TMI Blog1992 (8) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... May 14, 1988 and July 26, 1988 on March 28, 1988, May 25, 1988, and March 6, 1988, or any other date and even if any such meeting was held, that the same is non est in the eye of law ; ( c )Declaring that petitioners continue to be directors of the first respondent-company ; ( d )Declaring that the purported co-option of the fourth respondent as a director of the first respondent is illegal and non est in the eye of law ; ( e )Declaring the fifth respondent not to take on record Form No. 32 filed by respondent No. 2 on August 19, 1988, purporting to notify the fifth respondent that petitioners Nos. 1 and 2 had vacated their office as directors of the first respondent-company pursuant to section 283(1)( g ) of the Companies Act and that the fourth respondent had been co-opted as a director of the first respondent-company ; ( f )Issuing an order of permanent injunction restraining respondents Nos. 2 and 3 from interfering with the rights of the petitioner to act as directors of the first respondent-company ; ( g )Issuing an order of permanent injunction against the fourth respondent from acting as director of the first respondent-company. ( h )Directing respondents Nos. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the death of C.L., Rakhra, the second respondent was inducted as a partner in his place. Similarly, on the demise of B.L. Rakhra, the second petitioner was inducted as a partner. The firm has been dealing in sports goods and is located in Commercial Street, Bangalore. For a few number of years there were four partners, that is to say, the two petitioners and respondents Nos. 2 and 3. They decided to convert the firm into a private limited company. Consequently, the company in question was incorporated on December 2, 1983. The main objects to be pursued by the company on its incorporation, as stated in the memorandum of association, includes : "To take over as a going concern, the partnership firm 'Rakhra Sports Company' situated at No. 6, Commercial Street, Bangalore 560 001, as at the close of the date of November 30, 1983, from the vendors, with all its assets and liabilities at book value, as reflected in its balance-sheet drawn as on that date, and to pay the vendors thereof by allotment of equity shares treated as fully paid up in the company". The erstwhile partners became the directors of the company. The articles of association states that the members of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the parties in the matter of business of the first respondent-company. Certain instances are given in the company petition in this regard. It is unnecessary to detail the averments in the company petition in view of certain events which happened in the course of this litigation. The second respondent as the chairman of the company had a casting vote and this mattered much when the two groups fell apart. The petitioners, however, assert that there was a complete deadlock in the management of the company and the business of the company could not be carried on since the quorum for a valid board meeting was absent "Mutual trust" also has been lost. The petitioners also state that the winding up of the company would unfairly prejudice the rights of the parties though respondents Nos. 2 and 3 are conducting the affairs of the company in a manner prejudicial to the interests of the company. The exclusion of the petitioners from the management and control of the company and induction of the fourth respondent as a director, who is a total stranger to the family, are all instances warranting invocation of the provisions of section 398 of the Act. The petitioners also, alternatively, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided or fixed by the company's auditor. The value so fixed shall be deemed to be the fair value. A member who wants to transfer his/her shares by way of sale to any person who is not a member of the company can do so only when the existing members are not willing to purchase the same. On receipt of intimation from a member of his/her intended transfer, the board in turn shall ascertain from the existing members whether any of them is interested in the purchase of those shares. The board shall, for this purpose, offer the shares for sale to the members of the transferor's immediate family other than the transferor-member, in an equitable manner and in proportion to their existing shareholdings, by giving a month's time for the members to accept the offer in full or in part. If none of them or some only are interested in the offer and all or some of the shares remain unaccepted, the board shall forthwith intimate that fact to the transferor-member who can afterwards transfer these unaccepted shares to any person in the immediate family group of other members representing the 'B' family". Messrs. Ramaswamy and Company admittedly is the auditor of the company. It seems that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught for time till September 30, 1988, to make this payment. As a preliminary step to effect a settlement between the parties it is ordered that the second 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 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 this respect on the next date of hearing. However, it is contended by learned counsel for the respondents that this payment should be without reference to the claim of the petitioner to the leasehold right of the premises that the company had obtained in Cotton Complex, situated on Residency Road, Bangalore. Whether this condition should be imposed on the petitioner will be considered by this court in exercise of its powers under the provisions of section 402 of the Companies Act. 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 compr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit before tax 1984-85 24,26,552 4,11,216 3,72,115 39,101 1985-86 26,89,035 4,52,978 4,22,972 30,004 1986-87 29,69,425 4,75,400 4,97,186 Loss 21,786 1987-88 34,49,798 7,75,389 5,04,152 2,71,237 Total for 86-87 and 87-88 64,19,223 12.50,789 10,01,338 2,49,451" The increased turnover during the year 1987-88 was found to be due to the large orders received in the previous year amounting to Rs. 3,69,768 and one-time orders for Rs. 61,248 with a higher margin of profit. Therefore, the auditors say : "Hence it may not be correct to adopt the turnover and gross profit of 1987-88 as a representative year. Instead it will be fair to take the average of the turnover and gross profit for the two years, .1986-87 and 1987-88". The auditors point out that all the directors are whole-time directors in respect of remuneration by way of salary, sitting fees and medical expenses. Therefore, for purpose of taking the profit for valuation purposes, one-thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not forthcoming in the report. This auditor concludes that the value of each share is Rs. 328 as on March 31, 1988, as per the profitability method as already stated. Though, this auditor refers to the current assets and the goodwill, no reference is made to them in terms of value. Similarly the value of the leasehold rights also is not forthcoming. The gross profit for the four years at Rs. 12,50,789 is divided by two to arrive at the average for two years at Rs. 6,25,394. From this the actual expenses of Rs. 5,00,669 is deducted and then income-tax of 63 per cent, is further deducted. The other auditor, Messrs. Ramadhyani and Company, gave their report on November 16, 1988. After discussing the various methodologies, they proceeded to give the valuation, first on maintainable profits basis. They observed that the profitability trend during 1988-89 is the same as that prevailing during the previous year and that the high incidence of profit during 1987-88 was due to execution of large one-time orders which are not likely to be repeated in future years. They also noticed that in case the lease at Cotton Complex is terminated there will be a reduction in the overheads by about R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other formula of their own by giving weightage of 2 to the maintainable profits resulting in Rs. 676 and weightage of one to the break up value method leading to the figure Rs. 760 and the total profit of Rs. 1,436 was divided by the total weightage of three which gave the weighted average as Rs. 479. Thereafter, the auditors proceeded to refer to some observations of Justice Williams regarding the controlling interest and its valuation. A few other factors like telephone connections "pending orders ", benefits arising out of long association, were referred to, and they concluded : "Taking these factors into account, we are marking up the value of an equity share arrived at as per paragraph 6.3 above by 50 per cent. Such enhanced value will work out to Rs. 719 per share". The report of Messrs. C.K.S. Rao and Associates, Consulting Engineers and Architects, is enclosed to the report of Messrs. B.K. Ramadhyani and Company. The petition came up before the learned company judge on July 7, 1989. The learned judge opined that the contesting parties have not arrived at any settlement and that this court is not bound in law or otherwise to take up the task of the valuer and fix it ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor, Messrs. Ramaswamy and Co., for this is a case in which the value of the share of the company is to be determined as if the company is under 'notional liquidation', but in reality it may not". Thereafter, at para 70, it was held : "It is an undisputed fact that the court has passed orders on September 16, 1988, and September 30, 1988, and directed the petitioners to sell their shares to respondents Nos. 2 and 3 and 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 the oppressed among those two groups. It is also an undisputed fact that the petitioners as well as respondents Nos. 2 and 3 are having equal shares of 50 per cent. each. The two valuers have adopted two different methods for valuing the shares of the company which have not been found favour with both the petitioners and respondents Nos. 2 and 3. To my mind, the methods adopted by the valuers to arrive at the valuation of the shares 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the maintainable profit as per Messrs. Ramadhyani and Company at Rs. 2,51,585 and capitalising at 11 per cent. would be the 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 Nos. 2 and 3 'A' group of the shareholders, i.e , the fair share value would be fixed at Rs. 930 per share" Learned counsel for the appellants and the respondents have reiterated their contentions. While Mr. Udaya Holla emphasised the principles stated by the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621; AIR 1973 SC 1023, as governing the valuation of shares, Mr. Raghavan contended that the court should apply various methodologies to evaluate the respective interests and the highest value should be paid to the interest of the outgoing shareholders. There can be no doubt that the first respondent-company is in the nature of a "quasi-partnership "; though initially started as a proprietary concern, the business was continued for a long period by the partners (who were direct brothers and the members of their families); this firm was converted into a private limited compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther would do. If ever there was a case of deadlock, I think it exists here ; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible. We are told that we ought not to do it because the company is prosperous, making large profits, rather larger profits than before the disputes became so acute. I think one's knowledge of what one in the streets is sufficient to account for that, having regard to the number of cigarettes that are sold, and we can take judicial notice of that in judging whether the business is much larger than it was before. Whether such profit would be made in circumstances like this or not, it does not seem to me to remove the difficulty which exists. It is contrary to the good faith and essence of agreement between the parties that the state of things which we find here should be allowed to continue". At page 435, another learned judge pointed out : "I am prepared to say that in a case like the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mi as a partner but regarded him as an employee in repudiation of Ebrahimi's status as well as of the relationship. (6)Ebrahimi though ceasing to be a director lost his right to share in the profits through directors' remunerations retaining only the chance of receiving the dividends as a minority shareholder. Bearing in mind the above features in the case, the House of Lords allowed the petition for winding up by reversing the judgment of the court of appeal and restoring the order of Plowman J. None of the parties questions the principles as such adumbrated by the House of Lords in Ebrahimi's case [1973] AC 360 or even those in the earlier Yenidje's case [1916] CH 426 and indeed these are sound principles depending upon the nature, composition and character of the company. The principles, good as they are, their application in a given case or in all cases, generally, creates problems and difficulties" The facts of the instant case can lead to only one conclusion that the business concern of the parties here was being carried on, in reality, by the parties as partners, in the garb of an incorporated company. Though Mr. Holla would like us to hold that there cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des: "In my considered view the fair value of the shares will be. Paid-up capital + Expected profit in 1987 88 + goodwill 2,50,000 + 2,50,000 + 3,17,000 = 8,17,000. Value per equity shares = Thus, there was an amalgam of various elements which are normally considered separately to evaluate the value, under different methods. In other words, the method adopted by Messrs. Ramaswamy and Co. is an amalgamation of the methods followed under the "super profit method", and the "asset method ", by simplifying those methods. Shah, in his letter dated May 18, 1988, addressed to the first petitioner disagreed with the above valuation made by Ramaswamy and Company ; Shah suggested, to follow either of the two methods ( i ) yield method, or ( ii ) intrinsic value method. Under the "yield method" he considered the exceptionally high profit earned by the company during the year ending March 31, 1988, as indicative of the future trend and stated that "at least Rs. 2,50,000 should be adopted as the reasonable profit for the year"; capitalising this by 10, he arrived at the company's worth (with issued shares of 2,500), as Rs. 25,00,000 ; therefore, each share was valued at Rs. 1,000. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or that the present applicants should be directed to sell their shares to the former at the same rate. That the company as a going concern has its name as a substantial element in its goodwill cannot be denied and is not denied. In the submissions of the petitioners ( i.e. , present respondents Nos. 1 and 2) dated December 1, 1988, on the valuation reports made by the auditors, these respondents stated the valuation made by Messrs. Brahmayya and Co., is attacked as it has failed to take note of the goodwill in its proper perspective. If the company is not to be wound up, its existing goodwill including its trade name has to be preserved. If the trade name can be freely used by the parties without reference to the company and by those who are not likely to continue to do business in the company's name, the damage or injury likely to be caused to the company cannot be ignored". Again, the court proceeded to say, "It is an admitted case that the company in question is a family concern, more in the nature of a partnership ; in fact, earlier it was a partnership firm. As per section 53 of the Indian Partnership Act, 1932, after a firm is dissolved (only in the absence of a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is quite valuable to them and, therefore, cannot be given up by them. Mr. Raghavan, learned counsel for the petitioners, pointed Out that the petitioners offered to buy the shares of the respondents at Rs. 1,050 per share and that the entire offer made in the "submissions of the petitioners on the valuation reports filed by Messrs. Brahmayya and Co. and Messrs. B.K. Ramadhyani and Co". dated December 1, 1988, still holds good. The offer stated in para 21 of the above submissions reads : "Notwithstanding what is stated above, the petitioners reiterate : (1)their offer to purchase the shares of respondents Nos. 2 and 3 in the first respondent-company at" a value of Rs. 1,050 per share and are willing to let respondents Nos. 2 and 3 to have the benefit of premises of the' first respondent at Cotton Complex. (2)If it is the case of the respondents that the premises at Commercial Street, have no value, the petitioners are willing to sell their shares at the face value that is Rs. 100 per share and in turn take posses-sion of the shop premises at Commercial Street and two godown premises at Golar lane, 1st Cross, Commercial Street, Bangalore. (3)The petitioners are also prepare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the various factors for purchase or sale of shares in a company, the dominant factor determining the price he will pay or receive, as the case may be, is the yield". However, there may be instances where profits of the company are not reflected in the dividends ; as to this situation, Supreme Court observed, at page 1027 (at page 629 of 86 ITR) : "If profits are not reflected in the dividends which are declared and a low-earning yield for the shares is shown by the company which is unrealistic on a consideration of the financial affairs disclosed for that year, the Wealth-tax Officer can on an examination of the balance-sheet ascertain the profit earning capacity of the concern and on the basis of the potential yield which the shares would earn, fix the valuation". Green's Death Duties is quoted in this regard, which reads (at page 629): "Not infrequently the dividends represent only a small proportion of the company's profits and large sums are systematically accumulated in the form of reserves. It is important to remember in this connection that the interests of shareholders in unquoted companies often differ from those of investors in quoted shares, especially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors were stated in page 1029 and thereafter the Supreme Court said (at page 634 of 86 ITR) : "In setting out the above principles, we have 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 prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. 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 into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods". The entire discussion was in the context of section 7 of the Wealth-tax Act and the question framed by the Supreme Court. is found at page 1029 of AIR 1973 SC, (at the end of para 13) (at page 634 of 86 ITR). Though the decision is under the Wealth-tax Act, guidance is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares would be likely to realise upon a liquidation' and stated in no uncertain terms that 'the general principle of valuation in a going concern is the yield on the basis, of average maintainable profits, subject to adjustment, etc., which the circumstances of any particular case may call for'. The breakup method would not be appropriate for valuation of shares of a company which is a going concern because as pointed out by the court in Mahadeo Jalan's case [1972] 86 ITR 621, "among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor of break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern'. It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit earning capacity of the company, that the valuation by the break-up method would be justified. The Revenue leaned heavily on the observation in Mahadeo Jalan's case [1972] 86 ITR 621 that the factors likely to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. (2) It is recognised that an appraisal of stock of a dissenting stockholder should take into consideration assets or net assets value, which depends on the real worth of the corporate assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence. Asset value represents a judgment as to the fair market value of the assets based on the price that wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets in the Schedule, and in clause ( f ) though provision is made for including a part of the premium paid in respect of leasehold properties proportionate to the unexpired period, no value of the leasehold interest for the unexpired period is given. Goodwill of a business is an intangible asset : it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features ; Trego v. Hunt [1896] AC 7. Goodwill of an undertaking, therefore, is the value of the attraction to customers arising from the name, and reputation for skill, integrity, efficient business management, or efficient service. Business of banking thrives on its reputation for probity of its dealings, efficiency of the service it provides, courtesy and promptness of the staff, and above all the confidence it inspires among the customers for the safety of the funds entrusted. The Reserve Bank, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar circumstances. The court found that the company was in the nature of a quasi-partnership ; though the petitioners approached the court with an allegation of oppression by the majority shareholders, their shares are not to be valued either at a premium or at a discount and that a fair value should be fixed by the court, for the sale of their shares, to the respondents. The learned judge held that on this question of "discount" or "premium", there is no rule of universal application ; on the other hand the general rule is to adopt a fair basis of valuation. At page 450, the learned judge observed (at page 878 of [1984] 2 WLR) : "In summary, there is in my judgment no rule of universal application. On the other hand, there is a general rule in a case where the company is at the material time a quasi-partnership and the purchase order is made in respect of the shares of a quasi-partner. Although I have taken the case where there has in fact been unfairly prejudicial conduct on the part of the majority as being the state of affairs most likely to result in a purchase order, I am of the opinion that the same consequences ought usually to follow in a case like the present where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year 1981, the cash flow forecast was extremely optimistic. But there was a difference of opinion as to the estimate for the year 1981-82. The learned judge accepted the estimate of Mr. Bird and Mr. Foster on this aspect. The next difference of opinion between the two valuers was with regard to the multiple to be applied to the estimated profit for 1981-82. The other valuer, i.e. , Mr. Foster maintained that it was wrong to take only the estimated figure for 1981-82, but opined that an average of the figure for 1981-82 and the actual figures for the preceding two years should be taken, to which the estimate of the average excessive director's emoluments were to be added. To this a multiple of three was applied ; the result was the "earnings-based valuation". The valuation based on the "net tangible asset value "was also given which was slightly lower than the former figure. The learned judge said at page 458 : "In my view the basic approach of Mr. Foster to the question of maintainable level of profits is to be preferred to that of Mr. Milburn. In other words, I think that a purchaser would be more likely to take an average of three years actual and anticipated profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly and severally to purchase the shares of the petitioners at 18.25 each". The above decision of the Chancery Division is a good guidance for us. The court has to apply both the methods and compare them, before arriving at a fair value, However, in the above case, there was unanimity regarding the net tangible assets and as to its valuation. The difference pertained to the earnings-based valuation. On this question, the court preferred to consider the average profits of the last three years (including the estimated profits of the latest year, though the year had not come to an end) and thereafter, to apply the multiple, looked further back in order to see the earlier record of the company. Under the condition of that counting, the expected gross profit was estimated roughly as 25 per cent, and hence a multiple of 3.75 was chosen. The gross profit which is to be the basis for applying the multiple and to consider the expected return on investment, is a pre-tax profit and not a profit after paying the income-tax. However, the court had no occasion to consider the impact of the "goodwill"(probably because it was a young company started in or about the year 1975). The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir shares at a fair price ; and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholder what is, in effect, money compensation for the injury done to them ; but I see no objection to this. The section gives a large discretion to the court, and it is well exercised in making an oppressor make compensation to those who have suffered at his hands". As to this observation and another earlier decision, Oliver L.J. said in connection with the respondents' arguments (at page 531) : "They seem to me to be entirely against them because, as it seems to me, they indicate as clearly as can be the wide discretion which the court has in directing the basis on which shares should be valued for the purpose of a purchase ordered under this section. It may be true that it can be compensatory, but what the court is required to do, in the exercise of its very wide discretion, is to do what is just and equitable betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's creditors". The net assets figure, undiscounted, was 39,000. The figures for "sales ", "gross profit", "overheads and profit before taxation "from the time when the company started trading, till December 31, 1981, were then referred to. The court noticed that the profit before tax, having risen sharply to start with, showed an even steeper downward trend. One of the valuers adopted an asset value, which the court found to be actually an "earnings value" in disguise. To the net asset value, the value of goodwill (based on future profits) was added. At page 741, the court quoted Accountant's Digest, which referred to this method ; the excerpt reads: " Super profits approach. The super profits approach has a long and ancient pedigre and appears in one form or another in most texts. Idea behind it is that there is a normal rate of return that can be earned on assets of a certain type but over a number of years it may be possible to earn profits in excess of this normal level. This method assumes that the purchaser will buy, in addition to the normalised value of the assets, a number of years' super profits. The procedure is to estimate the value of the net assets on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut there are two unknowns ; what the future profits would be, and what price/earnings ratio would commend itself to a purchaser as appropriate for capitalisation. It is possible to make an allowance for risks in calculating either figure. What one must guard against is making allowance for the same risks twice over, i.e., in the assessment of future profits and also in the choice of a price/earnings ratio. In order to avoid that, the assessment of future profits can be made on a best guess basis, allowing for risks but without either undue caution or exaggeration, and a price/earnings ratio can then be chosen on the basis that the figure for future profits is the probable answer. That seems to me the best method for the present case ; in other cases the converse method could be adopted, and the allowance for risk could be incorporated in the ratio rather than the profit figure, or part of it in one and part in the other". The future maintainable profits was estimated by the court at 6000 per annum, and thereafter the court proceeded to consider the figure of the multiplier on a "pre-tax basis and not post-tax". The court opined that the purchaser of the company would be conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise, it will result in ignoring commercial realities. The worth of a company as a going concern would, and should, normally, include its tangible and intangible assets which are being commercially exploited. When two groups who have been working together for decades fall apart and seek separation, each group is entitled to have a proportionate worth of the business built up by all of them together. Though, in the instant case, the evaluation of the shares is done by virtue of the consent orders, the source of the court's power is in section 402. Under section 397, the court is empowered to make an order "as it thinks fit "; similar is the power vested in the court under section 398. Power under section 402 is a power which may be exercised without prejudice to the generality of the powers of the court under sections 397 and 398, and, therefore, such a power can in no way he of a limited nature. A power to make an order as the court thinks fit would necessarily comprise within it a power to make an order which is just and equitable in the circumstances of the case, because, essentially, this is an unlimited judicial power. The court cannot ignore the realities, while ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. The main asset of the company may comprise intangibles like goodwill and the benefits that arise out of the location of the leasehold premises. In such a situation, the tangible asset-valuation method may not depict the clear worth of the company. To take an extreme example, we may consider the case of a company trading as a commission agent, it does not require any capital investment except good premises ; the real assets are the business connections of the company including the goodwill earned, if any. In terms of annual profits, the company may be very prosperous. Here the comparison between the asset-value and the "maintainable level of profits" value can be achieved only by selecting a proper multiple to capitalise the profit. The percentage of return expected in such a case will be quite high, because no tangible investment in terms of money has to be made. The company in the instant case is a sound company with a goodwill of its own, earned in the course of its business which was established as early as the year 1932. It is a family concern. Dividends are not declared ; the shareholders have been enjoying the fruits of the business by way of remuneration, allowances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings gives the total remuneration of directors at Rs. 9,500, apart from other allowances of Rs. 1,000 per month. Therefore, the maintainable level of profits will be Rs. 1,95,880. A reasonably good investor would further probe into the affairs of the company to discover that since the year 1985 (after February, 1985), the company opened a branch at Cotton Complex and has been incurring a loss in the business conducted in that branch ; however, the lease of the premises was on a monthly rent of Rs. 4,389 with an advance of Rs. 43,890. While the respondents were anxious to close this business, the petitioners, opined that these premises can be utilised in a better way. The learned company judge has added to the maintainable level of profits a further sum of Rs. 60,000 on account of closing this business, so that, the company's gross profit would go up. This cannot be termed as an erroneous approach. If, however, this sum of Rs. 60,000 is not added, naturally, the percentage of profit on the investment will be lower, resulting in applying a higher multiple. If Rs. 60,000 is added, the average profit will be Rs. 2,55,880, (rounded off to Rs. 2,56,000). The investor's yield w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable with the "income-capitalised value "of the company's worth of Rs. 20,48,000. Therefore, the value of an equity share at Rs. 820 ( i.e. , Rs. 819.50 rounded off) seems to us quite fair and reasonable. The valuation has to relate back to September 30, 1988 (the date on which the payment at Rs. 600 per share to the petitioners was recorded, subject to further valuation). Therefore, it is just and equitable that petitioners should be paid interest on this balance sum receivable by them. We direct the payment of interest on the balance sum payable by the contesting respondents to the petitioners at the rate of 10 per cent, per annum with effect from October 1, 1988, till the date of payment. The petitioners have offered to purchase the shares at Rs. 1,000 per share. This may be for reasons best known to them ; probably they have been nourishing great hopes of larger profits during future years or the offer was made, to bring a psychological pressure on the valuers knowing fully well that the contesting respondents, would not, under any circumstances, give up the business at Commercial Street, since the business was initially started by their father, B. L. Rakhra, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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