Section 391 – The Companies Act,1956

The Companies Act, 1956

391. Power to compromise or make arrangements with creditors and members.

(1) Where a compromise or arrangement is proposed

(a)between a company and its creditors or any class of them; or

(b)between a company and its members or any class of them,the 1[Tribunal] may, on the application of the company or of any creditor or member of the company or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be to be called, held and conducted in such manner as the 1[Tribunal] directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members as the case may be, present and voting either in person or, where proxies are allowed 2[under the rules made under section 643], by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the 1[Tribunal], be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or, in the case of a company which is being wound up, on the liquidator and contributories of the company:

3[Provided that no order sanctioning any compromise or arrangement shall be made by the 1[Tribunal] unless the 1[Tribunal] is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the 1[Tribunal], by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor’s report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under sections 235 to 351, and the like.]

(3) An order made by the 1[Tribunal] under sub-section (2) shall have no effect until a certified copy of the order has been filed with the Registrar.

(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company.

(5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to 4[one hundred rupees] for each copy in respect of which default is made.

(6) The 5[Tribunal] may, at any time after an application has been made to it under this section stay the commencement or continuation of any suit or proceeding against the company on such terms as the 5[Tribunal] thinks fit, until the application is finally disposed of.

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(i) A scheme sanctioned by the Court does not operate as a mere agreement between the parties, it becomes binding on the company, the creditors and the shareholders and has statutory force. It cannot be altered except with the sanction of the Court even if the shareholders and creditors acquiesce in such alteration; J.K. (Bombay) Pvt. Ltd. v. New Kaiser-I-Hind Spinning and Weaving Co. Ltd., 1970 (40) Comp. Cas. 689: (1970) 1 Com LJ 151: AIR 1970 SC 1041.

(ii) A binding obligation created under a composition under section 391 of the Companies Act, between the company and its creditors does not affect the liability of the surety unless the contract of suretyship otherwise provides; Punjab National Bank Ltd. v. Sri Vikram Cotton Mills Ltd., 1970 (40) Comp. Cas. 927: 1970 (2) Com LJ 18: AIR 1970 SC 1973.

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1. Subs. by Act 11 of 2003, sec. 39, for “Court”.

2. Ins. by Act 65 of 1960, sec. 151 (w.e.f. 28-12-1960).

3. Added by Act 31 of 1965, sec. 48 (w.e.f. 15-10-1965).

4. Subs. by Act 53 of 2000, sec. 174, for “ten rupees” (w.e.f. 13-12-2000).

5. Subs. by Act 11 of 2003, sec. 39, for “Court”.

6. Sub-section (7) omitted by Act 11 of 2003, sec. 39.

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