Section 391(1) of the Companies Act, 1956 provides that where a compromise or arrangement is proposed between company and its creditors or any class of them or between company and its members or any class of them, the Court may on the application of the company or any creditor or member of the company or liquidator (where company is being wound up), order a meeting of creditors or class of creditors or members or class of members, as the case may be, to be called, held and conducted in such manner as it directs. From the above provision of law, it is clear that there could be a compromise or arrangement between a company on the one side and its creditors or any class of them on the other side. There could be an arrangement between a company and its members or any class of them. In such a scheme of compromise or arrangement, the creditors or members could be the interested parties. In the case of a company in winding up, the liquidator becomes the party entitled to present the scheme to the court. All or any one of the interested parties have to make an application to the court praying for sanctioning the scheme of compromise or arrangement.
Pertinently, it has been held in several cases that Section 391 is a ‘complete code’ or ‘single window clearance system’, and that the Court has been given wide powers under this section, to frame a scheme for the revival of a company. Being a complete code, the Court can, under this ‘section’, sanction a scheme containing all the alterations required in the structure of the company for the purpose of carrying out of the scheme.
Section 391 contemplates a compromise or arrangement between a company and its creditors or any class of them, or its members or any class of them, and provides machinery whereby such a compromise or arrangement may be binding on dissentient persons by an order of the Court. [Oceanic Steam Navigation Co. In re. (1939) 9 Comp. Cas. 229 (Ch.D)].
When an application is made, the Court will naturally consider the merits of the scheme. The Court will also see whether all interested parties or whether all parties whose rights are likely to be affected have been put on notice about the scheme. In other words, Court gives an opportunity to all persons who are concerned or interested in the scheme. The Court may order a meeting of the creditors and / or the members. While ordering the convening of a meeting, the Court has the power to direct the manner in which the meeting should be conducted and how the proceedings and the result of the meeting should be reported. The Court has the discretion to sanction the scheme. You may note the use of the word 'may' in Sub-section (1) of Section 391 of the Act. It clearly implies that the Court has the discretion to make or not to make the order. As already stated, even before convening a meeting, the Court should pay attention to the fairness of the proposed scheme because it would be no use putting before the meeting a scheme, which is not fair. The Court may also refuse a meeting to be called where the proposals contained therein are illegal, or in violation of provisions of the Act or incapable of modification. [Travancore National & Quilon Bank, In Re. (1939) 9 Comp. Cas. 14 (Mad.)]. Thus, the Court does not have to compulsorily call for a meeting, but in its discretion, dismiss the application at that stage itself [Sakamari Metals & Alloys Limited, In Re. (1981) 51 Com. Cas. 266 (Bom.)].
The Court is duty bound to ascertain the bona fides of the scheme and whether the scheme is prima facie feasible. The Court will not act merely as a rubber stamp while sanctioning a scheme. The Court must consider the application on merits. [N.A.P. Alagiri Raja & Company v. N. Guruswamy (1989) 65 Comp. Cas. 758 (Mad.)]. The Court should examine the nuts and bolts of the scheme and should not hesitate to reject the scheme or ask for additional material or even point to creditors, members, etc. of pitfalls in the scheme and the Court's role under Section 391(1) is equally useful, vital and pragmatic as under Section 391(2) [Sakamari Metals & Alloy Limited In Re. (1981) 51 Comp. Cas. 266 (Bom.)]. Where a large number of creditors opposed the scheme, it was obvious that there was no possibility of its being implemented [Krishnakumar Mills Co. Ltd. In Re. (1975) 45 Comp. Cas. 248 (Guj.)].
