecured creditors, had expressly negatived any power of the court to alter the scheme. Section 153 of the Indian Companies Act, 1913 authorised the court to sanction or reject the scheme as presented, but did not confer a general power to rewrite it. Although modification may be possible where the scheme itself reserves such power, the court would not alter fundamental terms in a manner contrary to the basis on which consent had been given, particularly where that would prejudice the Corporation and conflict with the statute governing it.
Conclusion: The court had no power to impose a materially modified scheme, and no workable scheme existed for sanction.
Final Conclusion: The compromise application failed because the proposed arrangement depended on an unauthorised lease by the Corporation and, in any event, the conflicting conditions attached by creditors left no sanctionable scheme.
Ratio Decidendi: A court cannot sanction a scheme of arrangement that necessarily requires an act beyond the statutory powers of a participant, and it cannot materially modify a scheme where the statute and the scheme itself do not authorise such modification.
TaxTMI 
AI Drafter ✕
TaxTMI 
