1976 (4) TMI 134 - HC - Companies Law

Summary

Issues Involved:
1. Sanction of the scheme of amalgamation under sections 391 and 394 of the Companies Act, 1956.
2. Objection by the official liquidator regarding the exchange ratio and undervaluation of assets.
3. Evaluation of the conduct of the directors of the transferor-company, Karamchand Premchand Pvt. Ltd.
4. Determination of the appropriate method for valuation of shares.

Issue-wise Detailed Analysis:

1. Sanction of the Scheme of Amalgamation:
The court was approached to sanction a scheme of amalgamation between Karamchand Premchand Private Limited and other transferor-companies with Shahibag Entrepreneurs Private Limited. The amalgamation aimed to achieve economic and efficient functioning by consolidating multiple investment companies into one, thereby reducing administrative, accounting, secretarial, and personnel costs. The scheme was unanimously approved by the board of directors of all involved companies.

2. Objection by the Official Liquidator:
The official liquidator raised objections regarding the exchange ratio prescribed in the scheme of amalgamation. It was argued that the exchange ratio was unreal and based on an undervaluation of the assets of Karamchand Premchand Pvt. Ltd. by approximately Rs. 10,49,34,838.34. The official liquidator contended that the affairs of the transferor-company were conducted in a prejudicial manner, affecting the shareholders' interests.

3. Evaluation of the Conduct of the Directors:
The court examined whether the directors of Karamchand Premchand Pvt. Ltd. conducted the company's affairs in a manner prejudicial to the shareholders or the public interest. It was noted that the valuation method adopted was recognized under the Wealth-tax Act and was not arbitrary or unreasonable. The court found no evidence to support the official liquidator's claim of prejudicial conduct by the directors.

4. Determination of the Appropriate Method for Valuation of Shares:
The court discussed various methods for share valuation, including the maintainable profit basis method and the break-up value method. The maintainable profit basis method, used by Anil Shah, was deemed appropriate as it is recognized for valuing shares, especially when the company is not on the verge of winding-up. The break-up value method is generally used in exceptional circumstances or when a company is ripe for liquidation. The court referred to the principles set out in the book "Valuation of Shares" by Adamson and the Supreme Court's decision in Commissioner of Wealth-tax v. Mahadeo Jalan, which emphasized the yield method as the generally applicable method for share valuation.

Conclusion:
The court concluded that the directors of Karamchand Premchand Pvt. Ltd. did not conduct the company's affairs in a prejudicial manner. The valuation method adopted was appropriate, and the exchange ratio proposed in the scheme of amalgamation was reasonable. The official liquidator's objections were not substantiated, and the scheme of amalgamation was sanctioned by the court.