Section 391 — Power to Compromise or Make Arrangements with Creditors and Members (Companies Act, 1956)

Section 391 of the Companies Act, 1956, empowers a company to make a compromise or arrangement with its creditors or members. This section is significant as it provides a mechanism for companies to restructure their debts or reorganize their capital structure in a legally binding manner. The process involves the company proposing a scheme of arrangement, which must be approved by a majority in number representing three-fourths in value of the creditors or members present and voting. Once approved, the scheme requires the sanction of the National Company Law Tribunal (NCLT) to become binding on all parties involved. The statutory test involves ensuring that the scheme is fair, reasonable, and not prejudicial to the interests of the creditors or members. The burden of proof lies with the company to demonstrate the scheme's viability and fairness. Practically, this section is crucial for companies facing financial difficulties, as it allows them to negotiate terms with creditors and avoid insolvency.

Common Litigation Flashpoints

1. Valuation of company assets
2. Fairness of the proposed scheme
3. Adequacy of disclosure to creditors
4. Compliance with statutory procedures

Judgments on Section 391 — Power to Compromise or Make Arrangements with Creditors and Members (Companies Act, 1956)

• Saraswati Industrial Syndicate Ltd vs C.I.T., Haryana, Himachal Pradesh, Delhi — SC,
  The identity of the assessee must remain the same in the previous and subsequent years to attract tax liability under Section 41(1).
• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• The Authority for Advance Rulings (Income Tax) and Others vs Tiger Global International II Holdings — SC,
  The DTAA between India and Mauritius allows capital gains to be taxed only in Mauritius, provided the entity holds a valid TRC.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.