1998 (10) TMI 399 - HC - Companies Law

Summary

Issues Involved:
1. Direction to convene meetings under Section 391 of the Companies Act, 1956.
2. Bona fides of the applicant-company.
3. Financial viability and turnaround strategy of the applicant-company.
4. Opposition from petitioning creditors and their objections.
5. Legal principles governing the court's role in sanctioning schemes under Section 391.

Detailed Analysis:

1. Direction to Convene Meetings:
The applicant-company, engaged in the business of manufacturing industrial oils, sought directions to convene meetings under Section 391 of the Companies Act, 1956, to consider and approve a Scheme of compromise and arrangement between the company, its shareholders, and creditors. The Scheme included detailed provisions for the repayment of dues to unsecured and trade creditors based on the outstanding principal amounts.

2. Bona Fides of the Applicant-Company:
The bona fides of the applicant-company were questioned due to its past conduct, particularly in relation to the dues of ITC Classic Finance Ltd., which had advanced funds for purchasing windmills. The applicant-company retained a refunded amount without repaying ITC Classic Finance and produced a false certificate regarding the installation of windmills. This conduct raised doubts about the trustworthiness of the company in managing any Scheme.

3. Financial Viability and Turnaround Strategy:
The applicant-company proposed a turnaround strategy involving a joint venture with an NRI group, negotiations with banks for working capital, and the sale of office buildings. However, the financial statements indicated significant losses, reduced sales, and income, suggesting commercial insolvency. The Scheme's success depended on securing funds from the NRI group and banks, which were not firmly committed.

4. Opposition from Petitioning Creditors:
Petitioning creditors in various winding-up petitions opposed the Scheme, alleging it was a subterfuge to delay the hearing of winding-up petitions and to benefit others by dissipating the company's assets. They highlighted discrepancies in the company's accounts and the non-payment of declared dividends, which violated Section 205 and constituted an offense under Section 207 of the Companies Act.

5. Legal Principles Governing the Court's Role:
The court referred to the Supreme Court's judgment in Mihir H. Mafatlal v. Mafatlal Industries, emphasizing that the court's role is limited to ensuring the proper conduct of the Scheme rather than evaluating its merits. However, the court must ensure the Scheme is bona fide and in the company's interest. In this case, the court found no prima facie evidence that the Scheme was bona fide or in the company's interest, given the serious allegations and substantial opposition from creditors.

Conclusion:
The application to convene meetings under Section 391 was rejected due to the lack of prima facie evidence of the Scheme's bona fides and the significant opposition from creditors, coupled with the company's questionable conduct and financial instability.