1983 (6) TMI 157 - HC - Companies Law

Summary

Issues Involved:
1. Appointment and role of the valuer.
2. Valuation methodology and fairness.
3. Disclosure of documents and procedural fairness.
4. Judicial review of the valuer's report.

Detailed Analysis:

1. Appointment and Role of the Valuer:
The applicant moved an application under sections 397 and 398 of the Companies Act, 1956, against the company and two of its directors, seeking the appointment of a special officer or an administrator and an investigation into the dealings of the company. An order dated February 1, 1982, stipulated that the petitioner would sell his shares to the respondents, and a valuer, Shri A. Basu, was appointed to ascertain the fair value of the shares as of December 8, 1980. The court retained seisin of the matter, indicating that the valuation report was intended to serve as evidence rather than a binding arbitration award.

2. Valuation Methodology and Fairness:
The valuer determined the fair market value of one fully paid share of the company at Rs. 283.55 and the aggregate value of the petitioner's 2,000 shares at Rs. 5,67,100. The petitioner challenged this valuation, arguing that it was ex facie erroneous and grossly undervalued the shares. The petitioner contended that the company's assets, including plant and machinery and a flat, were significantly undervalued. For instance, the plant and machinery, which earned hire charges over Rs. 4 lakhs annually, were argued to be worth more than Rs. 65 lakhs when valued at 16 times the rental charges. The flat's reasonable rent was stated to be Rs. 8 per sq. ft. per month, leading to a valuation of Rs. 34 lakhs, though the company admitted a market rent of Rs. 4 per sq. ft.

3. Disclosure of Documents and Procedural Fairness:
The petitioner alleged that the valuer did not provide copies of the documents submitted by the company, which were considered in the valuation process. The petitioner was not given an opportunity to inspect these documents, and the valuer appointed an engineer-valuer without informing the parties. The valuer's failure to disclose the engineer's report further compounded the procedural unfairness. The court found that the hearing by the valuer was ineffective and vitiated as the parties were unaware of the material evidence on which the valuer based his valuation.

4. Judicial Review of the Valuer's Report:
The court examined whether the valuer acted as an arbitrator or quasi-arbitrator and concluded that the valuer was not appointed by consent to act as an arbitrator. The court retained jurisdiction over the matter, and the valuer's report was intended as evidence rather than a final, binding decision. The court held that the valuer's report could be reviewed and set aside if it was found to be procedurally flawed or based on erroneous principles. The court cited several precedents, including Hopper, In re [1876] 2 QB 367, where valuations made in a judicial capacity were subject to review if they contained errors or were based on incorrect principles.

Conclusion:
The court set aside the valuer's report due to procedural irregularities and the failure to provide the petitioner with a fair hearing. A new valuer, Mr. K. P. Bhargava, was appointed to revalue the shares and submit a detailed report, including the break-up of the company's assets and the basic calculations. The new valuer was directed to disclose all evidence and material to the parties and allow them to be heard before finalizing the report. The initial remuneration for the new valuer was fixed at Rs. 7,000, to be paid by the petitioner. The report would be subject to confirmation by the court, and other orders prayed for would be considered before the final disposal of the application.