Compromise schemes require full disclosure and court scrutiny; majority approval alone cannot replace fairness and reasonableness

Unsecured creditors may be treated as one class for convening a compromise meeting where their debts are of the same kind and no prejudice is shown merely because some hold decrees and others do not. For sanction, the Court must still be satisfied that the scheme is bona fide, fair, reasonable and supported by full disclosure of the company's latest financial position and auditor's report. Where the material is unreliable, the scheme is indefinite, and winding up appears more advantageous to the unsecured creditors, majority approval alone does not justify sanction. On the material presented, both compromises were rejected.

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Issues: (i) whether the unsecured creditors could validly be treated as one class for the purpose of convening meetings under the compromise provisions; (ii) whether the proposed schemes were bona fide, fair, reasonable and supported by sufficient disclosure of the companies' latest financial position so as to justify sanction.

Issue (i): whether the unsecured creditors could validly be treated as one class for the purpose of convening meetings under the compromise provisions.

Analysis: The statutory arrangement provisions contemplate a compromise between a company and its creditors or any class of them, and the classification contemplated in the present context was between secured and unsecured creditors. The debts of all unsecured creditors were of the same kind and on similar terms, and no prejudice was shown to any section of them by treating them as one class. The mere fact that some had decrees and others had not did not create a separate class.

Conclusion: The objection to the class constitution and the meeting was rejected.

Issue (ii): whether the proposed schemes were bona fide, fair, reasonable and supported by sufficient disclosure of the companies' latest financial position so as to justify sanction.

Analysis: The proviso to the compromise provision required full disclosure of all material facts, including the latest financial position and auditor's report, before sanction could be granted. The companies failed to place reliable and up-to-date accounts before the Court, and the material produced did not inspire confidence that the assurances in the schemes could be carried out. The schemes were indefinite, did not show that the debts would be satisfied within a reasonable time, and on the material available a winding-up appeared more advantageous to the unsecured creditors than the proposed arrangements. Mere approval by a majority did not displace the Court's duty to be satisfied that the schemes were made in good faith and were fair and reasonable.

Conclusion: The schemes were held not fit for sanction and were rejected.

Final Conclusion: The Court declined to approve either compromise, left the parties free to seek winding-up relief, and directed that the interim protective arrangements cease.

Ratio Decidendi: Under the compromise jurisdiction, sanction cannot be granted unless the Court is satisfied from full and reliable disclosure that the scheme is made in good faith, is fair and reasonable, and is commercially advantageous to the class of creditors concerned, and majority approval alone is insufficient to overcome the Court's duty of independent scrutiny.

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