ORDER
Kedambady Jagannatha Shetty, J.
1. This Company Petition is presented by the petitioners under Sections 397 and 398 of the Companies Act, 1956 (to be hereinafter called the 'Act'). The respondent-Company is a private limited company incorporated under the Companies Act, in the name and style of M/s. Rakhra Sports Private Ltd, (hereinafter referred to as the 'Company').
2. Petitioners 1 and 2 and respondents 2 and 3 were initially carrying on the business in partnership under the name and style of Rakhra Sports Company for more than three decades, in equal proportions contributed towards the capital and likewise in equal proportions they were sharing the profits and losses. Apart from their business relationship are also close family relationship. The firm of M/s. Rakhra Sports Company was being taken over as a going concern by the Company with effect from the close of working hours on 30.11.1993. The registered office of the respondent is located at No. 6 Commercial Street Bangalore. Petitioners 1 and 2 and respondents 3 and 4 were the Board of Directors and Directors of the respondent-company. In order to maintain business relationship between the parties inter se they have incorporated Article 3(c) in the Articles which provides that the members of the 1st respondent-Company shall be of two family groups. Family Group-A shall consist of Krishan Kumar Rakhra and his immediate family members (spouse and children) and Om Prakash Rakhra and his immediate family members (spouse and children), Family group-B shall consists of Khraitilal Rakhra (1st petitioner) and his immediate family members (spouse and children) and Smt. Chandra Prabha Rakhra (2nd petitioner) and her immediate family members (husband and children). The said clause of Articles of Association further provides that the distinction between Group-A and Group-B shall not vitiate the voting rights of members and that the distinction is meant to give effect to two family groups who were partners in 'Rakhra Sports Company. Thus, it is provided that the quorum for a meeting of the Board of Directors shall be three Directors personally present thereby ensuring that both Groups 'A' and 'B' are represented at every meeting of the Board of Directors. If either of the two Groups is not represented at the meeting of the Board of Directors, no meeting of Board of Directors can validly be held as provided by Articles. This provision is made in the Articles only to ensure that no decision is taken by any group unilaterally to the detriment of the other group in the absence of any member of the other group.
3. It is averred in the Petition that all the four directors were active partners in the business of the 1st respondent-Company and in terms of the resolution passed by the Board of Directors each of them was paid a monthly salary. The family relationship between the petitioners on the one hand and respondents 2 and 3 on the other remained cordial. The main business activity of the Company is selling of sport goods and wears. Till about October, 1985 the only place of business of the Company was at Commercial Street, Bangalore, where the Company had acquired a shop premises on lease basis. It was acquired somewhere in October, 1985. The Company opened additional retail premises for its business under the name of Rakhra Super Sports at Bishop Cotton Schools Complex, Residency Road, Bangalore, having obtained shop premises on lease from its owners. Thus the Company carried on its business both at Commercial Street shop and also at newly acquired shop at Bishop Cotton Schools Complex, Residency Road, Bangalore.
4. It is stated that the business of the Company at Bishop Cotton Schools Complex are resulting in loss. As such a Resolution dated 3.10.1987 was passed, which reads as follows:
'The resolution of the Company at the 30th meeting of the Board of the Directors of the Company to close the business of the Company at Bishop Cotton Schools Complex reducing further loss to the Company and possibility of transferring the premises to a prospective buyer if any....'
5. When the question of implementing the Resolution of the Company dated 3.10.1987, dispute arose between the petitioners on the one hand respondents 2 and 3 on the other resulting in want of confidence between the parties inter se. Thereafter a Resolution dated 14.11.1987 said to have been passed in the Meeting of the Board of Directors. The minutes of the Meeting of the Board of Directors were signed by respondents 2 and 3 and the petitioner did not sign. As per the said minutes that respondent-2 himself suggested to the 1st petitioner that the 1st petitioner should take over Bishop Cotton School Complex on the condition that he relinquished his interest in Rakhra Sports Private Limited. It is also further averred in the petition that subsequently several Meetings purported to have been held namely 32nd, 33rd, 34th and 35th meetings.
6. In the mean-time correspondence was exchanged between the parties vide Annexure-G, H, J, K, L, M, N, O and P annexed to the Petition. It is averred that perusal of the correspondence between these parties to to show there was a total lack of confidence and trust resulting in want of good faith in the matter of the management of affairs of the Company. As no action was taken in the matter of Bishop Cotton School Complex Shop, the respondent stated to have taken action in filing Form No.32 to the Registrar of Companies in the year 1988 stating that the petitioners 1 and 2 had vacated their offices as Directors of the Company with effect fro 13.8.1988 pursuant to Section 283 of the Companies Act, indicating therein that Mr. Gyan Prakash Gupta, respondent-4 had been co-opted as a Director of the Company. A copy of the communication dated 19.8.1988 addressed by the 2nd respondent to the Registrar of Companies enclosing a common objection was made as Annexure to the Petition.
7. The petitioners being aggrieved by the said action of respondent-2 filed the above Petition under Sections 397 and 398 of the Act. Thus the relationship between the petitioners on the one hand and respondents 2 and 3 on the other hand deteriorated. Further one group made accusation against other group, thus there was total loss of the mutual trust which is the very essence of the understanding between the parties concerned in the matter of business of the respondent-1 Company. It is further averred that co-option of 4th respondent as additional Director when he was not a share holder of the 1st respondent Company is totally illegal. Further it is averred that he is a total stranger to both the groups and he was not a member of the family either Group-A or Group-B and he had no experience in the line of the business as that of the 1st respondent-Company. As such there was no valid meeting of the Board of Directors, could have been held in the absence of the petitioners, atleast one of whom should be present for the purpose of constituting quorum under Article 12 of the Articles of Association.
8. It is further alleged that in any view of the matter, co-option of the 4th respondent is no co-option in the eye of law and in any event is illegal.
9. It is averred in the Petition that the facts and circumstances stated in the Petition indicate that there is a complete dead-lock in the management of the 1st respondent Company and that on account of want of mutual trust, no business of the 1st respondent-Company can effectively be carried since the quorum required for valid Board meeting is absent. As such the petitioner averred that sufficient grounds exist for winding up of the 1st respondent Company mainly on the ground that it is just and equitable to do so under Section 433(f) of the Act. Further it is averred that it is necessary to state that facts as indicated in the petition also warrant an order for winding up of the partnership firm under Section 44(G) of the Partnership Act and that the same principles are applicable in the case of the 1st respondent-Company.
10. Accordingly, the petitioner made prayers in the Petition to pass appropriate and suitable order in exercise of the power conferred under Sections 397 and 398 read with Section 402 of the Act. The prayers made in the Petition read as under:
a) Declaring that minutes as recorded in the meeting of the Board of Directors purported to have been held on 14.11.1987, 28.11.87, and 13.2.1988 are illegal, improper and be deleted from the minutes book of the meeting of the Board of Directors;
b) Declaring that no meeting was held pursuant to the meeting notices dated 19.3.1988, 14.5.88 and 26.7.88 on 28.3.88, 25.5.88 and 6.8.88 or any other date and even if any such meeting was held that the same is honest in the eye of law;
c) Declaring that petitioners continue to be directors of the 1st respondent-Company:
d) Declaring that the purported co-option of the 4th respondent as a director of the 1st respondent is illegal and honest in the eye of law;
e) Declaring the 5th respondent not to take on record the Form No,32 filed by respondent No.2 on 19.8.88 purporting to notify the 5th respondent that petitioners 1 and 2 had vacated their office as Directors of the 1st respondent Company pursuant to Section 283(1)(g) of the Companies Act and that the 4th respondent had been co-opted as a Director of the 1st respondent-Company.
f) Issuing an order of permanent injunction restraining respondents 2 and 3 from interfering with the rights of petitioner to act as directors of the 1st respondent-Company.
g) Issuing an order of permanent injunction against the 4th respondent from acting as Director of the 1st respondent-Company.
h) Directing respondents 2 and 3 to purchase shares of petitioners in the 1st respondent-Company at a value of Rs. 1,000/- per share or directing respondents 2 and 3 to sell their shareholding of the 1st respondent-Company to petitioners at the same value of Rs. 10,000/- per share.
i) If this Hon'ble Court is pleased to hold that the facts and circumstances, do not warrant any feasible order under Sections 397 and 398 read with Section 402 of the Companies, alternatively, it is prayed that this Hon'ble Court may be pleased to order that the 1st respondent-Company M/s. Rakhra Sports Private Ltd., No. 6, Commercial Street, Bangalore-1 be wound up on the ground that it is just and equitable to do so under Section 433(f) of the Companies Act, 1956.
j) Grant such other order or orders as this Hon'ble Court may deem fit to grant on the facts and circumstances of the case including award of cost.
11. The Petition was resisted by respondents 1 to 3 by filing Objection Statement. In the Objection Statement respondents have denied all the allegations contained in the petition and also denied the allegations that the petitioners' right and status were prejudicially affected by the conduct of respondents 2 and 3. Further it is stated that the allegation that respondents 2 and 3 are not co-operative with the petitioners is untrue. In fact, the 1st petitioner became irregular in attending his duties. The respondents 2 and 3 are not guilty of oppressing the petitioners and that they have not committed any illegal acts as alleged by the petitioners. The allegation that the respondents 2 and 3 have committed illegal acts with an object to cause or commit oppression against the petitioners are wholly false. It is further stated that the allegation that the 1st respondent-Company can fairly be called in effect a partnership between the petitioners on the one hand and respondents 2 and 3 on the other hand in the guise of a Private Limited Company is false. Further, they have denied the allegations that the petitioners are being illegally excluded from the business of the 1st respondent Company. It is further stated that the allegation that the change of the Board Meeting, fixed with the consent of the Directors and that was the practice from the inception of the Company is not true and it is also not true that no Meeting of the Board of Directors held on 28.3.1988, 25.5.1988 and 6.8.1988 or any other date. It is further averred that the allegation that no Meeting could have been held on those dates having regard to the Article 12 of the Articles of Association of the Company is not true.
12. It is further stated that the allegation that the respondents devised a scheme to exclude the petitioners by taking shelter under Section 283 of the Act is wholly false. It is further stated that the allegation that the petitioners are being illegally excluded from the business of the 1st respondent-Company is false and the 4th respondent is the Chairman and Managing Director of reputed Companies in Bangalore and is a man of high standing in society as well as business circles. The allegation that he has no experience in the line of business of the 1st respondent Company is not fully correct in that the 4th respondent is a business man of repute of long standing and is fully conversant with the business practices as well as Company procedure. The allegation that the 4th respondent is totally a stranger to both groups is wholly false, in that he is well known to the petitioners as well as respondents 2 and 3.
13. Moreover it is further averred that the co-option is illegal and that no valid Meeting of the Board for co-option could have been held in the absence of the petitioners for co-opting the 4th respondent and further there is no co-option in the eye of law and that the co-option is illegal are totally false. The further allegation that the respondents are purporting to exclude the petitioners from the management of the 1st respondent Company is not true. The petitioners have chosen to exclude themselves from the management of the Company from the successive Board Meeting and incurring disability under provisions of Section 283(1)(g) of the Act.
14. It is further averred in the Objection Statement that the petitioners have suppressed the material facts and have tried to mislead this Hon'ble Court. They have deliberately made false allegations and statements and that they had not attended the Board Meeting on 14.11.1987 despite the fact that they had received sitting fee in respect thereof. The basis of grievance of the petitioners in the present Petition is that they have ceased to be the Directors of the Company. It is further stated that no averments or allegations have been made by the petitioners with a view to show that there has been any suppression of the right of the petitioners as Members even the cessation of Directorship of the petitioners is the result of their own lapses and the respondents were not responsible for the same, and ultimate prayer sought by the petitioners are all untenable as the Petition itself is not maintainable. That apart the petitioners have not come to the Court with clean hands and this conduct of the petitioners has been bad. In fact, a few months back, he also started a sports goods business in the name of Rakhra Sports and Agencies and started approaching the customers of the 1st respondent-Company soliciting business, thereby trying to destroy the 1st respondent-Company. All these conducts of the petitioners have been totally unfair and vindicative and disentitle them to maintain their Petition and, therefore, it has been prayed by the respondents that the Petition has to be dismissed.
15. Along with the Company Petition, a Company Application No.739 of 1988, was filed seeking the following interim reliefs, which read as follows:
(a) Restraining respondents 2 and 3 from operating upon the Bank A/cs. of the 1st respondent-Company with respondents 6, 7 and 8 or any other Bank or Banks except with the joint signature of the 1st petitioner.
(b) Granting an order of temporary injunction restraining R-2 and R-3 from interfering with the functioning of petitioners as Directors of the 1st respondent-Company.
(c) Issuing an order of temporary injunction restraining the 4th respondent from acting as Director of the 1st respondent-Company.
(d) To appoint a commissioner to take immediate physical inventory of stock and other assets of the 1st respondent lying at the registered office of the 1st respondent-Company viz., No.6 Commercial Street, Bangalore and at two godowns of the 1st respondent-Company at Collar Lane adjacent to the Commercial Street, Bangalore and at Bishop Cotton Schools' Complex of M/s. Rakhra's Super Sports;
(e) to direct respondents 2 and 3 to file into Court weekly stocks statements showing purchases, sales and balance of stocks.
16. The application was resisted by the respondents 2 and 3 by filing an elaborate Objections. This Court after considering the contentions of the parties in that Company Petition and the Company Application, passed the following Orders on 8.9.1988:
'Restraining the respondents from issuing any cheques in favour of any party either in their own names or in the name of the Company upto 12.9.1988.'
17. By another Order dated 12.9.1988 Interim Order was continued till 14.9.1988.
18. Allegation that the petitioners are being On 16.8.1988 an Order was passed directing the sale of the petitioners' shares to the respondents 2 and 3. In the said order it is observed 'that there is a family dispute between the two groups. That family dispute between the two groups have arisen under the provisions of Section 397 and 398 of the Act. There is no dispute about the relationship between the parties nor their share-holdings in 1st respondent's Company. The only dispute is who is the oppressor and who is the oppressed in this family group.'
It is further observed: 'that from the material placed, it appears to me that this dispute is amenable to an amicable settlement out of Court. But it was suggested whether the claim of the petitioners could be settled on payment of the present market value of the shares held by them as the parties were thinking on these lines as is evident from two valuation reports furnished by the respective groups. According to the petitioners the value of the Equity Shares in the 1st respondent-Company would be in the region of Rs. 1000/- per share, whereas the respondents valued Rs. 326-80 per share. The petitioners in order to resolve the dispute had offered to purchase the shares of the respondents at Rs. 1000/- per share forthwith and settle the matter. But the 2nd respondent's group is not prepared to accept the offer though the valuation of the petitioners' share valuation is on the higher side. But they made counter offer that they would purchase the petitioners' shares by making a down payment of Rs.600/- per share and there after wards seek the correct valuation of the shares by the 3rd valuer. They also sought for time till September 30, to make this payment. As a preliminary step to effect a settlement between the parties, it is ordered that the 2nd respondent's group shall pay the petitioners tentatively a sum of Rs. 600/- per share and that amount shall be received by the petitioners in part satisfaction of the claim in this Company Petition. After such payment the valuation of the shares shall be made by a reputed firm of Auditors acceptable to both the parties. The choice of the firm is left to the parties and they shall make appropriate submissions in that regard on the next date of hearing.'
19. At that stage, it is contended by the learned Counsel for the respondent that this payment should be made without reference to the claim of the petitioner to the lease hold rights of the premises that the Company had obtained in Cotton Complex, situate at Residency Road, Bangalore. The Court on consideration of the request made by the respondents' Counsel has observed that whether this condition should be imposed on the petitioners in the exercise of its power under the provisions of Section 402 of the Act. However, it is made clear that the order of this Court that payment of Rs. 600/- per share would be subject to the order of this Court on this aspect of the case at the time of recording the final compromise between the parties.
20. This Court has also passed an order to call the case on 20th of September 1988 for reporting the compliance. Further, it was also made clear that respondents 1 to 3 are permitted to make payment of all statutory liabilities and also payment of customers' bills. The petitioners were directed to instruct the Banks i.e., respondents 6, 7 and 8 suitably in this regard authorising them to make the above payments by honouring the cheques issued by respondent No. 1 Company till 30th September, 1988. This Court has further ordered that Subject No.3 relating to the appointment of Gyana Prakash Gupta as a Director of the respondent Company shall be deferred till the 30th of September, 1988 and until orders of this Court.
21. On 30.9,1988, this Court allowed the parties viz., Groups 'A' and 'B' to appoint two Valuers to value the shares. As per order, M/s. Brahmayya and Co., Bangalore-1, and M/s. Ramadhyani & Co., as suggested by the parties - have been appointed as Valuers to make necessary valuation independently of each other and submit their reports within four weeks from the date of the order. It was further made clear that the report of these Auditors would be subject to the final order of this Court on the question of valuation. The payments made by the respondents to the petitioners aggregating to Rs,7,50,000/- at the rate of Rs.600/- per share will also be subject to the final valuation made on the basis of the Auditor's report.
22. In that order it has been made clear that the party should file a Memo of Instruction to the Auditors not on the mode of valuation but on the assets of the Company to be taken into consideration for the purpose of valuation.
23. It appears that after the order was passed by this Court the petitioners gave instructions to both the Auditors. Accordingly the Auditors have submitted their reports, namely by M/s. Brahmayya & Co., on 30.1.1988 and M/s. B.K. Ramadhyani & Co., on 16.11.1988. The value arrived at by the two Valuers on Equity shares in the Company is as follows:
1. M/s. Brahmayya & Co., Rs. 328/- per Equity share.
2. M/s. B.K. Ramadhyani & Co., Rs. 718-50 per Equity share.
24. After the Valuers have submitted their reports as aforesaid, the matter came up for further hearing in this Court, This Court after hearing the matter by its Order dated 7.7.1989 recalled the earlier Orders dated 16.9.1988 and 30.9.1988 against which, the petitioners have filed an Appeal and the Appeal was allowed by this Court and restored the orders dated 16.9.1988 and 30.9.1988 on the ground that they were 'consent orders.'
25. The learned Counsel appearing for the petitioner, Shri K.G. Raghavan, has contended that on 16.9.1988, the petitioners have made an offer to purchase share holdings of respondents 2 and 3 at the rate of Rs. 1000/- per share. But respondents 2 and 3 for the reasons best known to them, did not agree to the offer made by the petitioners. But, however, they made an offer to purchase the share-holding of the petitioners at the rate of Rs. 600/- per share. He has further submitted that at that time, respondents 2 and 3 have made a counter offer of Rs. 600/- per share. He further claimed that when the respondents 2 and 3 made a counter offer of Rs.600/- per share as there was an Company Auditors report viz., M/s. Ramaswamy & Co., which proclaim to determine the value of the share at Rs. 233/- per share. Notwithstanding the valuation given by the Auditor and they were conscious of that fact that the Auditors have, valued the share at Rs. 233/- per share. The respondents 2 and 3 made an offer to purchase the petitioner's share valued at Rs. 600/-per share.
26. From this it is clear that respondents 2 and 3 have consciously declared the valuation made by M/s. Ramaswamy & Co., and accordingly, they valued at Rs. 600/- per share and they gave counter offer of Rs. 600/- per share, against the offer of the petitioner to purchase the share of respondents 2 and 3 at the rate of Rs. 1,000/-per share.
27. It is relevant to note that at the time of passing the Order on 16.9.1988, this Court had taken note of the submissions made by both the sides and in that Order it is observed thus:
'As a preliminary step a settlement between the parties it is ordered that 2nd respondent's group shall pay the petitioners tentatively a sum of Rs. 600/- per share and that amount shall be received by the petitioners in part satisfaction of their claim in this Company petition. After such payment the valuation of the share shall be made by a reputed firm of Auditors acceptable to both the parties...Payment of Rs. 600/- per share would be subject to the order of this Court on this aspect of the case at the time of recording the final compromise between the parties.'
28. It is further submitted that the Orders passed by this Court on 16.9.1988 and 30.9.1988 were later recalled by an Order of the Court dated 7.7.1989 which was challenged in the Appeal after hearing respondents 2 and 3, which came to be allowed and the Orders of 16.9.1988 and 30.9.1988 came to be restored on the ground that they were Consent Orders. Thus, in the Appeal, it has been clearly held that the Orders dated 16.9.1988 and 30.9.1988 were by consent. It is further submitted that the valuers were appointed only to resolve the difference between Rs. 600/- per share and Rs. 1000/- per share and to ascertain whether the value was anything higher than Rs. 600/- per share as contended by the petitioners to which respondents 2 and 3 did not agree. It is also submitted that even otherwise, the value of the shares cannot be less than Rs. 600/- per share for the reasons that the market for the share comprises of petitioners and respondents 2 and 3 and the value quoted between them, is the real market price. In other words, it is contended that the offer made by the petitioners to purchase the share of the respondents 2 and 3 is real market value. However, he submitted that the Orders of the Court dated 16.9.1988 and 30.9.1988 cannot be construed in the light of any facts occurring subsequent to the date of the said order viz., the reports of the two Valuers.
29. The petitioners' Counsel further submitted that the two Valuers appointed by this Court have sought to arrive at the value of a share by two methods of valuation, viz.,
(a) Profitability method and
(b) Break up value method or intrinsic value method.
30. The petitioners' Counsel has attacked the method adopted by the two Valuers in arriving at the market value of the share. In his view the Valuers have committed errors in the process of valuation and as such the petitioners endeavour is to persuade this Court to determine the correct value of shares adopting the right principle of valuation applicable to a closely held Private Ltd. Company, like the present one on the basis of all the facts and circumstances of the case including the very nature of relationship between the petitioners on the one hand and the respondents 2 and 3 on the other hand in the matter of business and affairs of the Company. The Orders passed by this Court dated 16.9.1988 and 30.9.1988 were with the whole object of settling the matter amicably. It is contended, that the valuation cannot be made adopting the principles of valuation set out for taxation purpose, having regard to the purpose for which the valuation now required to be made. It is further contended that that profitability method alone, as contended by the respondents Nos. 2 and 3 should be the criteria in the matter of determining the value of a share of a going concern and no other method is, on the face of it, legally/permissible to be adopted. The ultimate analysis of his argument, is that both the Valuers have committed error in arriving at the value of a share by adopting only profitability method and in the alternative break up value method or intrinsic value method ignoring other aspects of which ought to have been taken into consideration particularly with reference to the very relationship between the petitioners on the one hand and respondents 2 and 3 on the other in the matter of business.
31. The learned Counsel strenuously submitted that the valuation should be ascertained by every method known to law and the Company must award highest price as such the two Auditors' reports, neither to be accepted nor to be rejected in toto, and this Court will have to independently value the share by adopting all equities by the parties.
32. The petitioners' Counsel has further submitted that having regard to the 'orders passed by this Court, respondents are estopped from contending that the value of the share is less than Rs. 600/- per share. The method of valuation to be adopted on the basis of the determination of Wealth Tax is not correct. The valuation must be ascertained by every method known to law and the Court must award the highest price. The Auditors reports both by M/s. Brahmayya & Co., and M/s. B.K. Ramadhyani & Co., do not deserve to be accepted as correct valuation of the share value. It has not valued it from the point of view of notional liquidation of the Company. In that event, having regard to the factors, that the partnership firm become a Private Ltd. Co., the business was carried on by mutual association of two groups 'A' and 'B' with equal share holdings which has now reached to a deadlock in the management of the Company, the Court having observed that disputes could be settled amicably treating the Company on notional liquidation it should independently value the share by adjusting all equities by the parties. The learned Counsel in support of his submissions relied upon the Decisions referred to in 1966(59) Company Cases 222 (Cal); 1982(2) Kar.L.J. 153; and American Jurisprudence Volume 18-A paras 836 and 838.
33. The respondents' Counsel Sri Udaya Holla, submitted that the two Orders viz., 16.9.1988 and 30.9.1988 are by consent of parties and consequently, all equitable jurisdiction under Section 402 of the Act and all other aspects of the Acts pertaining under Section 397 and 398 had been settled come into play of the operation and only the question that is to be required to be decided by this Court what is fair value of the share in question. Relying on Articles of Association under Section 37 of the Companies Act, he submitted that it is specifically stipulated in the Article by the Members and as well as the Company. He tried to point out, that as per Article 6 of the Articles of Association of the Company, if any share holder wishes to sell his share he shall offer to the same members of the immediate family group on their refusal, the other family group.
34. It is further contended that before filing Company Petition the share value of the Company's share valued at Rs. 326/- per share by the Company's Auditors viz., M/s. Ramaswamy and Co. This valuation binds both the parties. However, in view of the various orders passed by the Court referred to above and pursuant to those Orders passed by this Court, the Valuers have filed their valuation reports and the Court based upon the said reports is required to determine the market value/fair value of the shares in question. He has reiterated that no other issues are involved except the determination of the market value of the share, consequently, he submitted that only question that arises for consideration of this Court is what is the fair value/market value of the equity share of M/s. Rakhra Sports Ltd.
35. ft is submitted that in the matter of arriving at a market value of the share of the instant Company M/s Rakhra Sports Ltd., which is a Private Company and is a going concern and is not ripe for winding up, the only method is profitability method. In support of this proposition of law he relied upon two Decisions of the Supreme Court, reported in (1) : [1972]86ITR621(SC) , Commissioner of Wealth Tax Assam v. Mahadeo Jalan Etc. and (2) : [1980]122ITR38(SC) , Gift Tax Commissioner, Bombay v. Kusumben.
36. Mr. Holla, relying on these Decisions strenuously argued that the only method to arrive at the market value of the going concern such as the Company in question is profitability method. Mr. Holla, has also attacked both the reports of the Auditors as they adopted two different methods, such as profitability method and capitalising method.
37. Mr. Holla, took me through the two reports of the Auditors, viz., M/s. Brahmayya & Co., and M/s. Ramadhyani and Co. They valued the shares on profitability method and arrived at a figure of Rs.328 and Rs. 322 per share respectively. He has pointed out that the very basis of arriving at the valuation of share were profitability method itself is wrong as M/s. Brahmayya & Co., worked out the value at Rs. 328/- per share by taking the average of the last two years profit and on the basis of the capitalisation method at 11 per cent It ought to have taken the average of past four years profits (since the formation of the Company) and capitalise at 15 per cent. Thus the value of the share works out at Rs. 166/- per share. The average profit for the last four years works out at Rs. 62,366/-. If it is capitalised at 15 per cent, it would work out 62362/15 X 100/2500 equivalent to Rs. 166/- per share. On the basis of the asset method M/s. Brahmayya & Co., has also valued the share at Rs. 136/- per share. This method is known as net asset-liabilities plus total number of shares.
38. Mr. Holla, referred to the valuation report of Ramadhyani and Co., and pointed out that on the basis of the said method they arrived at the value of Rs. 760/- per share. According to him this method is not proper method for valuation in view of the Decision of the Supreme Court reported in : [1980]122ITR38(SC) . The Supreme Court in the said Decision has held:
'The question which has to be determined in this case, is what is the basis of valuation of shares in private limited companies for the purposes of Section 7 of the Wealth Tax Act (27 of 1957). Sub-section (1) of Section 7 provides that 'the value of any asset, other than cash, for the purpose of this Act, shall be estimated to be the price which in the opinion of the Wealth Tax Officer, it would fetch if sold in the open market on the valuation date.'
39. The Supreme Court in the case reported in : [1972]86ITR621(SC) regarding the valuation of shares a private limited Company has held as under:
'That where shares are of a public limited Company.... or of a private limited Company the value determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis.'
Further, at paragraph 12 of the said Decision the Supreme Court has observed as under:
'But one thing is clear, the market value unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it in to liquidation, it should be valued as on liquidation by the break-up method.'
This Decision of the Supreme Court has been referred to in the subsequent decision in : [1980]122ITR38(SC) . In the said Decision the Supreme Court has held:
'Break up method would not be appropriate for valuation of shares of a company which is a going concern. The combination of the two methods i.e., the break-up method and the profit earning method has no sanction of any judicial or other authority and cannot be accepted as a valid principle of valuation of shares.'
40. Then Mr. Holla, has pointed out, the very basis of method adopted in arriving at a valuation of share in the facts and circumstances of the case by M/s. Ramadhyani & Co., is directly in contravention of the methods by which the valuation of shares in a going concern to be arrived at as held by the Supreme Court. Further, he pointed out that M/s. Ramadhyani & Co., have taken out the lease-hold right at Rs. 12.60 Lakhs as assets of the company and have further taken a sum of Rs. 3,00,000/- as good will. According to him, these factors do not at all arise for consideration while determining the valuation on the basis of asset method. He has argued that the leasehold right is valued at Rs. 12.60 lakhs on the ground that the lease is current for another twelve years, and it is liable to be terminated by taking proceedings under the Karnataka Rent Control Act, and as such the term lease has no protection from eviction having regard to the Karnataka Rent Control Act. He has further maintained that the lease-hold right has no value. He has further argued that once the good-will is taken, it is not proper and is not permissible to take the lease-hold right value of the share on the basis of the said method. He strenuously attacked the valuation report of M/s. Ramadhyani, as he had made an amalgam of the value arrived at on the basis of profitability method and on the basis of assets method and arrived at a valuation of Rs. 719/- per share. This is wholly impermissible as has been held by the Supreme Court.
41. Mr. Holla, has referred to the book 'Study on Share Valuation'. Elaborating his argument Mr. Holla, has submitted that the said book 'Study on Share Valuation' by Institute of Chartered Accountants at page 1, has stated thus:
'This study of valuation of shares primarily to explain the relevant provisions of the various tax laws. But the principles discussed are general application and may, therefore, be used while making the valuation for other purposes also.'
Further at pages 3 and 4 in the said book it is stated thus:
'In theory, the fair value of a share is equal to the present worth of the future dividends which will be received by its holder.
A practical way to apply this principle in actual valuation is to resort to capitalisation of the maintainable profits of the company.'
Further at page 14 of the said study it discusses the valuation by maintainable profits basis. It is stated as follows:
'This method seeks to implement the sound principles of valuation in practical way, wherever a fair value of shares is to be determined on an open market basis. Under this method a reasonable estimate of the average future maintainable profits is made by taking past earnings, their trend and the future plans of the company as guides. This estimated future average maintainable profit after deducting the preferred claims, if any, is capitalised at an appropriately selected rate and the resultant is divided among the different classes of equity shares.
Ultimately at page 7 it is stated thus:
'The fact that a special buyer would, for his own special reason, give a higher price than the price in the open market, is however, to be disregarded. Thus, for example, if a person who already holds a sizeable number of shares of the company and is prepared to pay unreasonably high price for the shares of the deceased in order to acquire the control of the company, such a price is to be disregarded.'
42. Further Mr. Holla, in support of his argument, relied upon the statement contained in AMERICAN JURISPRUDENCE in volume 18-A at paragraphs 451 and 836. In the said jurisprudence it has been stated thus:
'Appraising the value of the stock of dissenting share-holders is not a judicial function, and the Court will not substitute itself for the appraisers even at the request of the share-holders in a desire to keep the expenses at a minimum.'
Further it is stated therein:
'However, it has often been stated that the role of the courts in an appraisal proceeding is limited and that they must give great weight to the findings of the appraisers.'
He has submitted that the Authorities cited in support of his submission clearly support that profitability method is the only method for purposes of valuation of share of a going concern and for purposes of determining the future maintainable profits the average of the past five years profits will have to be taken into account and capitalised. If that methodology is adopted the valuation of the shares of the Company in question would work out to Rs. 166/- per share on a capitalising average profits at 15 per cent which is the normal return expected in business. He further argued that this Court cannot be bound by the offers made by the respective parties. This Hon'ble Court as per the Orders dated 16.9.1988 and 30.9.1988 has held that the Valuers will determine the market value of the shares and the respondents are required to pay the market value to the petitioners and such payments which are already made cannot be stated to be the base figure. The payments which have been made by the respondent is subject to the market value or value determined by this Court based on the valuation of the two reports of the Experts appointed by this Court.
43. Finally, he submitted the offer of Rs. 1000/- by the petitioner has been made with the sole intention of prejudicing the mind of this Hon'ble Court, knowing full well the respondents would never agree to sell their shares. This figure is only arbitrary in nature. He further submitted that the share value which have been made by the two experts by adopting the profitability method are of Rs. 328 and Rs. 323 respectively. If the Court has to accept the offer made by the Auditors on profitability method then it may have to make the order for payment of Rs. 328 or Rs. 338 as per share. In the alternative, it is submitted by Mr. Holla, that on the realistic valuation as stated earlier the real value of the share at profitability method works out to Rs. 166/-per share.
44. Mr. Raghavan, learned Counsel for petitioner has countered the arguments of respondents Counsel and submitted that the method adopted for arriving at value of Rs. 328 or Rs. 326 by the Valuers on the basis of profitability method on the principles of law laid down by the Supreme Court is not correct. The two Decisions of the Supreme Court relied upon by Mr. Holla, learned Counsel for the respondent, in support of his case, were in the context of a reference of Question of Law made by the Tribunal under the Wealth Tax Act and Gift Tax Act, and, therefore, any observation in those Judgments should be understood with the scope of question referred to be answered. Thus he has pointed out, that these two Supreme Court Judgments were in the back ground of the relevant Statutes or Rules unlike in the present case, where no Statute or Rules governing the question of valuation of shares of a company, exercising jurisdiction under Sections 397 and 398 read with Section 402 of the Act. In other words he submitted that this Court without going into the question who is among the petitioners respondents (they are identified as 'B' and 'A' groups) is oppressed or oppressor, with a view to settle the matter amicably proceeded with by treating the Company under 'notional liquidation' and directed the petitioner to purchase respondents share which is evident from the order of the Court, on such arrival of the fair value, the respondents shall pay the same to the petitioners. In the two Decisions of the Supreme Court, it is true that the points involved were that of relating to an investment company. In Mahadev Jalan's case the Decisions was rendered under the Wealth Tax Act, and the question was as to what was the appropriate method for valuation of shares of a Private Ltd. Co., for purposes of Wealth Tax. In the said Decision, the Court observed that in setting out to lay down the principles, the Court had not 'tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospectus of profitability and such other consideration will have to be taken into account as will be applicable to facts of each case.'
45. The Supreme Court has in para 5 of the Judgment has observed as under:
'Now it is true as observed by the Court that there cannot be any hard and fast rule when the matter of valuation of shares in a limited company and ultimately the valuation must depend upon every facts and circumstances of each case, but that does not mean that there are no well settled principles of valuation applicable in a specific fact situation and whenever question of valuation of shares arise the taxing authority is in an unchartered sea. It is to innovate new methods of valuation according to the facts and circumstances of each case.'
46. It is clear that the question referred to the High Court for Decision in the case referred to above was specifically under Section 7 of the Wealth Tax Act. The Supreme Court has also specifically stated that the Rules laid down are not hard and fast rules, because ultimately the facts and circumstances of each case, the nature of business and other circumstances will have to be taken into account for arriving at the value of the share. Moreover the Supreme Court has observed in the Judgment reported in : [1980]122ITR38(SC) that this does not mean that whenever a question of valuation arises the 'taxing authority is in a chartered sea.' This observation makes it clear that the Supreme Court was addressing itself from the point of view of taxing authority and not for any purpose. Therefore, the contention of the petitioner, that it is not justified or tenable that profitability method alone to be adopted for the purpose of ascertaining the value of the share of the going concern as contended by the learned Counsel for the respondent relying on the two Decisions of the Supreme Court referred to above, are well founded, for, those two Decisions of the Supreme Court were rendered in the back-ground of relevant statutes for totally different purpose.
47. Mr. Raghavan, has further pointed out with reference to the Valuers report of M/s. Brahmayya & Co., and M/s. Ramadhyani & Co., who have been appointed as Valuers at the instance of the parties, that the method adopted by M/s. Ramadhyani & Co., is somewhat scientific and acceptable from several points of view. Referring to the
valuation report of M/s. Brahmayya & Co., he commented that the method, ad opted by M/s. Brahmayya & Co., is neither appropriate nor acceptable for more than one reasons. He has pointed out that M/s. Brahmayya and Co., have set out the turnover of gross profit, the expenses debited to profit and loss a/c, profit percentage for the year 1984-85 to 1987-88 i.e., for four years since the inception of the Company (excluding three months period from 1.1.1984 to 31.3.1984). After having taken into account the various data, the Valuers have taken, only the average turnover of gross profit for two years viz., 1986-87 and 1987-88 to determine the 'representative profit'. The reason given by the Valuer for so arriving by adopting two years figure in that the increased turnover and increased gross profit during the year 1987-88 is explained to be the execution of large orders which were received in the year 1986-87 amounting to Rs. 3,69,768 and one time orders for Rs. 61,248 with higher and marginal profit. While so doing M/s. Brahmayya & Co., has excluded totally the consideration of trading performance of the Company during the year without assigning any reason. Having taken into account two years trading result M/s. Brahmayya & Co., the valuers have arrived at an average profit of Rs. 1,14,725/- adopting the simple arithmetic means.
49. Moreover, in the report, the Valuer has not taken into consideration the value of the premises in the event of passing of the premises to the 3rd party according to the prevailing trade practices a consideration of Rs. 30/- lakhs on conservative estimate can be expected. The reason given by the Valuer is that the Company is a going concern with no prospects of the business being liquidated in the near future.
50. Mr. Raghavan, further submitted that the reasoning given is on misconception of law. As pointed out in the proceedings though there could be no liquidation; in strict sense of the term, it is to be taken as 'notional liquidation' and the valuation of the share ought to have valued as if the Company liquidated. He has referred to the extract of the 'Study on Share Valuation.' It reads as follows:
'While valuing the shares number of situation will arise in which special consideration have to be given one factor to the other.......When appraisal of shares carrying controlling interest in a Company is to be valued, some special consideration has to be given to this factor. Special consideration rose from the facts purchaser of such appraisal of shares does not only acquire the shares of the Company, but also the control of Company which itself is a valuable commodity. He has therefore to pay for this control also.'
51. It has been argued that all factors ought to be taken into consideration particularly keeping in mind the factor that the purchaser of shares in the instant case acquires the control of the Company which itself is a valuable commodity. Since M/s. Brahmayya & Co., has failed to take the factors which is essentially an important factor at the valuation of the shares of the Company of which the purchasers respondents 2 and 3 get the controlling of the Company.
52. Counsel for the petitioner Mr. Raghavan, referring to the valuation report of M/s. Ramadhyani & Co., pointed out that the Company having set out the various data as that of, M/s. Brahmayya & Co., however, has compared the trend in performance during first six months of the financial year ending 31.3.1989 with the performance during the corresponding period preceeding financial year viz., 1987-88 and has come to the conclusion that the profitability trend during the first six months of the current financial year is the same as that prevailing during the corresponding period in the financial year. That being so, M/s. Ramadhyani & Co., has found no evidence to substantiate the claims of respondents 2 and 3 in their Memo of Instructions that the profit of the year 1987-88 are not maintainable and usually high owing to execution of large one time orders. As such M/s. Ramadhyani & Co., has chosen to take into consideration the performance of the Company for all the five years i.e., 1984-85 to 1987-88 the relevant period and according to Mr. Raghavan, it has been rightly taken.
53. Further, Mr. Raghavan, has drawn my attention to the report of M/s. Ramadhyani & Co., and pointed out that the Company has adopted the weighed 'arithmetic mean' instead of simple arithmetic mean, chosen by M/s. Brahmayya & Co., to arrive at the future maintainable profits which according to the petitioners is a right step taken for arriving at just market price of shares of the Company. M/s. Ramadhyani & Co., in fact, assigned weight of one to the trading results for the year 1984-85 to 1986-87 and weight of three to the trading result of 1987-88 and M/s. Ramadhyani & Co., accordingly arrived at an average profit of Rs. 2,07,372/- as against an average profit of Rs. 1,24,7251- determined by M/s. Brahmayya & Co., learned Counsel has further pointed that adopting of two years result as has been done by M/s. Brahmayya & Co., without any basis, specially when the profits earned during the year 1987-88 was Rs. 2,71,237/- and while during 1986-87 the Company sustained a loss of Rs. 21,786/-. With this back ground, the learned Counsel for the petitioner has argued that M/s. Brahmayya & Co., has not taken into account all factors in proper perspective but simply accepted the statement of respondents 2 and 3 to come to the conclusion that the operating results during the year 1937-88 was not normal. He has further submitted that the proper method would be to take into account average earning over five years period immediately preceding the operation has been the most common basis.
54. Proceeding further Mr. Raghavan, pointed out that the method of average - weighted average is more appropriate. The Valuers have chosen the method of averaging while M/s. Brahmayya & Co., has adopted the simple arithmetic mean. M/s. Ramadhyani & Co., has adopted the weighted arithmetic mean to arrive at average profit. Adoption of simple arithmetic mean as has been done by M/s. Brahmayya & Co., is given equal weightage to trading results of all previous years to determine the future trend is wholly inadequate and inappropriate. M/s. Brahmayya & Co., as pointed out has rightly attached great weight to the results of operation during 1987-88 than the operating result during the year preceding viz., 1984-85, 1985-86 and 1986-87. In support of his submission, he has cited the observation in the in the Book 'Statistical Methods' by Dr. S.P. Gupte. At page E-7-16, it is stated that 'concept of weighted arithmetic mean explained - The terms weight stands for the relative importance of the different items.' In the study on 'Share Valuation' by the Institute of Chartered Accountants of India, it is stated thus:-
'In the case of companies which records a clear up trend of past profits weighted average giving more weight to the recent years that to the past is appropriate - a simple way of weighing is to multiply the profit by the respective number of years arranged chronologically.'
He has further argued and pointed out that the report of M/s. Brahmayya & Co., suffers from legal infirmity in as much as they have not sought the views of the petitioners, before accepting the say of respondents 2 and 3 regarding usefulness of the operating results of the year 1987-88.
55. In support of his submission, he relied on the Decision reported in 1986(59) Company Cases 222 (Cal.), Sudhir Kumar Basu v. New Central Group Engineering P. Ltd. and Ors.. In the said Decision, it is observed as follows:
'It is also found that under the order, the valuer was directed specifically to hear the parties before making a valuation. Documents of the respondent made available to the valuer were not disclosed to the petitioner and the valuer also did not give inspection of such documents to the latter. The valuer appointed his own engineer as an expert or a valuer and acted on the report of the engineer without making the same available to the parties. Without going into the question whether under the order dated February 1, 1983, the valuer was justified in engaging another expert without the permission of the Court or without the consent of the parties, it appears to me that the parties were not given a hearing by the valuer as was directed. The hearing was ineffective, incomplete and vitiated as the parties did not know and were kept unaware of the material evidence on which the valuer proceeded. This limited ground is sufficient for setting aside the report of the valuer.'
56. It appears M/s. Brahmayya & Co., has accepted the say of respondents 2 and 3 regarding usefulness of the operating results of the order without seeking the views of the petitioner. When it is required to obtain the views of the petitioner in a matter like this, valuation of shares of the Auditor appointed by the Court by consent of parties and fails to seek the opinion of the petitioner on vital part to take only the say of respondents 2 and 3, then such report of the Auditor viz., M/s. Brahmayya & Co., suffers from illegality. As observed in the above Decision 'that even if the Court cannot point to the actual error, nevertheless, if the figure is so extravagantly large or so inadequately small that the only conclusion is that he must have gone wrong somewhere, then the Court will interfere as much the same way as the Court of appeal will interfere with the award of damages, if it is a wholly erroneous estimate.'
57. The petitioner's Counsel in the background of the above referred fact and circumstances and the position of law, contended that the average profit determined by M/s. Ramadhyani & Co., as Rs. 2,07,372/- should be accepted as fair and just to arrive the fair share value. Further to the said amount a sum of Rs. 50,000/- to be added to it as being excess remuneration drawn by the Directors. Thereby depleting the profits of the Company (referred to at para 4.9 and 4.10 at page 5 of M/s, Ramadhyani & Co., report) though M/s. Brahmayya & Co., did add back of Rs. 44,213/- for the same reason. However, the petitioner has no objection taking the same figure of Rs. 44,213/- as determined by M/s. Brahmayya & Co., By so adding back the said amount to the profits determined by M/s. Ramadhyani & Co., the average maintainable profit would be Rs. 2,51,585/-. The petitioner's Counsel proceeding further has pointed out that it is an admitted fact that the operation of the Company at Bishop Cotton Complex has resulted in a loss and the Company has decided to close down the operation. Due to closure the loss incurred by the Company on such operation has been cut, thereby the profitability of the Company stand expanded. Thus M/s. Ramadhyani & Co., has rightly taken the minimum deduction in the over-heads by about Rs. 60,000/-. Having said this M/s. Ramadhyani & Co., has not added it for the purpose of arriving at the value of the share, M/s. Brahmayya & Co., has not even referred to it even though their attention was drawn into it, Thus it is the contention of the petitioner, that both Valuers have failed to take note of this aspect and failed to add back the said amount of Rs. 60,000/- to the profit: had it been done then it leaves the average maintainable profit at a figure of Rs. 3,11,585/-.
58. It is also contended by the petitioner's Counsel that both the Valuers having determined the average maintainable profit they have deducted 63% of it towards income-tax payable. M/s. Ramadhyani & Co., has reduced a sum of Rs. 1,30,644 and has arrived at a maintainable profit of the Company after tax at Rs. 1,26,758/-. Whereas M/s. Brahmayya & Co., has reduced Rs. 73,576/- from the sum of Rs. 1,24,725/- and arrived at a figure of Rs. 90,362/- as the average maintainable profit.
59. Mr. Raghavan, has strenuously argued that both the Valuers have committed serious error in deducting the income-tax payable (notional income-tax) from the average maintainable profit. It is only in the case of declaring dividend the net profit is taken after deduction of tax which has no bearing on the determination of profitability of the Company for determining the value of the share particularly in the facts and circumstances of the instant case. If Income-tax is not an item of expenditure it is an out-go from the profit In this context the petitioner's Counsel has referred to page 1090 of Blacks Law Dictionary. In it profit is defined as 'gross proceeds of a business transaction viz., net proceeds'. He relied on the Decision of our High Court reported in 1982(2) Kar.L.J. 153, Vinutha v. Selection Committee in support of his argument that income-tax payable cannot be deducted from the profit as it is not a revenue expenditure. He argued, that: 'Income tax as defined under the Income Tax Act, is for the specific purpose of that Act and not to give a general meaning to the term 'income'. If it occurs in all other statutes - This Court should follow the the golden rule of construction and give dictionary meaning of the term.'
60. Mr. Raghavan, has also pointed out from the report of the Company's Auditor M/s, Ramaswamy & Co., who has taken the profitability of the Company at Rs. 2,50,000/- being the expected profit during 1988-89 which figure is the net profit without making any deduction towards tax.
61. Mr. Holla, learned Counsel for the respondents countered this argument of Mr. Raghavan, stating that in the profitability method the tax payable to be deducted and then arrive at the profit. In other words the net profit is minus tax from the gross profit. Deduction of tax is automatic and therefore the net profit is arrived at. This contention of the respondents' Counsel is unacceptable for more than one reason. As already noticed in the present case, the question of purchasing share for the purpose of investment does not arise at all. The petitioners were directed to purchase shares of respondents 2 and 3 since the Company could not carry on the business due to dead-lock and the settlement arrived at accordingly and the Court directed the petitioners to sell the shares to respondents 2 and 3 by way of settlement between the parties, without going to the question who was the oppressor and oppressed, treating the Company under a notional liquidation. In the Decision relied on by Mr. Holla reported in : [1972]86ITR621(SC) , it is observed that: 'yield obtainable on a share is relevant only in a case of person who wishes to buy a share only to invest.'
62. This is not a case where the petitioners are selling the shares to the respondents and the respondents are purchasing the shares only to invest. If in the case of investment thus the investor has to see what would be the dividend which the share will fetch. In such an event the dividend will be declared only out of net-profit after deduction of the income-tax. Mr. Raghavan, is right in contending that in the matter of adoption of profitability method income-tax should not be deducted as has been done by the Company's Auditor M/s. Ramaswamy & Co., for this is a case in which the value of the share of the Company to be determined as if the Company under 'Notional Liquidation.' but in reality it may not.
63. It is pointed out by the learned Counsel for the parties that the two Valuers M/s. Brahmayya & Co., M/s. Ramadhyani & Co., have also adopted asset value method - intrinsic value or break-up value method for arriving at the value of the share. Learned Counsel Mr. Holla, for respondents 2 and 3 relying on the observation of the Supreme Court reported in : [1980]122ITR38(SC) said 'that the yield method is generally applicable method while the break up method is the one resorted to in exceptional circumstances or where the Company is ripe for liquidation.' ' 'e pointed out that in the instant case the Company is a Private Limited Company, which was a going concern, and there were no exceptional circumstances which would attract the applicability of the break-up method.
64. Mr. Raghavan, learned Counsel for the petitioner, while submitted that the instant case is one which involves exceptional circumstances, as such the Court with consent of the parties appointed two Valuers of their respective Auditors chosen by them to value the share which is to sold by the petitioners to the respondents as per the order of the Court. Thus it is argued that the Valuers, while valuing the share could and should take into consideration all factors or items of the value such as asset value, market value and earning value. The observation of the Supreme Court in the above referred case is applicable to the facts of that case in which the Company was a going concern and as such it has held that the break-up method is not attracted, but only method which could properly be applied for arriving at the valuation of the share in the Company.
65. Mr. Raghavan, has relied on the statement contained at pages 836 and 838 of American Jurisprudence Volume 18-A which read as follows:
'Whether it arises under appraisal statutes or in other situations, the process of valuation of dissenters's shares has generally required appraisers and the Courts to examine various factors or items of value, the major ones being asset value, market value, and earnings value, But regardless of the method used, the tendency of the Courts is to consider all relevant or material factors and elements. However, all three elements do not have to influence the result in every valuation proceeding. It suffers if they are all considered. Compelling the consideration of all of them, including those which may turn out to be unreliable in a particular case, has the salutary effect of assuring more complete justification by the appraiser of the conclusion he reaches. It also provides a more concrete basis for Court review. Also the three elements are not always discrete; definitionally, they may even flow into one another. The underlying theory is one of compensating the owner of the stock for his property right and no one method of valuation should be relied upon exclusively. The task of placing a specific monetary value upon stock is by no means a simple arithmetical process. It often calls for the application of judgment and Courts in many instances rely on the judgment made by experts in the field - the appraisers chosen by the parties. Furthermore, the various elements and factors may be given different weights by the appraiser or the trial Court, subject to judicial review, The question of what weight to give the various elements of value lies always within the realm of judgment; there is no precise criterion to apply to determine the question.'
66. Thus Mr. Raghavan argued, the determination of the value of the share particularly where there is exceptional circumstances as in the present case, it is not a matter of exact mathematical computation and no one formula or figure binding or conclusive but the decision is a matter of judgment based on all material evidence and consideration of a relevant factors that may influence valuation.
68. The petitioner's Counsel referring to the two Valuers reports viz., M/s. Ramadhyani & Co., and M/s. Brahmayya & Co., has contended that both have taken the book value of the assets of the Company as per Auditor's Balance Sheet as on 31.3.1988 (book value and not the actual value). M/s. Ramadhyani & Co., does not give any reason as to why the balance sheet figure taken and not actual value. Whereas M/s. Brahmayya & Co., has stated that Book Value of assets are adopted as per Wealth Tax Valuation Rules. It is strenuously argued by Mr. Raghavan, that both Valuers have taken the book value of assets and not the actual value for determining the market value of share, which is wholly erroneous. It is also argued that the two Valuers have not attached much importance in taking into consideration of the lease-hold right which according to him would be at Rs. 22,00,000/- adopting the profit rent method. He has also pointed out that the Valuers M/s. Brahmayya & Co., had not taken into consideration any item of value viz., goodwill. Moreover, it does not feature in the balance sheet which has been relied on by M/s. Ramadhyani & Co., to arrive at a figure of Rs. 328/- as the value of shares. It is contended that M/s. Ramadhyani & Co., has dealt with the good will at Rs. 3,00,000/- and similarly or somewhat little higher value of good will at Rs. 3,17,000/- was assessed by M/s. Ramaswamy & Co., Auditors. Referring to the reports of the Valuers, Mr. Raghavan pointed out that M/s. Brahmayya & Co., has erroneously ignored, but M/s. Ramadhyani & Co., has rightly pointed it out to take into account the value to be attached to the controlling interest which respondents get on the purchase of the share of the petitioner. It is submitted that by selling the petitioners share the respondents 2 and 3, will make respondents 100 per cent owners of the Company as the remaining 50% shares are already held by respondents. They would get complete control and management and affairs of the Company.
69. Mr. Raghavan has rightly contended that in view of the exceptional circumstances in the case wherein the petitioners are made to sell all their shares to respondents, who would ultimately get 100 per cent controlling interest of the Company both the goodwill, the tangible assets and the valuation of controlling interest (valuable commodity) the Court should take into consideration factors for fixing the fair value of the share. Finally, he submitted that the value of the share on the basis of the intrinsic value of the interest of the cannot be less than Rs. 1200/- per share. In support of his contention, he has produced the work-sheet of the value of the share based onto methods viz., profitability method and intrinsic method. The work-sheet prepared by the petitioner giving details of various figures as to the different items which were required to be taken for arriving at fair price of the share is given below:
ONPROFITABILITY METHOD ACCORDING TO PETITIONER THE VALUE SHOULD BE AS FOLLOWS
1.
Profitability as determined by M/s. B.K. Ramadhyani& Co., as per para 4.11(a)
Rs. 2,07,372-00
B/F
Rs.2,07,373-00
Add:
Excess remuneration drawn by Directors as per M/s.Brahmayya & Co., at page 3.
'44,213-00
Add:
Reduction of loss due to closure of M/s. Rakhra SuperSports (as per M/s. B.K. Ramadhyani & Co., para 4.7)
'60,000-00
Average maintainable profits
'3,11,585-00
Capitalising at 11% (page 3) as per M/s. Brahmayya &Co.;, value per share will be
Rs.3,11,585 x 100
11 X 2500
= Rs.1133.03 P.
II.
The value per share on the basis of the figures as abovebut excluding Rs. 60,000/- added as savings from loss on account of closureof M/s. Rakhra Super Sports
251585 x 100
11 X 2500
= Rs. 914-85 P
III.
Profitability as determined by M/s. Brahmayya & Co.,(page 3)
Rs. 1,24,725-00
Add:
Remuneration paid in excess to Directors as per M/s.Brahmayya & Co., (page. 3)
' 44,213-00
Add:
Savings of loss from M/s. Rakhra Super Sports
' 60,000-00
(as per M/s. B.K. Ramadhyani & Co., - para 4.7)
' 2,28,938-00
Capitalising at 11% as per M/s. Brahmayya & Co.,value per share will be
' 832-50 P.
IV.
Capitalising at 10% (as adopted by Mr. V.S. RamaswamyCo., Auditor)
i)
On a profitability of Rs. 3,11,585
311585 x 100
10 x 2500
= 1245-34
ii)
On a profitability of Rs. 2,51,585 value per share willbe
211585 x 100
10 X 2500
= 1,006-34
iii)
On a profitability of Rs. 228938 value per share will be
228938 x 100
10 x 2500
= 915-75
ONINTRINSIC METHOD ACCORDING TO THE PETITIONER THE VALUE SHOULD BE AS FOLLOWS:-
I.
Value per share as determined by M/s. B.K. Ramadhyani& Co.,
Rs. 760-00
II.
Additional values to be added:
a. Difference between the market value and the balancesheet value of assets
Rs. 3.00 Lakhs
b.
Additional value to be attached to the leaseholdinterest omitted to be taken note by Sri C.K.S. Rao, in his report, in viewof Clause 1(d) of II Schedule to the agreement dated: 1.6.1981.
Rs. 8.00 lakhs
Total:
Rs. 11.00 Lakhs
Additional value per share
Rs. 11.00 Lakhs =
250
Rs. 440-00
Total
Rs. 1,200-00
70. Let me now consider the respective contentions of the parties, as to the fair value of the share of the Company which is a Private Limited Company wherein the petitioners Group-B and respondents 2 & 3 Group-A are having equal shares, 50 per cent each and as per the order of this Court, the petitioners shall sell the shares to respondents 2 and 3 by way of settlement. Thus the point for consideration and determination by this Court is whether on the facts and circumstances the value of the share fixed by the two Valuers who have been appointed for the purpose, are correct and acceptable. As the two Valuers have given two different values of the shares by adopting different methods of valuation, which one is to be accepted as correct, if not would the Court be justified to value the share in the given circumstance as best judgment.
71. The facts discussed above do go to show that neither party after having got the two Valuers appointed at their instance were happy with the valuation report, as methods adopted by them in arriving at the value of the share of the Company suffered from innumerable infirmities. However, the petitioner's Counsel has in ultimate analysis submitted on taking into consideration the various factors, particularly, when there was a deadlock in the Company due to the recalcitrant attitude of the petitioner B-group and respondents A-group which had lead into the position that any one group could bring the Company into liquidation. As such the break-up method would be taken into consideration of the valuation of share; then on the said basis the share value shall be Rs. 1200/- per share. The respondents stuck to their position that the Company, as a going concern, only the profitability method which is the right method of the valuation of the share is arrived at by M/s. Brahmayya & Co., comes to Rs. 326/- per share and nothing more.
72. It is an undisputed fact that the Court has passed orders on 16.9.1988 and 30.9.1988 and directed the petitioners to sell their shares to respondents 2 and 3 by consent of parties two Valuers have been appointed to value the shares. This has been done without going into the question who is the oppressor and who is oppressed among those two groups. It is also an undisputed fact that the petitioners as well as respondents 2 and 3 are having equal shares 50 per cent each. The two Valuers here adopted two different methods for valuing the shares of the Company which has not been found favour with both the petitioners and respondents 2 and 3. To my mind, the methods adopted by the Valuers to arrive at the valuation of the share of the Company are not totally wrong or incorrect. In fact, certain required factors have not been taken into consideration. The two Valuers ought to have, while adopting the methods of valuation of shares viz., profitability method and asset method, viewed from the angle, that the Company was under 'notional liquidation' and the purchaser-respondent would get 100 per cent control of the Company which is a Valuable commodity'. Had the Valuers taken into consideration all items including the factors that one of the groups purchasers get cent per cent controlling interest in the Company, they would have arrived at a quite different value of the share which would be somewhat fair value. It is true in a matter like this it is difficult to arrive at a mathematical precision in valuation of shares. Since the two Valuers have taken both profitability and asset methods (break up method) and arrive at two different figures as to the valuation of share which are not accepted by either party, except taking such figures from the valuation report they have claimed Rs. 1200/- (petitioner) and Rs. 326/- (respondents) as the correct valuation of the share. To resolve this dispute, this Court will have to scan through the valuation report and adjust the equities between the parties by fixing the fair price of the shares.
73. IN RE: PRESS CAPS LTD., 1949 Ch. 434 (L), it is observed that: 'a valuation is only an expression of opinion......but the final test what is the value of a thing is what it will fetch if sold.' In this case the petitioners who are having 50 percent of shares have equal authority to manage the affairs of the Company has offered to purchase the shares at Rs. 1000/- per share. Whereas respondents 2 and 3 have agreed to pay Rs. 600/- per share subject to the final valuation of the share by competent Auditors appointed by the Court. Price offered by the petitioners prima facie does not appear to be unfair. But they might have offered the said price keeping in mind that by so purchasing the shares of the respondents, they would get cent per cent controlling interest in the Company as they were already having 50 per cent share of the Company. As the respondent did not agree to it - the Court with a view to settle the matter amicably directed the petitioners, to sell their shares to the respondents at the fair value of the share fixed.
74. As already noticed the determination of the real value is not a matter of exact mathematical computation and no one formula or figure is binding or conclusive, but the decision is a matter of judgment based on all material evidence and consideration of relevant factors that may -influence valuation. In the matter of valuation of shares particularly in exceptional circumstances as in the present case, the Company is characterised under 'notional liquidation,' despite the valuers have given two appraisal report, the Court has to consider the various factors regardless of the methods used by the valuers for arriving at the fair value of the shares. As stated in American Jurisprudence: 'question of what weight to give the various elements of value lies within the realm of the judgment of the Court, particularly when there is no agreement between the parties as to the valuation of the share arrived at by the valuers.'
75. Both the valuers have adopted the profitability method. M/s. Ramadhyani & Co., has taken the maintainable profit of Rs. 2,51,585/-without adding back of Rs. 60,000/- being the closure of M/s Rakhra Sports Pvt. Ltd., at Bishop Cottons; and if capitalised the said maintainable profit at 11 % the value of the share will be at Rs. 914-85 Rupees per share. This is clearly shown at the working-sheet referred to above. Taking maintainable profit at Rs. 1,25,752/- as determined by M/s. Brahmayya & Co., adding thereto both Rs. 44,213 (excess remuneration) and Rs. 60,000/- (savings of loss of M/s. Rakhra Sports Ltd.,) capitalising it at 11% the value of the shares will be Rs. 832-50 ps. as shown in the chart referred to above. In these two methods factors as to the purchaser of share getting cent per cent control of the Company has not been taken into consideration. If that is added then in both the valuation of the share referred to above would be higher than what have been indicated in their respective valuation reports,
76. To my mind it appears, the valuation of share at Rs. 914.85 per share as indicated above based on the maintainable profit as per M/s. Ramadhyani & Company at Rs. 2,51,585/- and capitalising 11% would be fair value by adding to it another sum of Rs. 16/- because of special circumstances of this case viz., that complete control of the Company is being given to respondents 2 and 3 'A' group of the share-holders i.e., the fair share value would be fixed at Rs. 930/- per share.
77. For the aforesaid reasons, the Petition is disposed of by the following terms/order: