Conditional Votes Cannot Be Treated As Unconditional Approval Of Companies Act Revival Scheme: Delhi High Court

The Delhi High Court recently ruled that votes cast “for, with modification” cannot automatically be treated as unconditional assent to a Revival Scheme under the Companies Act, 1956.

The court must first examine the legal effect of the conditions attached to those votes before deciding whether they amount to approval of the Scheme.

“A vote cast “for” the Scheme simpliciter expresses assent to the Scheme as placed before the meeting. A vote cast “for, with modification” is, by its very description, conditional upon the modification accompanying the vote. The two cannot be treated as identical without first examining the nature and effect of the condition attached to the latter vote," a Division Bench of Justice Anil Kshetrapal and Justice Shail Jain observed.

The bench made the observation while allowing six connected appeals filed by allottees and investors of Gurugram-based real estate company A.N. Buildwell Private Limited.

The appeals challenged the February 17, 2020, order of the Single Judge sanctioning a Revival Scheme for the company under Sections 391 to 393 of the Companies Act.

A.N. Buildwell was engaged in developing the Spire Edge commercial project and Spire Woods residential project in Gurugram. The allottees had paid substantial amounts, and in several cases the entire sale consideration, under their respective builder-buyer agreements.

According to the allottees, the projects were not completed within the stipulated timelines. This led to disputes over possession, statutory approvals, and contractual obligations.

Several winding-up petitions were filed against the company. During the proceedings, the Official Liquidator was appointed as Provisional Liquidator.

A proposal to revive the company through a Revival Scheme was then placed before the Single Judge. Meetings of different classes of creditors, allottees, and other stakeholders were convened to consider the Scheme.

After the meetings, the respective chairpersons submitted reports setting out the voting pattern. The Single Judge sanctioned the Scheme on February 17, 2020, after finding that it had secured the requisite statutory majority.

The appeals primarily questioned how votes cast “for, with modification” had been treated.

In the Spire Edge project, 384 valid votes were recorded. Of these, 22 were cast in favour of the Revival Scheme without modification, 293 were cast in favour with modification, 19 were against without modification and 50 were against with modification.

Thus, 315 votes were categorised as being “for” the Scheme, but 293 of them were accompanied by modifications.

The bench held that Section 391(2) requires a majority in number representing three-fourths in value of the creditors, or class of creditors, present and voting, to agree to the compromise or arrangement.

The statutory requirement could not be treated as satisfied merely because a numerical majority had been categorised as having voted “for”. The question was whether the requisite majority had actually agreed to the arrangement that was ultimately placed before the court for sanction.

The modifications attached to the ballots were also substantive. They concerned contractual and financial rights of the allottees, including assured returns, lease commitment charges and other obligations relating to the projects.

“If the modifications were accepted, the arrangement assented to by such voters would be one arrangement. If they were rejected, the arrangement would be materially different,” the bench observed.

The court held that the conditional votes could not simply be aggregated with unconditional votes and treated as an unqualified approval of the Revival Scheme.

The Single Judge was required to examine the precise modifications and determine their legal effect before deciding whether the requisite statutory majority had approved the Scheme ultimately sanctioned.

The court also found that the individual objections raised by the allottees had not been examined in the required manner.

Those objections could not simply be treated as attempts to secure better terms under the Scheme. The Single Judge was required to consider whether they raised issues affecting the validity, fairness or statutory approval of the Revival Scheme.

The respondents had argued that the appellants represented only a small minority of allottees. They also contended that setting aside the Revival Scheme would prejudice those awaiting completion of the projects.

The bench held that determining whether the votes relied upon as constituting the requisite majority amounted, in law, to assent to the Revival Scheme did not amount to interference with the commercial wisdom of the stakeholders.

It held that commercial wisdom becomes relevant only after the court is satisfied that the statutory requirements governing sanction of the Scheme have been fulfilled. The court must first determine whether the Scheme placed before it was validly approved by the requisite majority and whether the statutory safeguards were followed.

“Commercial wisdom cannot be invoked to overcome uncertainty as to whether the statutory majority had, in fact, assented to the arrangement being sanctioned. It becomes relevant only after the existence of the requisite statutory assent is established,” the bench observed.

The bench also considered the voting pattern in the Spire Woods project. There, 358 of 364 valid votes were recorded in favour of the Scheme, but 292 of those were cast “with modification”.

The court held that numerical superiority alone could not replace an examination of whether the Scheme was just, fair and reasonable to the class as a whole.

The court clarified that it was not deciding whether revival was commercially preferable to liquidation. Nor was it assessing the commercial merits or feasibility of the Scheme.

Its intervention was confined to the foundational question of whether the Scheme, in the form ultimately sanctioned, had obtained the requisite statutory approval and whether the objections and material placed before the Single Judge had been adequately examined.

The bench accordingly allowed the appeals and set aside the February 17, 2020 order sanctioning the Revival Scheme. The matter was remanded to the Single Judge for fresh consideration.

The Single Judge has been directed to examine the legal effect of the “for, with modification” votes, the modifications attached to them, and the objections raised by the individual allottees and other stakeholders.

If a fresh or modified Scheme is proposed, the statutory procedure must also be followed, including convening meetings wherever required and furnishing stakeholders with the material necessary to make an informed decision.

The bench clarified that it had not adjudicated the individual claims of the allottees for refunds, assured returns, lease commitment charges, penalties, interest, compensation, or other amounts under their builder-buyer agreements.

Such claims remain open before the competent forum.

For Appellants: Advocates Animesh Sinha, Shubham Budhiraja, Ishita Pandey, Pragya Kumar, Vijay Gupta, Pardeep Chauhan and Lakshay Khanna

For Respondents: Advocates Vikrant Pachnanda, Mukul Katyal, Shivank Pratap Singh, Priya Singh, Samyak Jain, Shlok Chandra, Parikshit Singh Bhati, Lolita Crasta, Ruchi Sindhwani, Megha Bharara, Nidhi Raman, Arnva Mittal, Arnav Kumar, Akanksha Singh and Preeti Pant