Scheme of arrangement principles: transferee company consent is required where members, creditors, or share capital are affected.

Temporary use of funds pending finalisation of a scheme does not, by itself, attract the Monopolies and Restrictive Trade Practices Act, and the objection on that ground was rejected. A transferee company must also come before the court under the Companies Act, 1956 where a proposed transfer of undertaking, property and liabilities affects its members or creditors, or requires reorganisation of its share capital; the need for new equity shares and debentures brought the transferee within the arrangement process. Section 391 applies even if the transferee company is financially sound, because the statutory test is liability to be wound up, not present weakness. The scheme was sanctioned subject to the indicated amendment.

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Issues: (i) Whether the proposed scheme required sanction under the Monopolies and Restrictive Trade Practices Act, 1969; (ii) whether a transferee company must also seek sanction under sections 391 and 394 of the Companies Act, 1956 in a scheme involving transfer of undertaking, property and liabilities, where the scheme affects its members or creditors; (iii) whether section 391 of the Companies Act, 1956 was inapplicable because the transferee company was financially sound.

Issue (i): Whether the proposed scheme required sanction under the Monopolies and Restrictive Trade Practices Act, 1969.

Analysis: The question had already been answered by binding precedent holding that temporary utilisation of funds pending finalisation of a scheme does not amount to carrying on investment business or rendering service so as to attract the Act. The court found that the same reasoning governed the present facts, and the longer duration of the utilisation did not alter the principle applied in the earlier decision.

Conclusion: The objection based on the Monopolies and Restrictive Trade Practices Act, 1969 was rejected, in favour of the petitioner.

Issue (ii): Whether a transferee company must also seek sanction under sections 391 and 394 of the Companies Act, 1956 in a scheme involving transfer of undertaking, property and liabilities, where the scheme affects its members or creditors.

Analysis: Chapter V of the Companies Act, 1956 was treated as governing compromises, arrangements and reconstructions. The court held that an arrangement under section 391 is not confined to the transferor company; if the proposed transfer affects the rights of the transferee company's members or creditors, or involves a reorganisation of its share capital, the transferee company must also be before the court. The scheme here required issuance of new equity shares and new debentures, thereby affecting both members and creditors of the transferee company.

Conclusion: The transferee company was held to be required to seek sanction under sections 391 and 394, in favour of the petitioner.

Issue (iii): Whether section 391 of the Companies Act, 1956 was inapplicable because the transferee company was financially sound.

Analysis: The court treated the contrary observation in an earlier decision as obiter and declined to follow it. It held that the statutory test is whether the company is liable to be wound up, not whether it is presently financially weak. A financially sound company may still enter into an arrangement or amalgamation under the chapter.

Conclusion: Section 391 was held applicable notwithstanding the transferee company's sound financial condition, in favour of the petitioner.

Final Conclusion: The objections were overruled and the scheme was sanctioned with the indicated amendment requiring the appropriate High Court sanction and consequential orders for both the transferor and transferee companies.

Ratio Decidendi: In a scheme of arrangement involving transfer of an undertaking, sections 391 and 394 of the Companies Act, 1956 apply to the transferee company whenever the scheme affects its members or creditors or entails reorganisation of its share capital; the section is not confined to financially distressed companies.

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