Threshold scrutiny under company compromise law allows refusal of a non-bona fide scheme and no stay against secured creditor sale.

At the threshold stage under section 391(1) of the Companies Act, 1956, the Court may decline to direct convening of creditors' meetings where the proposed compromise lacks bona fides, is unworkable, or is contrary to public interest. The Court must be prima facie satisfied that the company is qualified to seek the scheme and that the proposal is fit to be placed before creditors. A scheme depending on uncertain licence arrangements and requiring secured creditors to waive substantial interest may be found non-viable and unfair. Section 391(6) does not authorise an injunction against a secured creditor's enforcement of mortgage or hypothecation rights by sale.

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Issues: (i) Whether, at the stage of an application under section 391(1) of the Companies Act, 1956, the Court may refuse directions for convening a meeting of creditors if the proposed scheme appears not bona fide, unworkable, or contrary to public interest; (ii) Whether the proposed scheme, which depended upon giving the factory on leave and licence and required waiver of past and future interest by secured creditors, was viable and fair; (iii) Whether an order could be made under section 391(6) of the Companies Act, 1956 to stay the secured creditors' realisation and sale of the company's assets.

Issue (i): Whether, at the stage of an application under section 391(1) of the Companies Act, 1956, the Court may refuse directions for convening a meeting of creditors if the proposed scheme appears not bona fide, unworkable, or contrary to public interest.

Analysis: The statutory scheme confers discretion on the Court even at the threshold stage. The ex parte nature of the application does not dispense with judicial scrutiny. The Court must be prima facie satisfied that the company is qualified to propose the scheme, that the proposal is made in good faith, and that the scheme is fit to be placed before creditors. The Court may refuse directions where the circumstances show that the proposal lacks bona fides, contains material uncertainties, or is otherwise unsuitable for consideration by creditors.

Conclusion: The Court held that it could dismiss the summons under section 391(1) at the threshold and was not bound to direct a meeting in every case.

Issue (ii): Whether the proposed scheme, which depended upon giving the factory on leave and licence and required waiver of past and future interest by secured creditors, was viable and fair.

Analysis: The scheme suffered from serious defects. The proposed licence arrangement was uncertain and inadequately supported by the disclosed material. The draft scheme also omitted or obscured material terms, including the increased compensation for renewal, which cast doubt on its credibility. More importantly, the scheme required secured financial institutions to forego substantial past and future interest on public money, while the company's own source of income had effectively disappeared after sale of the factory. On the facts, the proposal was neither workable for the secured creditors nor viable for the unsecured creditors, and it was detrimental to public interest.

Conclusion: The Court held that the scheme was not bona fide, not workable, and not fit for reference to creditors.

Issue (iii): Whether an order could be made under section 391(6) of the Companies Act, 1956 to stay the secured creditors' realisation and sale of the company's assets.

Analysis: The power under section 391(6) operates only in relation to the commencement or continuation of a suit or proceeding against the company and is ancillary to a pending section 391(1) application. The secured creditors' act of enforcing their mortgages and hypothecation rights by sale was not a suit or proceeding within that provision. Since the application under section 391(1) failed, no stay could be granted under section 391(6), and the provision did not authorise an injunction against the secured creditors' contractual realisation of security.

Conclusion: The Court held that no stay could be granted under section 391(6) against the secured creditors' sale of the assets.

Final Conclusion: The company failed to secure either convening directions for consideration of the compromise or an order restraining the secured creditors from completing the sale of the factory, and the proposed arrangement was rejected in its entirety.

Ratio Decidendi: At the stage of section 391(1), the Court must exercise independent threshold scrutiny and may refuse to convene creditors' meetings where the proposed scheme is not bona fide or viable; section 391(6) does not authorise an injunction against a secured creditor's realisation of security, as distinct from a suit or proceeding against the company.

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