2012 (8) TMI 629 - HC - Companies Law

Petition against Award u/s 34 by Arbitrator - Arbitrator erred in not dealing with the issue of the shareholding pattern of the Respondent No. 1 company - Held that - The order referring the disputes between the parties to arbitration no doubt begins by stating that all the disputes between the parties regarding the share holding of the said company are being referred. However it also notes that the Petitioners Group had agreed to surrender and transfer their shares in the Respondent No. 1 company to Respondent Nos. 2 to 5 or their nominees for a consideration which will be decided by the learned Arbitrator. The learned Arbitrator was also to decide the mode and method of payment of the said consideration . Consequently it was unnecessary for the learned Arbitrator to decide about the shareholding pattern since in any event the Petitioners agreed to transfer all their shares to Respondent Nos. 2 to 5 for a consideration therefore no error having been committed by the learned Arbitrator in this regard. Valuation of the Petitioners shares - Held that - In the Award the Arbitrator in method adopted by him for valuation has not only considered the value of the assets of the Respondent No. 1 company i.e. the plot of land and the value of the construction thereon but also the outstanding liabilities this in fact was the correct approach. A perusal of the report of M/s. G.C. Mallick & Associates Chartered Accountants also reflects this approach. While the report of M/s. Kumar Narang & Co. Chartered Accountants accounts for the current liabilities and unsecured loans it fails to provide for the contingent property tax liability. The land and building value according to the said report is no doubt higher than that suggested by M/s. G.C. Mallick & Associates however the report fails to explain the basis for such higher value. In any event it was for the learned Arbitrator to take a decision as to which of the two reports was more reliable & It cannot be said that the learned Arbitrator erred in not going by the report of M/s. Kumar Narang & Co. It is not possible to agree with the submission of the Petitioners that by fixing the value per share of the Respondent No. 1 company at Rs. 450 the learned Arbitrator committed a patent illegality. The view of the learned Arbitrator in the circumstances was a plausible one - no ground having made out for interference with the impugned Award - against petitioner.

Summary

Issues Involved:
1. Validity of the Arbitrator's Award.
2. Determination of share value.
3. Consideration of shareholding pattern.
4. Acceptance of the Arbitrator's methodology and reports.

Issue-wise Detailed Analysis:

1. Validity of the Arbitrator's Award:
The challenge in this petition under Section 34 of the Arbitration and Conciliation Act, 1996 was to an Award dated 8th December 2001 by the sole Arbitrator. The Arbitrator determined that Respondents 2 to 5 should pay the Petitioners Rs. 32,31,600 with interest at 12% p.a. from the date of the Award until payment. Upon receipt, the Petitioners were to surrender their shares in Respondent No. 1 company and execute transfer deeds. The Court found no error in the Arbitrator's decision and dismissed the petition, emphasizing that the parties had agreed to accept the Award as final and binding.

2. Determination of Share Value:
The central issue was the valuation of the Petitioners' shares. The Arbitrator considered the Petitioners' claim of Rs. 1,000 per share and the Respondents' lower valuation. He took an average of the land and construction costs proposed by both parties, determining the land cost at Rs. 1,07,61,125 and construction at Rs. 31,63,640, totaling Rs. 1,39,24,765. After deducting liabilities, the net value was Rs. 1,10,95,824. The Arbitrator used the report of M/s. G.C. Mallick & Associates, which valued shares at Rs. 135, reduced by 20% for being a private company, resulting in Rs. 108 per share. Ultimately, he determined the value at Rs. 450 per share, considering market conditions and the lack of buyers for private company shares. The Court upheld this valuation, finding it reasonable and based on a balanced view.

3. Consideration of Shareholding Pattern:
The Petitioners argued that the Arbitrator failed to address the changed shareholding pattern of Respondent No. 1 company. However, the Court noted that the referral to arbitration included the Petitioners' agreement to transfer their shares for a consideration decided by the Arbitrator. Thus, it was unnecessary for the Arbitrator to address the shareholding pattern separately. The Court found no error in this aspect of the Award.

4. Acceptance of the Arbitrator's Methodology and Reports:
The Arbitrator's methodology involved considering the value of the company's assets and liabilities. He referenced the treatise 'Lindley on Partnership' and the decision in Kidarsons Industries (P.) Ltd. v. Hansa Industries (P.) Ltd. The report of M/s. G.C. Mallick & Associates was deemed more reliable than that of M/s. Kumar Narang & Co., which the Arbitrator found unrealistic. The Court agreed with the Arbitrator's approach and valuation, finding no patent illegality or error. The Court also dismissed the Petitioners' challenge to the Arbitrator's finding that land prices had decreased since 1992, supporting the conclusion that the valuation of Rs. 450 per share was plausible.

Conclusion:
The petition was dismissed with costs of Rs. 5,000 to be paid by the Petitioners to the Respondents. The Court upheld the Arbitrator's Award, finding no grounds for interference under Section 34 of the Arbitration and Conciliation Act, 1996.