If a compromise or arrangement is not bona fide but intended to cover misdeeds of delinquent directors, the Court shall not sanction the scheme [Pioneer Dyeing House Limited v. Dr. Shanker Vishnu Marathe (1967) 2 Comp. LJ 16]. If the object of the scheme is to prevent investigation or there is failure in the management of affairs of the company or disregard of law or withholding of material information from the meeting or the scheme is against public policy, the Court will not sanction the scheme [J.S. Davar v. Dr. S.V. Marathe, AIR 1967 Bom. 456 (DB)]. If it can be shown that the petition is made mala fide and motivated primarily to defeat the claims of certain creditors who had obtained decrees against the company, there was inordinate delay in making the application for sanctioning the scheme and certain information was withheld from the Company Court, the petition for sanctioning the scheme though approved by the creditors and shareholders was rejected [Richa Jain v. Registrar of Companies(1990) 69 Comp. Cas. 248 (Raj.)].
Thus, the following salient aspects emerge in every proposal containing a scheme of compromise or arrangement:
— Any scheme of compromise or arrangement that falls within the provisions of Sections 391 to 393 of the Act should receive sanction from the Court in order to become effective and binding.
— The scheme of compromise or arrangement should be prepared as a written document.
— It should be presented to the Court.
— Court will direct the convening of meetings of creditors or a class of them.
— Court will direct the convening of meetings of members or a class of them.
— Court gives opportunity to all concerned.
— Under Section 391(1) of the Act, the Court gives directions with regard to conducting of meetings.
— The Court also fixes the time and place of such meeting, and appoint a chairman of the meeting.
— The Court fixes the quorum and lays down the procedure to be followed at the meeting, including voting by proxy; determines the value of creditors or members and the persons to whom notice is to be given.
— The Court also gives directions to the chairman to report to the Court the result of the meeting within a given period.