2017 (6) TMI 1319 - Tri - Companies Law

Oppression and mismanagement - valuation of shares - validity of valuer's report - Can the valuer's report be contested and be set aside on the allegations put forth by the Petitioner? - HELD THAT - The valuation of the shares was to take place on the basis of paid-up capital as on 31st March, 2010, and it was to take into consideration bad debts, doubtful advances, expenses and customer claims provided for in the books of R1 Company during 2010-11 which pertained to earlier years including unrecovered debtors above 730 days. Thereafter the Petitioner objected to Clause 2.3 of Grant Thornton's engagement letter and filed C.A. No. 511 of 2014 praying for a direction on Grant Thornton to conduct the valuation of the shares of the Company in terms of prescribed auditing standards and to independently investigate and verify the information provided by the Company before arriving at the valuation - However, no direction whatsoever was passed on the valuer to independently verify the information provided by the Company as had been prayed for by the Petitioner. Eventually Grant Thornton submitted its final valuation report on 8th April, 2015 which was subsequently challenged by the Petitioner by filing C.A. No. 923/2015, which is the present company application, where the principal contention of the Petitioner was that the valuer was required to value the shares of the company as on 31st March, 2010 and that it had taken into consideration figures beyond 31st March, 2010 which was allegedly not permitted and that the valuer had taken the actual figures from the audited balance sheets instead of the projected figures as is required under the Discounted Cash Flows method. There was no specific direction by the Company Law Board at any point of time regarding the use of a specific auditing standard to be employed by the valuer during valuation of the shares of R1 Company. The valuer's final valuation report could be challenged on the grounds of patent illegality, fraud, collusion or partiality, which has not been proven in the present case. The valuer's report under such circumstances cannot be contested and be set aside if either of the parties is not satisfied with the valuation. There is no reason to set aside the valuation report as has been submitted by the valuer - application dismissed.

Summary

Issues Involved:
1. Allegations of oppression and mismanagement.
2. Fair valuation of shares.
3. Methodology and standards used in the valuation report.
4. Challenge to the valuer's report based on alleged irregularities.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioner, a former officer of the Indian Administrative Services, contended that R2 and R3 committed acts of oppression. He alleged that R2 did not invest equity in R1 as initially agreed, instead providing subordinate debt at high interest rates, which prevented R1 from declaring dividends. The petitioner also claimed that R2 and R3 forced R1 to seek financing from banks and created a charge over its assets without his consultation, replacing a lower-interest PNB loan with a higher-interest shareholder loan from R2. Furthermore, the petitioner alleged that his shares were unlawfully diluted during a board meeting and an AGM held on 7th September 2010.

2. Fair Valuation of Shares:
During the hearing, both parties agreed that the respondent would buy out the petitioner's shares at a fair valuation. Grant Thornton was appointed as the valuer to conduct this valuation based on the paid-up capital as of 31st March 2010, considering bad debts, doubtful advances, expenses, and customer claims. The petitioner objected to the terms of the engagement letter, particularly Clause 2.3, which did not include independent verification of the data provided by the company. Despite these objections, the Company Law Board directed the valuer to proceed with the accepted accounting standards.

3. Methodology and Standards Used in the Valuation Report:
The petitioner argued that the valuer's report was flawed as it relied on actual figures from audited balance sheets instead of projected figures, which is required under the Discounted Cash Flows (DCF) method. The petitioner contended that the valuer used management inputs from majority shareholders and did not consider the interests of minority shareholders. He suggested that a fair valuation should use multiple methodologies, assigning weightage to each, and should not use hindsight for backdated valuations. The petitioner emphasized that the valuer's report was biased and colluded with the respondents, leading to an undervaluation of his shares.

4. Challenge to the Valuer's Report Based on Alleged Irregularities:
The respondent contended that the valuer's report adhered to the directions of the Company Law Board and followed acceptable worldwide practices. They argued that the valuer was not required to conduct due diligence on the data provided and that the DCF method was appropriate for a "going concern." The respondent also noted that the valuer used both DCF and Net Asset Value methods, resulting in negative values under both. The petitioner, in his rejoinder, reiterated his objections, claiming that the valuer's report was inconsistent and prejudiced against him.

Judgment:
The tribunal referred to case laws, including G.L. Sultania vs. SEBI and Sumana Bhasin vs. Eastern Connexion, emphasizing that courts should not interfere with expert valuations unless there is evidence of fraud, collusion, or patent illegality. The tribunal found that there were no specific directions from the Company Law Board regarding the auditing standards to be used by the valuer and that the valuer's report could not be contested on the grounds of methodology unless there was proof of fraud, collusion, or partiality, which was not present in this case.

Order:
The Company Application 923 of 2015 in C.P. No. 259 of 2011 was dismissed. The valuation report submitted by the valuer on 8th April 2015 was confirmed, and the petitioner was directed to accept the valuation of the shares as indicated in the final report. The case was listed for a final order on 28/07/2017, with no order as to costs.