COMPROMISE & SETTLEMENT – APPLICABILITY OF PRINCIPAL OF BEING HEARD BEFORE HOLDING REQUISITE MEETING UNDER SECTION 391 – 394 OF THE COMPANIES ACT, 1956
INTRODUCTION
With the liberation of economy, empowering entry of foreign players more vigorously, the provisions of Section 391 – 394 of the companies Act, 1956 which speaks of compromise and settlements with creditors and / or shareholders ( and is not restricted to the provisions of merger and amalgamation as commonly understood) gained further importance. The last decade has seen phenomenal rise in the amalgamations, mergers and demergers. In the scenario, the question Whether there any requirement to give notice to the concerned persons i.e. shareholders and / or creditors before
LEGAL PROVISIONS
The provisions of Section 391 – 394 of the Companies Act, 1956 deals with compromise and settlement. They are wider in terms and includes all kinds of compromises and settlement entered into by the company with the (1) Creditors and (2) Shareholders. Company Court Rules also contains elaborate provisions regarding the same.
The Relevant rules are as under :-
67. Summons for directions to convene a meeting.- An application under section 391(1) for an order convening a meeting of creditors and/ or members or any class of them shall be by a Judge’s summons supported by an affidavit. A copy of the proposed compromise or arrangement shall be annexed to the affidavit as an exhibit thereto. Save as provided in rule 68 hereunder, the summons shall be moved ex parte. The summons shall be in Form No. 33, and the affidavit in support thereof in Form No. 34.
73. Notice of meeting.- The notice of the meeting to be given to the creditors and/or members, or to the creditors or members of any class, as the case may be, shall be in Form No. 36, and shall be sent to them individually by the Chairman appointed for the meeting, or, if the Court so directs, by the company (or its Liquidator), or any other person as the Court may direct, by post under certificate of posting to their last known address not less than 21 clear days before the date fixed for the meeting. It shall be accompanied by a copy of the proposed compromise or arrangement and of the statement required to be furnished under section 393, and a form of proxy in Form No. 37.
74. Advertisement of the notice of meeting.- The notice of the meeting shall be advertised in such newspapers and in such manner as the Judge may direct, not less than 21 clear days before the date fixed for the meeting. The advertisement shall be in Form No. 38.
79. Petition for confirming compromise or arrangement.- Where the proposed compromise or arrangement is agreed to, with or without modification, as provided by sub-section (2) of section 391, the company, (or its Liquidator, as the case may be), shall, within 7 days of the filing of the report by the Chairman, present a petition to the Court for confirmation of the compromise or arrangement. The petition shall be in Form No. 40.
Where a compromise or arrangement is proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition shall pray for appropriate orders and directions under section 394.
Where the company fails to present the petition for confirmation of the compromise or arrangement as aforesaid, it shall be open to any creditor or contributory as the case may be, with the leave of the Court, to present the petition and the Company shall be liable for the costs thereof.
Where no petition for confirmation of the compromise or arrangement is presented, or where the compromise or arrangement has not been approved by the requisite majority under section 391(2) and consequently no petition for confirmation could be presented, the report of the Chairman as to the result of the meeting made under the preceding rule shall be placed for consideration before the Judge for such orders as may be necessary.
80. Date and notice of hearing.- The Court shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in the same papers in which the notice of the meeting was advertised, or in such other papers as the Court may direct, not less than 10 days before the date fixed for the hearing.
The reading of the above rules demonstrates that the rights of the shareholders and creditors are sought to the protected by the abovementioned statutory Rules inasmuch as the said rules provides for a confirmation by the company court by way of petition (of which notice of hearing is required to be advertised in the newspapers) enabling the shareholders / creditors to raise their objection, if any, after the special resolution is passed in favor of the scheme. ( Rule 79 & 80).
Rule 67 of The Company Court Rules especially provides that the order of convening meeting ought to be passed ex parte. The said Rules are enacted in exercise of the powers conferred by Section 643(1)(2) of the Companies Act, 1956 and hence have force of an Act passed by the Parliament. Though it is essential that the Court while issuing such summons is required to apply its mind to checklist indicated in Rule 69 and it needs to be prima facie satisfied about the genuineness and bonafides of the application. The court further needs to consider all the aspects before giving a sanction to the scheme. The said rules further provides for ex parte hearing because if hearing is required to be given to contributors, creditors and share-holders, then the entire scheme of Section 391 (which is a Code by itself) would become unworkable.
It has been held in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. 1997 (1) SCC 579 that
When a scheme ( under section 391 – 394 ) is put forward by a company for the sanction of the Court in the first instance the Court has to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme and once the majority in number representing three-fourths in value accord their approval to any compromise or arrangement, and once such compromise is sanctioned by the Court, it would be binding to all creditors or class of creditors or members or class of members, as the case may be including dissenting creditors or class of creditors or dissenting members or class of members.
Before sanctioning the scheme Court has to be satisfied that all the relevant matters mentioned in the proviso to sub-section (2) of that section has been disclosed to the voters so that the parties concerned can take an informed and objective decision whether to vote for the scheme or against it.
Company Court which is called upon to sanction such a scheme has not merely to go by the ipse dixit of the majority of the shareholders or creditors or their respective classes who might have voted in favour of the scheme by requisite majority but the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant.
On a conjoint reading of the relevant provisions of Sections 391 and 393 it becomes at once clear that the Company Court will not sanction a scheme merely because the said resolution has been passed by the requisite majority or in other words the court is not just a rubber stamp and have no power to refuse to sanction the said scheme. Before sanctioning the scheme the Court has to consider the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. Where the sanctioned scheme falls within the vice of any of the aforestated the court will refuse to sanction the scheme.
Though the constitutional validity of the Rule 67 of the Company Court Rules on the ground of being violative of the Principals of Natural Justice has not been challenged and decided, but the decision of Hon’ble Supreme Court of India in the matter of Miheer H. Mafatlal v. Mafatlal Industries Ltd. 1997 (1) SCC 579 provides sufficient grounds for upholding the same.
Similar View was taken by the Hon’ble Bombay High Court in the matter of Sakamari Steel & Alloys Ltd. in 51 Company Cases page 266, wherein it was held that that Section 391(1) is not a sign-post but a check-post, and it is a duty of the Court to examine the genuineness and the bonafides of the Scheme.
Hon’ble Supreme Court of India in the matter of Chembra Orchids Produce Ltd & Ors. Vs. Regional Director of Company Affairs and Others reported in 2009(1) SCALE 1, 2009(1 )JT 412 upheld the above proposition of law and concluded that there is no requirement for grant of opportunity of being heard before issuance of notice for holding the meeting of creditors / shareholders and non issuance of notice is also not violative of the principals of natural justice.
WRITTEN BY
PRAVEEN AGRWAL
B COM, A C S , LL B
ADVOCATE ON RECORD
SUPREME COURT OF
DDA FLAT NO 36 E, POCKET 1,
MAYUR VIHAR – 1,
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