Judicial sanction for reconstruction schemes requires fairness, bona fides and workability; majority approval alone is not conclusive.

A scheme of reconstruction under section 153 of the Indian Companies Act, 1913 is not sanctionable merely because the statutory majority of creditors and shareholders approved it. Judicial sanction still requires the court to be satisfied that the majority acted bona fide, the class was fairly represented, and the scheme is fair, reasonable and workable. Where a company is insolvent, lacks realistic business prospects, seeks to transfer personal liabilities of directors, relies on unrealistic asset valuation, or omits material facts such as pending misfeasance proceedings, the scheme may properly be refused sanction and winding up may 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 approved it; (ii) whether the proposed scheme was fair, reasonable and workable so as to deserve judicial sanction.

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

Analysis: Section 153 of the Indian Companies Act, 1913 requires approval by the statutory majority, but judicial sanction remains necessary. The majority's view is an important factor, yet it does not conclude the matter. The court must still be satisfied that the statutory requirements are met, that the majority acted bona fide, that the class was fairly represented, and that the arrangement is one which a reasonable business person could approve.

Conclusion: The court is not bound to sanction the scheme merely because the statutory majority approved it.

Issue (ii): Whether the proposed scheme was fair, reasonable and workable so as to deserve judicial sanction.

Analysis: The company was hopelessly insolvent, had meagre assets, heavy liabilities, no adequate working capital, and no realistic prospect of resuscitating its business. The scheme also sought to burden the company with the personal debts of the managing director, rested on an unrealistic and arbitrary valuation of assets, and appeared designed to protect delinquent directors. A further material circumstance was the non-disclosure of pending misfeasance proceedings against the directors, which would have affected the creditors' and shareholders' decision. Such a scheme could not be treated as one that sensible business people would reasonably approve.

Conclusion: The scheme was neither fair nor reasonable nor workable and could not be sanctioned.

Final Conclusion: The sanction granted by the District Judge was set aside and the winding up proceedings were directed to continue.

Ratio Decidendi: In sanctioning a scheme of arrangement under section 153 of the Indian Companies Act, 1913, the court must independently satisfy itself that the scheme is bona fide, fair, reasonable and workable, and the statutory majority's approval is only one relevant factor and not conclusive.

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