Miheer H Mafatlal v Mafatlal Industries Ltd

Facts

• Mafatlal Industries proposed a scheme of arrangement/reconstruction which was approved by the requisite majority of members and creditors.
• Miheer Mafatlal (a dissenting member) opposed the scheme before the court at the sanction stage.
• The opponent argued that the scheme was unfair and commercially imprudent.
• The company contended the court's role was limited and commercial wisdom lay with the majority.

Issue

1. What is the scope of the court's jurisdiction in sanctioning a scheme of arrangement: can the court refuse sanction on grounds of commercial imprudence if the statutory majority has approved?

Held

• The Supreme Court held that the court's power at the sanction stage is circumscribed. The court must satisfy itself that: (1) the statutory provisions have been complied with; (2) the class was fairly represented and the majority acted bona fide; (3) the scheme is not contrary to law or public policy; (4) an intelligent and honest man acting in respect of his interest could reasonably approve the scheme. Beyond this, the court must not assume the role of a commercial critic: the commercial wisdom of the majority prevails.

Ratio Decidendi

At the sanction stage, the court performs a limited but vital function. It acts as a safeguard to ensure procedural regularity, fairness, legality, and that no fraud is perpetrated on the minority. However, the court does not sit in appeal over the commercial judgment of the majority. If the scheme passes the tests of legality, fairness, and reasonable commercial sense (judged from the perspective of an intelligent and honest member of the class), the court should ordinarily sanction it.