Challa Rajendra Prasad Vs. Asian Coffee Limited, Secunderabad - Court Judgment

Excerpt:
company - expert opinion - section 393 of companies act, 1956 - amalgamation of companies - report of valuer regarding exchange ratio agreed with brutal majority by share holders - valuing conducted by technical experts and court has no expertise to alter it - held, application for furnishing mathematical complexities for valuing rejected. - all india services act, 1951.sections 8 & 11 & a.p. buildings (lease, rent and eviction) control rules, 1961, rule 5: [v.v.s. rao, g. yethirajulu & g. bhavani prasad, jj] refusal by landlord to receive rent - deposit of rent in court - held, a tenant has the option to take recourse to section 8 in case of refusal or evasion by landlord to receive rent and if landlord were to not name a bank or refuse even the money order of rent, the tenant can deposit the rent in accordance with sub-rules (1) to (3) of rule 5. the notice to person entitled to rent and proper maintenance of accounts of such deposits under sub-rules (4) and (5) of rule 5 are solely dependent on compliance with sub-rule (3) by the tenant. the payment or deposit of rent under section 11 read with sub-rule (6) of rule 5 arises only in respect of a tenant who did not take recourse to section 8 or section 9 before an application for eviction has been made against him in respect of any rent in arrears by date of that application, whereas in respect of rent that becomes subsequently due since date of application for eviction, the tenant is bound to pay or deposit regularly until termination of proceedings in order to enable him to contest the application. any violation of section 11(1) to (3) and sub-rule (6) of rule 5 makes the tenant liable for the adverse consequences under sub-section (4) of section 11. thus, the provisions of section 11 and sub-rule (6) of rule 5 are intended only to ensure the payment and deposit of rent including arrears during pendency and till termination of proceedings for eviction. the forfeiture of right of tenant to contest in case of default is to protect the rights and interests of landlord pending such an application for eviction, but not to confer any right on tenant to plead that all defaults committed by him prior to application for eviction can never be considered wilful, if he were to deposit all arrears of rent due within fifteen days under rule 5(6) read with sub-section (1) of section 11. the object and effect of section 11 and sub-rules (1) to (5) to rule 5, the former being for protection of landlord during pendency of eviction proceedings and the later being for protection of tenant to avoid any liability for eviction on ground of wilful default. consequently, while taking recourse to section 8 by tenant is optional, once that option is exercised, compliance with sub-rules (1) to (5) of rule 5 becomes mandatory in the sense that any non-compliance with prescribed procedure will positively indicate the wilful nature of default committed in paying or tendering rent as prescribed. while deposit of rent in terms of provisions of act and the rules amounts to valid tender of rent to landlord, the failure to comply with rule 5 (3) requiring delivery of a copy of the challan for deposit of rent in office of controller or appellate authority, as the case may be, so as to enable controller or appellate authority to cause maintenance of proper accounts under sub-rule (5) and give notice of deposit to person amounts to wilful default in making valid payment or lawful tender of the rent by the tenant to the landlord. thus, where a tenant obtains an order to deposit rent, same shall be deposited at least by the last day of the month following that for which rent is payable and rent challan shall be delivered in the office of controller within a reasonable time so that rent controller can take necessary action for service of notice of deposit under sub-rule (4) of rule 5 of the rules within seven days of such delivery. in the absence of compliance in so depositing rent and delivering challan in the office of controller, tenant shall be deemed to have committed wilful default. - the applicant lias requested the acl to furnish the valuation report prepared by the chartered accountants, and a letter also was given to the chairman appointed by this court, who conducted the meeting of the share-holders on 23-10-1998 to furnish the same, but the acl has failed to give the basis of the valuation of the exchange ratio. 3. the learned counsel appearing for the applicant as well as the acl urged their respective contentions in support of their stand taken in the pleadings by seeking assistance from certain provisions of the companies act and also some of the judgments of the high courts and the supreme court, which i will be considering shortly. krishna kumar has further clarified that all the figures, informations and data sought for, for this purpose by the valuers was furnished to them by the company, and the calculations made by the valuers was examined and discussed by the board in detail, and the board has satisfied that the exchange ratio was fairand equitable. by giving certain other details he stated that he was satisfied regarding such exchange ratio and as such the cash option figure determined in the scheme was fair or reasonable. but what was lost sight of (was) that the jurisdiction of the court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. it is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. the court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. the high court appears to be correct in its approach that this test was satisfied as even though the chartered accountant who performed this function was a director of tomco, but he did so as a member of renowned firm of chartered accountants. ' from this observation of the apex court also it is clear that the company court does not function as an appellate court and as such, the courts obligation was only to be satisfied that the valuation was in accordance with law and it was carried out by an independent body like chartered accountants and the sanctioning court need not have to ascertain with malhematical accuracy of the determination of the valuation on the basis of the arithmetical test. moreso, when admittedly more than 95 per cent of the shareholders, who are the best judges of their interest agreed to the valuation determined by such valuers. no grievance therefore, can be made by the appellant at the st,age of company petition proceedings for demonstrating the ratio to be ex facie unfair and unacceptable as the appellant would like to have it.1. this application is filed in company petition no.1999 of 1998. the said company petition is filed by asian coffee limited (acl) and three other transferor companies viz., coffee lands limited (cll), charagni limited (cl) and veerarajcndra estates limited (vel) (hereinafter referred to as 'transferor companies'), for the approval of the scheme of amalgamation with consolidated coffee limited (conscqffee) (hereinafter referred to as transferee company). a counter is filed by one of the share-holders of asian coffee limited (acl) by name mr. challa rajendra prasad (hereinafter referred to 'the applicant') objecting for such amalgamation.he has also filed the present company application no.6 of 1999 to direct the acl to furnish the details of the valuation report and also the calculations as to how they have arrived at the exchange ratio, so as to enable the applicant to file a reply to the counter filed by the acl. in the affidavit filed in support of the application, it is contended that he has already filed company application. no.674 of 1998 questioning the exchange ratio fixed by the acl and the acl has not furnished the details regarding the mathematical calculation as to how the value of the share is fixed for the purpose of amalgamation with the conscoffee, transferee company, and this material is necessary for filing a detailed reply to the counter filed by the acl. regarding his application in ca 674 of 1998, a detailed counter is filed by acl denying the allegations made by the applicant stating that the present application is not maintainable and it is filed only with an intention to delay the approval of the scheme of amalgamation. it is also stated that the acl has supplied the valuation report and this valuation report was explained to the share holders at the time of meeting. it is further submitted that the value of the shares has been fixed on the basis of the valuations done by m/s. n.m. raiji and company and m/s. a.f. ferguson & co., which has been accepted by anz grindlays bank ltd. it is also stated that the valuer is an expert who considered the value of the shares by applying various methods it is further stated that in that process, the potentialities of the business of the company, future outlook of the business of the company and other various factors were considered by the valuer. it is also stated that the applicant being a competitor of the acl, he is not a bona fide share holder of the company. it is further stated that by asking for arithmetical calculations of the share exchange ratio, the applicant, who is a competitor, seems to extract vital and sensitive information about the future plans, prospects and workings of the company and the publication of such information would help him as a competitorof the company and as such the same cannot be furnished to the applicant and that the applicant is abusing the process of the court for the purpose of his own business and advantage and if the application is ordered as prayed for, it would cause irreparable injury to the acl. on the basis of these allegations, the acl prays dismissal of the application.2. by filing the reply affidavit, it is stated that as a share holder, the applicant is entitled to know the details as to how the exchange ratio is arrived at and how the exchange ratio has been fixed. the applicant lias requested the acl to furnish the valuation report prepared by the chartered accountants, and a letter also was given to the chairman appointed by this court, who conducted the meeting of the share-holders on 23-10-1998 to furnish the same, but the acl has failed to give the basis of the valuation of the exchange ratio. it is further stated that the valuation report submitted by m/s. n.m. raiji and company and m/s. a.m. ferguson & co., does not furnish the details as to how they have arrived at the exchange ratio. the applicant stated that he and his relatives are holding in all 61,364 equity shares of rs.10/- each and as shareholders, they are entitled for the details of calculation of the exchange ratio. he further stated; 'i further deny that even though, i am in the same line of business i am not a competitor of the respondent company', and the exchange ratio does not contain any sensitive information since the same has been worked out on the basis of the accounts of the transferors and the transferee companies and as such the said information cannot be withhold from the share-holders, who are entitled for the same. he further stated that such information is necessary to file reply to the counter and if such information is not furnished, he will be put to irreparable loss and accordingly he prayed that his company application may be ordered.3. the learned counsel appearing for the applicant as well as the acl urged their respective contentions in support of their stand taken in the pleadings by seeking assistance from certain provisions of the companies act and also some of the judgments of the high courts and the supreme court, which i will be considering shortly.4. before going into the merits of the contentions, i think it appropriate to note a few admitted facts for the purpose of my consideration. it is an admitted fact that in a meeting called for, as per the direction of this court, the chairman appointed held the meeting at 1 loo a.m. on 23-10-1998 and the scheme proposed for amalgamation was approved by majority of share-holders without any modification. it is stated by the chairman in his report that about six equity shareholders of acl voted against the proposed scheme being adopted and carried into effect without any modification. from the report i find that the present applicant is one of the persons who voted against the proposed scheme of amalgamation. the chairman also furnished the minutes of the proceedings, in which he has stated that the applicant herein observed that calculations relating to fixing of exchange ratio of shares in the scheme may be furnished to the members for examination since he has objections to the exchange ratio as proposed in the scheme. it appears that one mr. ashok chand also raised similar objection. but with the permission of the chairman, one mr. r.k. krishna kumar offered his clarifications stating that the exchange ratio was arrived at on the basis of the appropriate valuations by eminent firm of chartered accountants who are experts in the field. mr. r.k. krishna kumar has further clarified that all the figures, informations and data sought for, for this purpose by the valuers was furnished to them by the company, and the calculations made by the valuers was examined and discussed by the board in detail, and the board has satisfied that the exchange ratio was fairand equitable. he also further clarified that they also obtained information from anz grindlays bank ltd., and they have also confirmed the exchange ratio as fair and ' reasonable. he further sated that workings/ calculations of the exchange ratio contains sensitive information, publication of which could compromise the competitive position of the company. the minutes of the meeting shows that after discussion the scheme was approved by the majority and accordingly the chairman has declared that the resolution has been carried. it is not in dispute now that the applicant has been furnished with the copies of the notices for convening meeting, report of anz grindlays banly limited and also the report of the valuers. from a perusal of the report, i also find that the valuers fixed the exchange ratio of 6 shares of acl of value of rs.10/- each for one share of conscoffee of rs.10/- each as fair and reasonable. it is this equation of the exchange ratio the applicant is challenging and he wants the detailed arithmetical calculation as to how this exchange ratio has been arrived at.5. now, therefore, a short question that arises for consideration would be whether the applicant would be entitled for the same ?6. section 393(1)(a) of the companies act provides that with every notice calling the meeting, there shall also be sent a statement setting forth the terms of the compromise or arrangement and explaining its effect. section 393(3) further provides that where a notice is given by advertisement then the creditors or the members would be entitled to the copies of the statement setting forth the terms of the compromise or arrangement proposed and explaining its effect. if an application is made for that purpose, a copy of such statement shall be furnished to such creditor or a member. relying on this section, the learned counsel appearing for the applicant contended that the applicant would be entitled to thestatement explaining the effect of such compromise or amalgamation and such a statement includes also the mathematical calculation arrived at by the auditor regarding the valuation and equation of the exchange ratio. therefore, the petitioner would be entitled to figures of such mathematical calculations, as to how this exchange ratio has been arrived at by the valuers. he buttressed the argument by referring to section 173 of the companies act, stating that the statement annexed to the notice of the meeting shall state all material facts concerning each of such item of business, including in particular the nature of the concern or interest, if any, of every director or managing agent etc. he submitted that the phrase 'material facts' includes even the calculation sheet on the basis of which the exchange ratio is arrived at. in support of his contention, he relied upon the judgment of gujarat high court reported in bank of baroda ltd v. mahindra ugine steel co. ltd., (1976) 46 company cases 227. having gone through the said judgment, i find at page no.248, the said high court observed as under:'the foregoing discussion, however, reveals that in a matter of this nature, which involves amalgamation of two large companies, it would not be possible for the court to discharge its duty unless sufficient material is placed on record as regards the method and basis of valuation. if there is serious contest on the question of valuation, the court would be unable to accord sanction unless proper material including, if necessary an expert's report about valuation is placed on record. in fact, it may, in some cases, be desirable, if not necessary, to place such material even before the share-holders in the explanatory statement under section 393, for such material would help the average share-holders in deciding whether the scheme is in their interest.'the facts of this case reveal that in the affidavit, the secretary of the companyexplained the basis for exchange ratio. by giving certain other details he stated that he was satisfied regarding such exchange ratio and as such the cash option figure determined in the scheme was fair or reasonable. from this it follows that in .that case, the report of the valuers, determining the exchange ratio was not filed. it was only in those circumstances, the high court of gujarat held that whenever there is such a contest on the question of valuation, it is necessary that an expert report about the valuation should be placed on record and it may also be desirable to place such material before the share-holders in the explanatory statement under section 393 from this it follows that the ratio of the said judgment would be that in all such cases of amalgamation, a report of the valuers should form part of the statement annexed to the notice in view of section 393 of the companies act. this observation the court specifically made, because such valuers report was not placed on record. but in the instant case, such a report of the valuers was not only formed part of the proceedings of the general body, but a copy of which is also filed before this court. from this it follows that even though the principle laid down in that case cannot be disputed, but the said case does not apply to the facts of this case, in the sense that in the present case such valuers report was furnished to the share-holders along with the statement, as contemplated by section 393 (1) and (3) of the companies act. at any rate, the said judgment is not an authority for the proposition that the statement or the effect of statement contemplated by section 393 would also include the exact mathematical calculation arrived at by the valuers. in fact, a similar contention, as urged in this case, was urged in another judgment of gujarat high court reported in in re sidhpur mills co., ltd., : air1962guj305 , contending that in order to explain the 'effect', the details as to how the ratio had been arrived at, should have been mentioned in the statement along with the details as to thebenefit which was likely to accrue to the amalgamated company, on account of the unabsorbed depreciation. negativing such contention, the gujarat high court observed as under:' i cannot agree with this contention. it is true that the first part of clause (a) requires not only that the terms of the scheme must be stated, but, it further requires that the effect of the scheme must be explained. therefore, the statement must contain not only the terms of the scheme, but must also further explain as to what its effect would be. the clause does not state in terms as to effect on what has got to be mentioned in the statement. broadly speaking, however, it is quite clear that what has got to be explained are not the details of the scheme, but, the effect which the scheme will have obviously on such matters as the welfare of the company and the welfare of the share-holders or creditors, with whose interests the scheme purports to deal. 'effect' means consequence, a condition which arises as a result of a certain course of action. if there is anything in the scheme, compromise or arrangement, which is not quite obvious to a person, reasonably acquainted with the facts of a case, by merely reading the terms of the scheme, then, a duty is cast upon the persons concerned to mention what the consequence will be if the scheme is approved of. in other words, it is only the consequence or the result which has got to be explained which would arise on account of the approval of the scheme. if something is implied in the scheme, which is not obvious, the same must be brought to the notice of the share-holders. however the statement does make a specific mention about one of the above two things. the statement does mention that the share-holders of the company will be given 1-3/4 shares in the sidhpur company for each share held in the bombay company. that matter is self-evident and will be known to anyone who cares to read the statement. no further explanation on that particular point is called for. the details as to the way in which the ratio was arrived at is not a matter relating to the effect of the scheme. that is a matter of detail and pertains to things required to be considered for fixing the ratio.'with these observations, the high courtof gujarat ultimately held that suchdetails need not be given, in order toexplain the effect of the scheme and itsamalgamation, along with the statementunder section 393 (1) and (3) of thecompanies act. to the same effect alsois the judgment of the supreme courtreported in hindustan lever employees'union v. hindustan lever ltd, (1994) 4com.lj 267 (sc). in paragraph no.3 of thesaid judgment, the hon'ble supreme courtobserved as under:'but what was lost sight of (was) that the jurisdiction of the court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. a company court does not exercise an appellate jurisdiction. it exercises a jurisdiction founded on fairness. it is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. what is imperative is that such determination should not have been contrary to law and that it was not unfair for the shareholders of the company which was being merged. the court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. the high court appears to be correct in its approach that this test was satisfied as even though the chartered accountant who performed this function was a director of tomco, but he did so as a member of renowned firm of chartered accountants. hisdetermination was further got checked and approved by two other independent bodies at the instance of share-holders of tomco by the high court and it has been found that the determination did not suffer from any infirmity. the company court, therefore, did not commit any error in refusing to interfere with it.'from this observation of the apex court also it is clear that the company court does not function as an appellate court and as such, the courts obligation was only to be satisfied that the valuation was in accordance with law and it was carried out by an independent body like chartered accountants and the sanctioning court need not have to ascertain with malhematical accuracy of the determination of the valuation on the basis of the arithmetical test. moreso, when admittedly more than 95 per cent of the shareholders, who are the best judges of their interest agreed to the valuation determined by such valuers. it further observed that the court is least equipped, nor it is the function of the judge to embark upon the determination of arithmetical accuracy of the exchange ratio. there is another latest judgment of the supreme court reported in miheer h. mafatlal v. mafatlal industries ltd, : air1997sc506 . in this case, one of the points thai was required to be determined by the supreme court was, whether the exchange ratio of two equity shares of mil for 5 equity shares of mfl was unfair and unreasonable to the equity shares of mig and consequently the scheme of amalgamation on that count was liable to be rejected. while dealing with this point at paragraph no.39, the hon'ble supreme court took note of the fact that before formulating the proposed scheme for amalgamation, an expert opinion of a reputed firm of chartered accountants was obtained and such chartered accountants firm having considered all the relevant aspect, suggested the said exchange ratio, keeping in view the valuation of the shares of the respective companies. noticingthis aspects, the hon'ble supreme court observed that 'it must at once be stated that valuation of shares is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy'. the supreme court further approved the observation of the high court made in kaniala sugar mills limited, (1984) 55 company cases 308, by extracting the same as under :'once the exchange ratio of the shares of the transferee-company to be allotted to the share-holders of the transferor-company has been worked out by a recognised firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the share-holders of the two companies or to say that the share-holders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest.'the hon'ble supreme court further reiterated that the above observations of the high court made in that case represent the correct legal position on this aspect. from this law of the hon'ble supreme court it is clear that it is enough if the expert opinion is obtained regarding the valuation and fixation of the exchange ratio and the mathematical calculation as to how those valuers had arrived at would be a technical and complex problem and should be left to the consideration of such experts in the field of accountancy only. ultimately in paragraph no.40, the hon'ble supreme court concluded as under :'the aforesaid report of the chartered accountants heavily weighed with the transferor-company's board of directors which comprised amongst others, the appellant himself but also the board ofdirectors of transferee-company and also weighed with the general body of equity share-holders who approved the scheme and the ratio with overwhelming majority. no grievance therefore, can be made by the appellant at the st,age of company petition proceedings for demonstrating the ratio to be ex facie unfair and unacceptable as the appellant would like to have it.'from the above judgment it is clear that the petitioner in this case also cannot expect or insist for furnishing any mathematical calculation demonstrating the exchange ratio that is arrived at, and furnishing such mathematical calculations undertaken by the valuers, therefore, cannot be said to form part of the statement to be furnished under section 393 (1) and (3) or under section 173(2) of the companies act. in view of this established position of law, i do not think that there are any merits in this application and accordingly, i pass the order as under:7. company application no.6 of 1999 is hereby dismissed, but without costs.