Commercially unworkable scheme and no present charge: future security promise cannot defeat pari passu distribution on winding up.

A sanctioned company arrangement may be brought to an end under the supervisory power in section 392 of the Companies Act, 1956 if it becomes commercially unworkable and cannot be satisfactorily implemented; the court cannot compel continued financing or operation of a loss-making undertaking where revival is no longer realistic. The text also states that an agreement to create a second mortgage in future, coupled with a promise to defer repayment until execution, does not by itself create a present charge or secured priority. Until the mortgage is executed, the creditors remain unsecured, and completion of the security cannot be ordered after winding up because it would undermine pari passu distribution.

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Issues: (i) Whether the sanctioned scheme could still be worked and the court could compel its implementation under the supervisory power in section 392 of the Companies Act, 1956; (ii) Whether the agreement and scheme created a present charge or secured priority in favour of the schedule 'B' creditors before execution of the proposed second mortgage.

Issue (i): Whether the sanctioned scheme could still be worked and the court could compel its implementation under the supervisory power in section 392 of the Companies Act, 1956.

Analysis: The scheme was framed on the footing that the company was commercially insolvent but could be revived under a new management and worked at a reasonable profit so that creditors could be paid from future profits. The obligation to provide finance was construed commercially, not as an unlimited duty to fund an undertaking that had no reasonable prospect of profit. The evidence showed that the mills closed for reasons beyond the management's control, including scarcity and price escalation of cotton, compulsory extra holiday requirements, and mounting losses. Once the court was satisfied that the scheme could not be satisfactorily worked, it could not compel the parties to continue financing or operating the mills at a loss.

Conclusion: The scheme could not satisfactorily be worked, and winding up under section 392 was justified.

Issue (ii): Whether the agreement and scheme created a present charge or secured priority in favour of the schedule 'B' creditors before execution of the proposed second mortgage.

Analysis: The documents disclosed only an agreement to create a second mortgage in the future and a promise to postpone repayment until that mortgage was executed. There was no clear intention to create a charge in praesenti, and the creditors' priority could arise only upon execution of the mortgage. Until then, the creditors remained unsecured, and completion of the incomplete security could not be ordered after the winding-up process had intervened because that would defeat pari passu distribution among creditors.

Conclusion: No present charge or secured priority was created in favour of the schedule 'B' creditors.

Final Conclusion: The order directing winding up was upheld because the scheme had become unworkable and the appellants could not priority or compel completion of an incomplete security after the winding-up order.

Ratio Decidendi: Where a scheme of arrangement is sanctioned on the basis that a company can be revived and worked profitably, the court may order winding up under section 392 of the Companies Act, 1956 if the scheme becomes commercially unworkable, and an incomplete promise to create security does not confer a present charge or defeat pari passu distribution on winding up.

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