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2021 (3) TMI 264 - AT - Insolvency and BankruptcyReduction of share capital - minority shareholders adequately compensated to their legitimate expectation with regard to valuation of shares - method of valuation and assumptions carried out by the Valuers - HELD THAT - From the NAV method it is amply clear that the Company is going concern with positive networth. Learned NCLT has taken into consideration the valuation report which was made in the year 2017 which was submitted on 25.10.2017 by PWC and on 26.10.2017 by Haribhakti. Learned NCLT, Mumbai passed its order on 27.10.2020, almost three years after the submission of valuation report. In our view the valuation reports as made in 2017 are not as on date, when the learned NCLT passed its order on 27.10.2020 - We have not gone into the veracity of the methodology adopted by the Valuers. Even though the learned NCLT framed an issue with regard to whether the public shareholders constituting 3.59 % adequately compensated or not. However, the learned NCLT, Mumbai failed to consider the vital point that the valuation was done in the year 2017 and by the time learned NCLT, Mumbai passed the order, three years have passed. It is an admitted fact that the Company is a going concern and the learned NCLT, Mumbai ought to have considered the value of the shares for the current year. Method of valuation and assumptions carried out by the Valuers - HELD THAT - It is made clear that we have not gone into the merits/demerits of methodology adopted by the Auditors. We are concerned only the economic interest of the public shareholders who by virtue of cancellation and extinguishing the shares whether they get their legitimate expectation of the fair value and whether they have been paid the fair value considering the performance of the Company - The objection of the Appellants that the Company adopted a selective method for the reduction of the share capital is concerned, we are not in the agreement with the submission of the Appellants. There is no discrimination adopted by the Company in the present case. It is also an admitted fact that the shares of the Company were de-listed from the BSE and the shares of the public shareholders cannot be tradable. It is crystal clear that the Profit After Tax (PAT) for the Financial Year 2016-17 has been shown as ₹ 288.33 lakhs whereas for the Financial Year 2018-19 it shows ₹ 503.52 lakhs. The earning per shares (EPS) for the Financial Year 2016-17 has been shown as 87.52 lakhs whereas for the Financial year 2018-19 it shows as ₹ 158.24 lakhs. The net worth of the Company for the Financial Year 2016-17 is shown as ₹ 2,52,307 lakhs whereas for the Financial Year 2018-19 it is shown ₹ 3,26,645 lakhs. In a broad look at the figures, it is amply clear that the Company had made its growth substantially and also made good profits - the public shareholders/non-promotors shareholders have not been adequately compensated for the reason that the valuation done in the year 2017 had been taken into consideration even after three years it was passed. We are of the view that there is a drastic change in the growth of the Company. The shareholders in a Company has every right to sell their shares as and when they get good price meaning thereby the shareholders have every right to trade shares as and when they get good price. However, in the present case the Company passed its resolution for reduction of the share capital to an extent of 11,81,036 equity shares constituting 3.59 %. Since in the EGM, the majority shareholders approved the reduction of share capital, public shareholders/non-promotor shareholders have no option except to surrender their shares to the Company by extinguishing their shares and exit from the Company whatever price is fixed by the Company. Therefore, the shareholders in the present case expects justification from the Courts/Tribunals. Even though the public shareholders/non promotor shareholders had objected to the reduction of share capital in the EGH but the majority shareholders i.e. promotor group having majority, passed the resolution in favour of reduction of share capital. The Company is hereby directed to revalue the shares by a registered/independent valuers to value the shares of the Company and the Company shall pay the fair price arrived at by the valuer based on the latest audited accounts of the Company - The Company is directed to place all the audited accounts of the Company as required by the valuer to value the shares. The reduction of share capital as allowed is upheld - appeal allowed.
Issues Involved:
1. Validity of share valuation done in 2017 for the purpose of share capital reduction in 2020. 2. Obligation of the company to pay Dividend Distribution Tax (DDT) after its abolition in 2020. Issue-Wise Detailed Analysis: 1. Validity of Share Valuation Done in 2017 for the Purpose of Share Capital Reduction in 2020: The appellants argued that the share valuation done in 2017 was outdated by 2020, rendering the valuation of ?2445 per share redundant. They highlighted significant financial growth of the company from 2017 to 2020, which was not reflected in the 2017 valuation. The appellants provided comparative financial data showing increased profits, earnings per share, and net worth from 2016-17 to 2018-19. The respondents countered that the delay in NCLT's approval was due to objections raised by various shareholders, not the company's fault. They argued that the valuation was fair and conducted by independent valuers, Price Waterhouse & Co. LLP and Haribhakti & Co. LLP, with fairness opinion from Avendus Capital Private Limited. The NCLAT noted that the valuation reports were based on 2017 data, and the company's financial position had significantly improved by 2020. The tribunal emphasized that the valuation should reflect the current financial status to ensure fair compensation to the public shareholders. It was held that the NCLT failed to consider the updated financial position of the company, which was crucial for determining the fair value of shares. 2. Obligation of the Company to Pay Dividend Distribution Tax (DDT) After Its Abolition in 2020: The appellants contended that the company initially committed to paying DDT as per the 2017 explanatory statement for the EGM. However, due to the amendment in the Income Tax Act, 1961, effective from 01.04.2020, the obligation to pay DDT shifted to shareholders, reducing their net payout. The respondents argued that the company's commitment to pay DDT was based on the legal obligation in 2017, which changed with the amendment. They asserted that the company could not be held liable for the tax burden on shareholders due to the change in law. The NCLAT agreed with the respondents, stating that the company's obligation to pay DDT ceased with the amendment. The tribunal held that unless the amendment was challenged and declared void, the company was not liable to pay DDT. However, it criticized the company for not considering the updated financial scenario and directed a revaluation of shares based on the latest financial statements. Conclusion: The NCLAT directed the company to revalue the shares by an independent valuer based on the latest audited accounts and pay the higher value arrived at. The reduction of share capital was upheld, but the tribunal emphasized the need for a fair and updated valuation to protect the economic interests of public shareholders. The tribunal did not interfere with the issue of DDT due to the amendment in the Income Tax Act. The appeal was allowed in these terms, and no orders as to costs were made.
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