Reduction of capital and modified scheme of arrangement upheld where lost paid-up capital was proved and the plan was fair and equitable.

Section 100 of the Companies Act, 1956 permits reduction of capital by cancelling paid-up capital that is lost or unrepresented by assets, including part of such lost capital; on the balance-sheets and affidavit, prima facie proof of loss was sufficient. Section 391 also confers wide power to sanction a scheme of arrangement that reorganises share capital and modifies preference shareholders' rights, even without separate approval under the class-rights machinery in Section 106 or the articles. The scheme was treated as fair and equitable because the company's capital was largely lost, creditors were not prejudiced, and the affected class could reasonably approve it.

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Issues: (i) Whether the reduction of capital cancelling lost paid-up capital was permissible and sufficiently proved. (ii) Whether the scheme of arrangement, including modification of preference shareholders' rights, could be sanctioned notwithstanding the class-rights provisions and whether it was fair and equitable.

Issue (i): Whether the reduction of capital cancelling lost paid-up capital was permissible and sufficiently proved.

Analysis: The statutory power to reduce capital under Section 100 of the Companies Act, 1956 extends to cancellation of paid-up capital which is lost or unrepresented by available assets, and includes cancellation of part of such lost capital. The court found sufficient evidence of loss from the balance-sheets and supporting affidavit, and held that even prima facie proof is adequate for confirmation of reduction. The contention that lost capital could not be cancelled was rejected.

Conclusion: The reduction of capital was legally permissible and the loss of capital was proved; the issue was decided against the appellant.

Issue (ii): Whether the scheme of arrangement, including modification of preference shareholders' rights, could be sanctioned notwithstanding the class-rights provisions and whether it was fair and equitable.

Analysis: The court held that Section 391 of the Companies Act, 1956 gives wide power to sanction a scheme of arrangement, including one that reorganises share capital and modifies class rights. The absence of approval under the class-rights machinery in Section 106 or under the articles did not bar sanction of a scheme approved under Section 391. The court further held that the scheme, viewed as a whole with the reduction of capital, was fair and equitable: the company's capital had been largely lost, creditors were not prejudiced, the managing agents had foregone substantial dues, and the scheme was capable of reasonable approval by an honest and intelligent member of the affected class.

Conclusion: The scheme of arrangement could be sanctioned and was fair and equitable; the issue was decided against the appellant.

Final Conclusion: The appeals failed, and the orders confirming the reduction of capital and sanctioning the modified scheme of arrangement were upheld.

Ratio Decidendi: A court may sanction a scheme of arrangement under Section 391 of the Companies Act, 1956 even where it modifies class rights and accompanies a reduction of capital, provided the statutory requirements for reduction are satisfied and the scheme, as a whole, is fair and equitable to the affected class.

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