TMI Blog1993 (2) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... t is between Narender Nath on the one side and the other three brothers and their mother on the other side (hereinafter, Narender Nath will be referred to as the NN group and Mohinder Nath, his brothers and mother will be referred to as the MN group ). The main income of the company was admittedly commission from the agency business of Thyssen Stahl Union of Germany (hereinafter referred to as TSU ). I have used the word admittedly in view of the averments made by the NN group in the winding up petition filed by it which was registered as C.P. No. 28 of 1988. All the brothers were carrying on the business of Kidarsons together till the stage was reached when Narender Nath wanted to separate. It appears that Narender Nath succeeded in his efforts to outsmart his other brothers and to get the TSU agency exclusively to himself. 2. Thyssen Stahl Union of Germany served a notice on Kidarsons terminating their agency with effect from June 30, 1988. From July 1, 1988, the agency was given by TSU to Hansa Industries Pvt. Ltd., a company exclusively belonging to Narender Nath. This was not the end of the matter. The NN group filed a petition for winding up of Kidarsons Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Rajinder Nath Nanda groups, will give their acceptance and for this purpose this agreement will be filed in Company Petition No. 28 of 1988, as well and no further proceedings will be taken in the said Company Petition No. 28 of 1988. 5. The plaintiff company, Kidarsons Industries Private Limited, Shri Mahinder Nath Nanda, Shri Virender Nath Nanda and Shri Rajinder Nath Nanda agree on behalf of themselves and their respective groups as well as Shri Narender Nath Nanda and his group agree that the defendants in the suit will retain the agency of Thyssen Stahl Union and the company, Kidarsons Industries (P) Ltd., its directors and shareholders will have no concern with the same after June 30, 1988. 6. That Shri P. N. Khanna, a retired judge is at present acting as a mediator. He will act as a Commissioner, to separate 30.14 per cent of the assets of the company to be given to Shri Narender Nath Nanda group as set out hereinbefore. 7. The fee of the Commissioner will be paid by the company and in the first instance shall be ₹ 30,000. The court may, however, increase the same depending upon the work involved. 8. All payments of arrears of salary/commission and divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, order or judgment passed under this compromise will be made by any judge on the original side of the High Court of Delhi. 21. The parties are agreed that personal papers of Shri Narender Nath Nanda will be taken away by him upon the Commissioner handing the same over to him. All the original documents of title or otherwise, which belong to or relate to the assets of the company, shall be returned by Shri Narender Nath Nanda to the company. In the first instance, they shall be kept with the Commissioner who will, after settlement regarding share transfer, hand them over to the company. 4. In pursuance of the said compromise, the matter went into the hands of Justice P. N. Khanna, a retired judge of this court, in terms of para 6 of the compromise. Justice Khanna filed his report dated April 12, 1990, in this court concluding that he was unable to have the matter finalised in terms of the settlement. Justice Khanna had requested both the parties to give the valuation of immovable properties belonging to the company. As noticed in his report, the MN group gave him the assessment made in this behalf by Ray and Ray, chartered accountants while the NN group did not respond t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of valuation. V. Shankar Aiyar and Company who are on the said panel are appointed as chartered accountants for the purposes of valuation of the assets of the company. They will also give valuation of the shares according to the valuation of the assets and liabilities of the company. This valuation of the shares is needed to determine the value of 30.14 per cent of the assets of the company. The chartered accountant will determine the value of the shares keeping in view the provisions of clauses 2 and 14 of the agreement between the parties. The report of the chartered accountant shall be given in terms of orders dated June 9, 1988, and August 9, 1990. The report to be given by the chartered accountant within two months. The chartered accountant will intimate the parties of their fees, which amount will be paid by the parties in equal shares. 7. V. Sankar Aiyar and Co. who were appointed as the chartered accountants to determine the value of the shares, filed their report dated November 12, 1990, in this court. It is the said report which is the subject-matter of challenge at present. Only the NN group filed objections against the report of the valuers on May 13, 1991 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, in order to put an end to litigation, they accept the valuation as fixed by the expert valuers. 12. The following objections have only been pressed by the NN group against the report of the valuers V. Sankar Aiyar and Co. : 1. Shares of the company were not required to be valued. Only the assets had to be valued and 30.14 per cent thereof had to be given to the NN group. 2. The valuers were acting as a local Commissioner. The parties should have been given notice of the proceedings before them and should have been given opportunity to place relevant material before them along with opportunity of hearing. 3. Valuation of the immovable properties of the company was not done independently. 4. The function of valuation of shares, assuming that the shares were to be valued, is a judicial function and should not have been delegated by the court to a local commissioner. 5. The valuers did not take into account the value of goodwill and tenancy rights of the tenanted properties while assessing total value of the assets of the company. 6. The value of the Udyog Nagar plot was taken at a very low figure. 7. The method of share valuation followed by the valuers an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, specially now when he finds that the report of the valuers has gone against him. The objection is misconceived and is rejected. 2. Valuer was acting as a local Commissioner and ought to have given notice and opportunity to the parties. Great emphasis had been placed on this objection. The thrust of the argument is that the appointment of the valuers has to be taken to be under Order XXVI of the Code of Civil Procedure, and, Therefore, as a local Commissioner the valuers were obliged to give notice to the parties and give opportunity to them to place material on record and for oral hearing. In support of this argument, learned counsel for the objector has relied on A. Venkata Seshamma v. A. Appa Rao,: AIR1925Mad125 , Valliappa v. Maruda Pandian, AIR1934Mad548 , Sm. Mandera v. Sachindra Chandra, AIR1962Pat211 , Sardar Singh v. Chandan [1982] 84 PLR 473, Maroli Achuthan v. Kunhipathumma, AIR1968Ker28 and S. L. Kapoor v. Jagmohan, [1981]1SCR746 . Reliance has been particularly placed on the provisions of Order XXVI, rule 18 of the Code of Civil Procedure. Before dealing with the objection, I must refer to the order of appointment of the valuers. The order dated Septembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable directions to the valuers. Secondly, at the time of passing of the order by court, if any opportunity to appear before the valuers or for making representations before them is desired, normally the parties ensure that such measures are recorded in the order itself. No such opportunity was sought. It is also worth mentioning that actually Justice Khanna, when the matter was pending before him gave opportunity to the parties for inspection of records as also for suggesting valuation of the properties. While the MN group offered inspection as well as gave the report of Ray and Ray, chartered accountants, regarding valuation of shares and properties, the NN group neither showed any interest in inspection of records nor gave any counter suggestions regarding valuation of properties. Even during the course of protracted hearing in this court, except criticism of the report, there was no concrete suggestion forthcoming from the side of the objector as to what should be the value of the properties. The objector appears to have been sitting on the fence. He did not want to commit to any position so that he could raise whatever arguments/objections would suit him at the appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the facts stated above the objection has no substance. The same is hereby rejected. 4. The share valuation is a judicial function which could not be delegated : This objection is not open in view of the orders dated August 9, 1990, and September 4, 1990. On August 9, 1990, the court specifically observed that valuation of shares should be done by professional valuers. This order was never challenged, rather it was acted upon. The same has become final and the matter cannot be permitted to be reopened. I do not agree that share valuation is a purely judicial function and could not be entrusted to an expert. Even otherwise, I do not find any substance in this objection. The chartered accountant is the most suitable person for the job. He is supposed to be conversant with sound principles of accountancy coupled with judicial pronouncements, if any, in this connection. He is an expert in the field. Very often the courts have relied upon the expertise of chartered accountants in such matters. The argument that the function entrusted to an expert was a judicial function and as such could not be delegated is totally misconceived. In modern times we have a complex financial st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport that the value of tenancy rights need not be included in the value of assets of the company. An additional factor in this connection is the order of the court dated August 9, 1990, wherein it is stated that immovable properties owned by the company had alone to be considered for purposes of valuation of shares. Tenancy premises are not owned by the company. The tenancy rights are also not reflected in the balance-sheets of the company. Normally there are restrictions on transfer of tenancy rights. Therefore, the tenancy rights were rightly not taken into consideration by the valuers while evaluating the assets of the company. 6. Value of the Udyog Nagar plot taken at a very low figure. The property has been valued at ₹ 40,000. There may be something to say in favor of the objector that the value of this property is more. However, the objector has not suggested any value. Even during the course of hearing not even an approximate figure has been suggested as the value of the property. It appears that this is not going to have any significant impact on the value of shares and that is why no figure as such was suggested. I do not consider it to be just or fair to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial basis. But if the profits are not reflected in the dividends which are declared and a low earning yield is shown by the company, which is unrealistic on a consideration of the financial affairs disclosed for the relevant 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, fix the valuation. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of the profits. It follows from the above that in the yield method the profits made by a company are taken into consideration for arriving at the value of the shares whereas the break-up value method is adopted when the company is ripe for winding up. The idea behind the break up value method is to find out what would be realised by selling the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the stock-in-trade has been taken into consideration as against the book value which was much lower. Therefore, the valuers have taken into consideration the liability on account of capital gains tax (notional). The valuers have also taken into consideration the cost of realisation of market value, i.e., expenses in the event of sale or transfer of assets. These items are inherent in market value and cannot be ignored whenever one talks of market value of assets for purpose of valuation of shares of a company. The main objection on behalf of the objector in this connection is regarding deduction on account of capital gains tax. According to him there is no sale or purchase of any fixed asset or immovable properties of the company. Therefore, the question of payment of capital gains tax does not arise. According to learned counsel no deduction ought to have been made on this account from the market value of the properties. It is true that there is no actual sale or transfer of the immovable assets of the company involved, yet the question remains when the market value of the fixed assets is taken into consideration as against their book value, whether the concept of capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as payable. The market value of such a property cannot be considered de hors these charges. The use of the words market value would be understood to mean the price plus or minus, as the case may be, such charges. Thus in the context of market value of the properties under consideration, liabilities on account of capital gains tax and cost of realisation of the market value have to be provided for. The market value will be minus such liabilities. The value of assets of the company has been raised from book value to market value. When the objector wants to have the benefit of market value of assets being taken into consideration, he must provide for the basic elements of market value, i.e., the elements which form part of the market value. In A Study on Share Valuation a booklet published by the Institute of Chartered Accountants of India while dealing with the subject of valuation of assets, it has been said : In these times of changing price levels, it is unrealistic to take book values of different assets of a company - particularly fixed assets - if the values have changed materially since the date of their acquisition. In such cases, Therefore, realisable value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teral implementation of the said clause would mean that the settlement cannot be effectuated at all, the court will have to find out if within the frame work of the settlement, it is possible to implement the same. Clause 20 of the settlement gives such powers to the court because under the said clause the implementation and execution of the settlement and any orders or decisions etc. therein has to be done by the court. Clause 14 has to be considered along with other relevant clauses so that the settlement can be implemented as far as possible maintaining its spirit and content. Clause 2 of the settlement is another relevant clause in this behalf. Under clause 2 the price of the shares of the NN group has to be paid in specie by the company by transferring to it 30.14 per cent of the assets of the company. Marginal amount not exceeding rupees five lakhs may be paid by the company to Narender Nath and/or his nominees as the case may be, in cash, if found necessary. Similarly, Narender Nath may make similar compensatory equalisation payment to the company. 13. It is true that the valuer has not separately assessed the value of portion of the Golf Links property occupied by Narend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate owners of separate portions of the same property. 15. Thirdly, there is so much acrimony between the parties, that as per the case of both the parties, it is practically impossible for them to live together in the same house. Justice Khanna has adverted to this aspect in his report and has observed in para. 15 thereof that it is impossible for all the members of the family to live in one house. He has also observed that it is not possible nor desirable that all the family members should live in the same house. There have been various incidents when violence has been used and bad and undesirable incidents are reported to be taking place daily. In the same para, Justice Khanna has noted that he had put a proposal to the parties if partition of the house could be possible vertically. The proposal was rejected by both the parties. Therefore, the only possibility regarding the Golf Links house is that it should go to one group or the other. In this connection, the stand of Narender Nath is totally untenable. He accepts that relations between the two groups are so strained that it is impossible to live in the same house. The Golf Links house is so constructed that Narender N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of price of the value of the shares of the NN group in specie. This can be done by allocating and transferring any property of the company which may be nearest in terms of value of the shares of the NN group with a sum of ₹ 5 lakhs plus or minus as an equalisation amount. Clause 2, Therefore, leaves it to the court to allocate any property of the company which is near to the value of shares of the NN groups to the said group. Clause 2 in fact suggests that any property may ultimately fall to the NN groups. Mention of the equalisation amount in the said clause supports this view. In view of this provision in clause 2 of the settlement and in view of the difficulties expressed above in allocation of the Golf Links property to the NN group. Clause 14 of the settlement cannot be read in the manner suggested by the objector. 18. On the recording of the settlement, Narender Nath ceased to be a director of the company. The Golf Links property is owned by the company and, Therefore, a question could have arisen about the right of Narender Nath to continue to occupy portions in the said property which were under his occupation. It may be that in order to clothe Narender Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The market value of the defense Colony, New Delhi property has been taken by the valuers as ₹ 36,33,200. This property is thus within the range fixed under clause 2 of the settlement. On transfer of the defense Colony property to Shri Narender Nath or his nominees as per clause 2 of the settlement, the company will have to pay a sum of ₹ 4,45,212 which is the difference between the value of shares belonging to the NN group and the market value of the defense Colony property. This difference is within the range of ₹ 5 lakhs prescribed in clause 2 of the settlement. The defense Colony property, I gather from Justice Khanna's report, is the house in which the family was previously residing and which has been lying vacant. On the implementation of this compromise the said property will exclusively belong to Narender Nath or his nominees as the case may be. He will hopefully live in peace in the said house which will be exclusively with him in its entirety. The other three brothers and the mother will hopefully live peacefully in the Golf Links house to the exclusion of Narender Nath. This will save both the parties from their daily quarrels and bickering. Both the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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