9911796707
TMI Blog1992 (8) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... eting notices dated March 19, 1988, May 14, 1988 and July 26, 1988 on March 28, 1988, May 25, 1988, and March 6, 1988, or any other date and even if any such meeting was held, that the same is non est in the eye of law ; (c)Declaring that petitioners continue to be directors of the first respondent-company ; (d)Declaring that the purported co-option of the fourth respondent as a director of the first respondent is illegal and non est in the eye of law ; (e)Declaring the fifth respondent not to take on record Form No. 32 filed by respondent No. 2 on August 19, 1988, purporting to notify the fifth respondent that petitioners Nos. 1 and 2 had vacated their office as directors of the first respondent-company pursuant to section 283(1)(g) of the Companies Act and that the fourth respondent had been co-opted as a director of the first respondent-company ; (f)Issuing an order of permanent injunction restraining respondents Nos. 2 and 3 from interfering with the rights of the petitioner to act as directors of the first respondent-company ; (g)Issuing an order of permanent injunction against the fourth respondent from acting as director of the first respondent-company. (h)Directing re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd after the death of C.L., Rakhra, the second respondent was inducted as a partner in his place. Similarly, on the demise of B.L. Rakhra, the second petitioner was inducted as a partner. The firm has been dealing in sports goods and is located in Commercial Street, Bangalore. For a few number of years there were four partners, that is to say, the two petitioners and respondents Nos. 2 and 3. They decided to convert the firm into a private limited company. Consequently, the company in question was incorporated on December 2, 1983. The main objects to be pursued by the company on its incorporation, as stated in the memorandum of association, includes : "To take over as a going concern, the partnership firm 'Rakhra Sports Company' situated at No. 6, Commercial Street, Bangalore 560 001, as at the close of the date of November 30, 1983, from the vendors, with all its assets and liabilities at book value, as reflected in its balance-sheet drawn as on that date, and to pay the vendors thereof by allotment of equity shares treated as fully paid up in the company". The erstwhile partners became the directors of the company. The articles of association states that the members of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the parties in the matter of business of the first respondent-company. Certain instances are given in the company petition in this regard. It is unnecessary to detail the averments in the company petition in view of certain events which happened in the course of this litigation. The second respondent as the chairman of the company had a casting vote and this mattered much when the two groups fell apart. The petitioners, however, assert that there was a complete deadlock in the management of the company and the business of the company could not be carried on since the quorum for a valid board meeting was absent "Mutual trust" also has been lost. The petitioners also state that the winding up of the company would unfairly prejudice the rights of the parties though respondents Nos. 2 and 3 are conducting the affairs of the company in a manner prejudicial to the interests of the company. The exclusion of the petitioners from the management and control of the company and induction of the fourth respondent as a director, who is a total stranger to the family, are all instances warranting invocation of the provisions of section 398 of the Act. The petitioners also, alternatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or fixed by the company's auditor. The value so fixed shall be deemed to be the fair value. A member who wants to transfer his/her shares by way of sale to any person who is not a member of the company can do so only when the existing members are not willing to purchase the same. On receipt of intimation from a member of his/her intended transfer, the board in turn shall ascertain from the existing members whether any of them is interested in the purchase of those shares. The board shall, for this purpose, offer the shares for sale to the members of the transferor's immediate family other than the transferor-member, in an equitable manner and in proportion to their existing shareholdings, by giving a month's time for the members to accept the offer in full or in part. If none of them or some only are interested in the offer and all or some of the shares remain unaccepted, the board shall forthwith intimate that fact to the transferor-member who can afterwards transfer these unaccepted shares to any person in the immediate family group of other members representing the 'B' family". Messrs. Ramaswamy and Company admittedly is the auditor of the company. It seems that the company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r time till September 30, 1988, to make this payment. As a preliminary step to effect a settlement between the parties it is ordered that the second respondent's group shall pay the petitioners tentatively a sum of Rs. 600 per share and that amount shall be received by the petitioners in part satisfaction of their claim in this company petition. After such payment, the valuation of the shares shall be made by a reputed firm of auditors acceptable to both the parties. The choice of the firm is left to the parties and they shall make appropriate submissions in this respect on the next date of hearing. However, it is contended by learned counsel for the respondents that this payment should be without reference to the claim of the petitioner to the leasehold right of the premises that the company had obtained in Cotton Complex, situated on Residency Road, Bangalore. Whether this condition should be imposed on the petitioner will be considered by this court in exercise of its powers under the provisions of section 402 of the Companies Act. Payment of Rs. 600 per share would be subject to the order of this court on this aspect of the case at the time of recording the final compromise be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,72,115 39,101 1985-86 26,89,035 4,52,978 4,22,972 30,004 1986-87 29,69,425 4,75,400 4,97,186 Loss 21,786 1987-88 34,49,798 7,75,389 5,04,152 2,71,237 Total for 86-87 and 87-88 64,19,223 12.50,789 10,01,338 2,49,451" The increased turnover during the year 1987-88 was found to be due to the large orders received in the previous year amounting to Rs. 3,69,768 and one-time orders for Rs. 61,248 with a higher margin of profit. Therefore, the auditors say : "Hence it may not be correct to adopt the turnover and gross profit of 1987-88 as a representative year. Instead it will be fair to take the average of the turnover and gross profit for the two years, .1986-87 and 1987-88". The auditors point out that all the directors are whole-time directors in respect of remuneration by way of salary, sitting fees and medical expenses. Therefore, for purpose of taking the profit for valuation purposes, one-third of the remuneration paid to the directors was excluded again which came to Rs. 44,213. Thereafter, the report reads thus : "(c) The profit of the company adopted for valuation of shares is as follows Rs. Turnover (average for 1986-87 and 1987-88 as above) 6,25,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,669 is deducted and then income-tax of 63 per cent, is further deducted. The other auditor, Messrs. Ramadhyani and Company, gave their report on November 16, 1988. After discussing the various methodologies, they proceeded to give the valuation, first on maintainable profits basis. They observed that the profitability trend during 1988-89 is the same as that prevailing during the previous year and that the high incidence of profit during 1987-88 was due to execution of large one-time orders which are not likely to be repeated in future years. They also noticed that in case the lease at Cotton Complex is terminated there will be a reduction in the overheads by about Rs. 60,000. The auditors thereafter proceeded to give weightage of three to the profits of the year 1987-88, while for the previous two years after giving the average profits weightage of one was given. In this process weightage average was arrived at as Rs. 2,07,372. A sum of Rs. 50,000 was added out of the total remuneration payable to the directors. This Rs. 50,000 was added to arrive at the maintainable profits. The report thereafter states thus : "4.11. In the above circumstances, the maintainable profits ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B.K. Ramadhyani and Company. The petition came up before the learned company judge on July 7, 1989. The learned judge opined that the contesting parties have not arrived at any settlement and that this court is not bound in law or otherwise to take up the task of the valuer and fix it ; "Therefore, that approach should be given up in so far as it relates to valuation. The orders made on September 16, 1988, and September 30, 1988, are recalled. The payment made subject to the stipulation contained in the order of September 30, 1988, shall be returned to the respondent, i.e, a sum of Rs. 7,50,000". The company petition was ordered to be brought up for enquiry thereafter. The above order was challenged in appeal in O.S.A. No. 15 of 1989. The Division Bench reversed the order of the learned company judge dated July 7, 1989. The judgment of the Appellate Bench is dated August 16, 1989. The relevant observations of the Appellate Bench are as follows : "On giving our thoughtful consideration to the entire matter, we find that those two orders, passed in the presence of the parties and with their consent, could not be recalled just because the parties were not willing to purchase the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts Nos. 2 and 3. To my mind, the methods adopted by the valuers to arrive at the valuation of the shares of the company are not totally wrong or incorrect. In fact, certain required factors have not been taken into consideration. The two valuers ought to have, while adopting the methods of valuation of shares, viz., the profitability method and the asset method, viewed from the angle, the company was under 'notional liquidation" and the purchaser-respondent would get 100 per cent, control of the company which is a 'valuable commodity'. Had the valuers taken into consideration all the items including the factor that one of the groups of purchasers get cent, per cent, controlling interest in the company, they would have arrived at quite a different value of the share which would be a somewhat fair value. It is true in a matter like this it is difficult to arrive at a mathematical precision in valuation of shares. Since the two valuers have taken both the profitability and asset methods (break-up method) and arrived at two different figures as to the valuation of the share which are not accepted by either party, except taking such figures from the valuation report they have claimed R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a "quasi-partnership "; though initially started as a proprietary concern, the business was continued for a long period by the partners (who were direct brothers and the members of their families); this firm was converted into a private limited company subsequently. The articles of association of the company restrict the transfer of shares, to prevent the shares from going outside the family members ; the shareholders are grouped as "A" and "B" to represent the respective branches of the two brothers. Having regard to the decision of the Court of Appeal in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 and of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360, a company of the kind before us (the first respondent) could be called a quasi-partnership and, therefore, when a set of shareholders seek to go out of the company or are to be sent out of the company, the court's power to apply the just and equitable consideration (under sections 397, 398 and 402) of the Companies Act is quite wide since considerations governing section 433(f) could equally be attracted to the situation. In fact in Yenidge Tobacco Company's case [1916] 2 Ch 426, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrary to the good faith and essence of agreement between the parties that the state of things which we find here should be allowed to continue". At page 435, another learned judge pointed out : "I am prepared to say that in a case like the present, where there are only two persons interested, where there are no shareholders other than those who, where there are no means of overruling by the action of a general meeting of shareholders the trouble which is occasioned by the quarrels of the two directors and shareholders, the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of one of the partners against the other. Such ground exists in the present case. I think, therefore, that it is just and equitable that the company should be wound up". This approach was approved by the Supreme Court in Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 ; AIR 1976 SC 565. However, on facts, it was held by the Supreme Court that the company before the court was not in the nature of a quasi-partner-ship. The Supreme Court held, at page 571 (at page 99 of 46 Comp Cas ) : "In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly one conclusion that the business concern of the parties here was being carried on, in reality, by the parties as partners, in the garb of an incorporated company. Though Mr. Holla would like us to hold that there cannot be any deadlock in the management of the company, in view of the casting vote of the chairman, we cannot do so. The management of a company and its effectiveness are not to be considered theoretically ; if Mr. Holla's submission is accepted, it will be ousting a group of shareholders, who actually has a 50 per cent, interest in the entire company. Here, this theory of voting power need not detain us any further. In view of the two orders of the learned company judge dated August 16, 1988, and September 30, 1988, the contesting parties are precluded from contending otherwise than that one of the groups (petitioners) has to be paid by the other group (contesting respondents) so that 'the other group may continue to control the company thereafter. The only question to be considered in this appeal, is whether the shares were fairly valued by the learned company judge and if not, what value should be given to those shares. A few more facts may be referred to : Bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 should be adopted as the reasonable profit for the year"; capitalising this by 10, he arrived at the company's worth (with issued shares of 2,500), as Rs. 25,00,000 ; therefore, each share was valued at Rs. 1,000. Under the "intrinsic value method", he pointed out that the balance-sheet of the company would not disclose the value of leasehold rights of the premises and that the value of existing business connections also should not be ignored. The leasehold interest in the premises at Commercial Street was valued at Rs. 30,00,000 and then without further details, he reiterated his valuation of the share at Rs. 1,000. The two extreme valuations one by Ramaswamy and Co. (at Rs. 326.80) and the other by Shah (at Rs. 1,000), naturally gave scope for extreme rivalry between the two sets of parties. The further two reports of Messrs. Brahmayya and Co. and Messrs. Ramadayani and Co. in no way contributed to soften the hard stand taken by the parties. During the pendency of the proceedings before the company court, the petitioners started their own business concern. The contesting respondents were apprehensive of the new venture of the petitioners because, the latter was also using th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is a family concern, more in the nature of a partnership ; in fact, earlier it was a partnership firm. As per section 53 of the Indian Partnership Act, 1932, after a firm is dissolved (only in the absence of a contract to the contrary between the partners) every partner may restrain any other partner from carrying on a similar business in the firm name or using any of the property of the firm for his own benefit, until the affairs of the company have been finally wound up ; but this does not affect the partner who bought the goodwill. As per section 14, properties of the firm includes goodwill of the business. Contract between the parties as to who should get the goodwill and hence it can be used on dissolution, is permissible and its terms enforceable. Goodwill is an intangible asset, being the whole advantage of the reputation and connections formed with the customers together with the circumstances which' make the connection durable. It is attributable to the ability of the concern to earn profits because of its reputation, location and other features (vide Law of Partnership in India, by Desai, fifth edition, page 97). Assuming that Rakhra is a family name, the trade name 'R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Rs. 100 per share and in turn take posses-sion of the shop premises at Commercial Street and two godown premises at Golar lane, 1st Cross, Commercial Street, Bangalore. (3)The petitioners are also prepared to. accept Rs. 100 less, that is, Rs. 950 per share and the leasehold rights of Cotton- Complex pre mises". Can it be said that petitioners having offered the highest price should. be allowed to purchase the shares of the respondents because, by such a sale of the respondents' shares, the latter would not suffer any fiscal injury ? The two orders of the learned company judge made in September, 1988 (referred to already by us), proceed on the assumption that, in spite of the higher offer of the petitioners, the respondents are to be allowed to purchase the shares of the petitioners at a "fair value"; the question of bidding for the shares by the rival groups, by necessary implication, was ruled out and the parties consented to that situation. Therefore, what remains, is to find out the fair value of the shares of the petitioners to be sold to the respondents. The learned company judge treated the company as in notional liquidation, but, ultimately valued the shares, by capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of reserves. It is important to remember in this connection that the interests of shareholders in unquoted companies often differ from those of investors in quoted shares, especially as respects dividend policy. Where the shares are held by a few individuals (particularly members of a single family, it will not necessarily be to their advantage to have the greatest possible amount paid out to them as dividends. Retention of the profits by the company may suit them better than the receipt of taxable dividends. A purchase of shares in a company which distributes only a small fraction of its profits is unlikely to prove attractive to an investor in search of current income, but the open market is by no means confined to such investors. It includes, for instance, the existing members of the company to whom the shares may be more valuable than to others and who may wish to exclude outsiders, and surtax, payers whose goal is capital appreciation rather than current income". Again, at page 409 (Green's Death Duties), it is obseryed : "A valuation by reference to earnings is apposite as respects unquoted shares whenever the dividend alone does not. truly represent the profitability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amed by the Supreme Court. is found at page 1029 of AIR 1973 SC, (at the end of para 13) (at page 634 of 86 ITR). Though the decision is under the Wealth-tax Act, guidance is amply found in the judgment to identify the normal, general principles governing the valuation of unquoted equity shares. The dominant factor is always the yield method. This decision was followed in CGT v. Smt. Kusumben D. Mahadevia, AIR 1980 SC 769 ; [1980] 122 ITR 38, where the valuation of ordinary shares, in an investment company came up for consideration. The actual question before the court was, whether any question of law arose out of the orders of the Tribunal requiring reference to the High Court. After referring to the earlier decision rendered in Mahadeo Jalan's case [1972] 86 ITR 621, the court observed, at page 772 (at page 45 of 122 ITR) : "But where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit earning method. This method may be applied by taking the dividends as reflecting the profit earning capacity of the company on a reasonable commercial basis but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method would be justified. The Revenue leaned heavily on the observation in Mahadeo Jalan's case [1972] 86 ITR 621 that the factors likely to determine the valuation of a share include 'in special cases such as investment companies, the asset-backing' and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the court. When the court said that in the case of an investment company, the asset-backing is a relevant factor in determination of the value of the shares, what the court meant was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company which would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowances for depreciation and obsolescence. Asset value represents a judgment as to the fair market value of the assets based on the price that would be agreed on by a willing seller and a willing buyer under no' compulsion to sell or buy. Net asset value is the share which the stock represents in the value of the net assets of the corporation. Such assets include every kind of property and value. Thus, all assets, tangible or intangible, including goodwill and book value, should be taken into consideration. The courts will also consider the nature of the business and various other special factors". The Institute of Chartered Accountants of India has published a booklet called A Study on Share Valuation. Mainly, it is concerned with valuation of shares for tax purposes. However, Chapter V refers to "valuation of shares for other purposes "and states, "It can be safely said that for all those purposes, the fair value arrived at on the basis of open market may be accepted, because in normal circumstances the open market price will be the fair value". We may exclaim that the real problem before us is to find out this open market value. Chapter VI deals with "maintainable profits b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taff, and above all the confidence it inspires among the customers for the safety of the funds entrusted. The Reserve Bank, it is true, exercises stringent control over the transactions which banks carry on in India. Existence of these powers and exercise thereof may and do ensure to a certain extent the safety of the funds entrusted to the banks. But the business which a bank attracts still depends upon the confidence which the depositor reposes in the management. A bank is not like a grocer's shop : a customer does not extend his patronage to a bank merely because it has a branch easily accessible to him. Outside the public sector, there are 50 Indian scheduled banks, 13 foreign banks, besides 16 non-scheduled banks. The deposits in the banks not taken over under the Act range between Rs. 400 crores and a few lakhs of rupees. Deposits attracted by the major private commercial banks are attributable largely to the personal goodwill of the management. The regulatory provisions of the Banking Companies Act and the control which the Reserve Bank exercises over the banks may to a certain extent reduce the chance of the resources of the banks being misused, but a banking company for it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase order, I am of the opinion that the same consequences ought usually to follow in a case like the present where there has been an agreement for the price to be determined by the court without any admission as to such conduct. It seems clear to me that, even without such conduct, that is in general the fair basis of a valuation in a quasi-partnership case, and that it should be applied in this case unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company". Each party had nominated his valuer. The learned judge said at page 456 : "There was a certain amount of common ground between the two valuers. Firstly, they agreed that a dividend basis of valuation, being the one which is usually only relevant in a case of a company with a record of paying significant dividends was inappropriate in this case. Secondly, they agreed that the appropriate basis was one which involved looking both at the earnings of the business and at the value of its net tangible asset. The latter ignores goodwill, which is the measure of profits which the business can earn over and above a normal return on its net asset value. Mr. Milb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er words, I think that a purchaser would be more likely to take an average of three years actual and anticipated profits rather than to rely only on the most recent figure, particularly since it could only be an estimate and the company was still a young one". To the said figure, an appropriate multiple was applied, on a consideration of the company's progress during the further previous years. The court said : "Although I have assumed that a willing purchaser would take an average of the actual or anticipated profits for the three most recent years, he-would undoubtedly have looked further back in order to see the earlier record of the company. If he had done that, he would have seen that from 1977-78 onwards, i.e., from only two years after its birth, the company had been making a profit which, with one slight setback in the following year, had steadily increased from £80,000 to £ 175,000. I think he would have thought that those figures showed that this was a well run and soundly based company. Even in times of great recession in the industry, he would in my view not have expected a yield of as much as 33 per cent, on this investment and would, therefore, have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt had no occasion to consider the impact of the "goodwill"(probably because it was a young company started in or about the year 1975). The decision was affirmed by the Court of Appeal ; the decision in Bird Precision Bellows Ltd., In re [1985] 3 All ER 523. There, the appellants contended (at page 523) : "(i) that under section 75(4)(d) the court was not entitled to consider the merits of the case when fixing the value of the shares, (ii) that the court was limited to fixing the market price of the shares, i.e., according to the proportionate size of the shareholding in relation to the whole of the issued share capital but taking into account whether the shareholding formed a majority, of minority holding, (iii) that the court could not, e.g., by deciding that there should be no discount for the fact that the shares were a minority holding, fix a price which had the effect of reducing or increasing the ordinary open market value of the shares, and (iv) that it Was in implied terms of the concerned order that the shares were to be purchased at the ordinary open market value for a minority holding, i.e., at discount". The Court of Appeal held that under section 75(4) (comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the court is required to do, in the exercise of its very wide discretion, is to do what is just and equitable between the parties". The learned judge further said that since it was a quasi-partnership case, "it would be appropriate that the shares of the company should be valued as a whole and that the petitioners should then simply be paid the proportionate part of that value which was represented by their shareholding, without there being made a discount for the fact that this was a minority shareholding". The court also referred to the pre-emptive clause in the articles of association, which required that the seller of the shares had to first offer the shares to the other sharers and in case there was a dispute, the fair value was to be certified by the auditors. The court, after referring to Dean v. Prince [1954] Ch 409, quoted a passage from it to say that in such a situation, the right way to see what the entire shares of the company were worth, would be to see what the business itself was worth. In Buckingham v. Francis [1986] 2 All ER 738, Buckingham's 20 shares were to be valued, arising out of a dispute between him and others, who held only 30 shares. The business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, a number of years' super profits. The procedure is to estimate the value of the net assets on a going concern basis and to add to this the value of the super profits. The annual super profits are calculated by deducting from maintainable profits a sum which is equivalent to the normal rate of return on net assets. These super profits are then multiplied by a factor representating the number of years' purchase. The value of the super profits is entered in the accounts as goodwill. The super profits method has the theoretical attraction that it recognises the transitory nature of above average performance. In practice, it has serious shortcomings. The preoccupation with net asset value, which in practice is based on balance-sheet amounts, is unhealthy. Few businessmen would admit that their company's growth rates were a temporary phenomenon, nor would most of them recognise the concept of super profits. The going rate of return on net assets must be a highly subjective assessment, as must also be the amount and duration of super profits. How is one to know the going rate for the purchase of super profits? This valuation basis leads to highly esoteric arguments divorced from r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a "pre-tax basis and not post-tax". The court opined that the purchaser of the company would be content with a yield of 25 per cent, and, therefore, the multiplier of four was arrived at. However, Staughton, J. made the following observations at page 743 : "Frankly I doubt whether businessmen are ruled by accountants when deciding how much to pay for a private company. They no doubt seek the advice of accountants beforehand, and are told what likely price-earnings ratio would emerge from various different figures as the purchase price. And afterwards they are told, no doubt, what is the likely price/earnings ratio on the purchase price which they have decided to pay. But I wonder whether, in the crucial stage between, when they are deciding on a price, business acumen or hunch does not play a far larger part than the calculation of accountants". This case illustrates that under certain circumstances the "maintainable future profits "method would be the most appropriate method. This was a company which had no substantial assets to apply the 'breakup value' method. The decision also shows that the estimated profit is to be a pre-tax profit, to which an appropriate multiplier is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially, this is an unlimited judicial power. The court cannot ignore the realities, while evaluating the worth of a quasi-partnership. Sense of justice and principles of equity demand that every one concerned should be placed on par (proportionate to their interest in the business concern). By confining the attention to the valuation by only ore method the court may miss the real worth of the company. The English decisions referred to above further reveal that, in the process of evaluation, the question of any premium or discount would not be normally considered, even though the shares are to be valued for the purpose of sale and purchase amongst the rival groups of a quasi-partnership concern ; that will be inequitable at least to one of the groups. Another aspect to be clarified here pertains to the relevancy of tax on the gross profit of the company. The "maintainable level of profits"is to be arrived at without reference to tax liability. Mr. Udaya Holla's contention that tax liability should be deducted may have relevance to evaluate the market value of shares for tax purposes. Here, we are concerned with the worth of the company and the percentage of profit normally expect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs have been enjoying the fruits of the business by way of remuneration, allowances and perquisites. The business is located in Commercial Street which is a prominent commercial center in Bangalore. The leasehold of the premises itself is quite valuable. The balance-sheet figures of gross profit, in the circumstances, would not disclose the real profit of the company and sufficient care has to be taken while estimating the maintainable level of profits of the company without being unduly influenced by those figures stated in the balance-sheet. In Bird Precision Bellows Ltd., In re [1984] 3 All ER 444, the court took the average of the gross profits of the latest available profits of the two years and the subsequent year's estimated profit, to arrive at the maintainable level of profits and then added back the excess remuneration drawn by the directors. The company petition was filed in October, 1981. Therefore, the available gross profits for the years 1980-81 with the estimated gross profits for 1981-82 were considered (vide page 457 ; the basic position of Mr. Foster, one of the valuers). The court observed that this took into consideration the average of three years' actual and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit will be Rs. 2,55,880, (rounded off to Rs. 2,56,000). The investor's yield was considered as 11 per cent. The company is basically a well run, stable and sound company ; therefore, the investor's approach will be an approach to obtain a constant return, which is safe. A return of 12 to 13 per cent., therefore, can be safely accepted as the expected return and, therefore, we would select the multiple of eight to capitalise the profits. The capitalised figure, representing the company's worth will, therefore, be (Rs. 2,56,000 x 8) = Rs. 20,48,000. The value of an equity share would be Rs. 819.50. While selecting the multiple of 8, we have also noted, that according to Messrs. Ramadhyani and Co., the expected return will be 15 per cent. (This will take the multiple to 6.66), but this low multiple, seem to us not acceptable in the circumstances of this case. Re : Assets : Company had stock-in-trade, vehicles, reserves, and abundant goodwill. The interest in the leasehold premises at Commercial Street is a very valuable interest. Messrs. Ramaswamy and Co. valued the goodwill at Rs. 3,17,000. Messrs. Brahmaiah and Co. has, quite strangely, ignored these aspects. Messrs. Ramadhyani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1932. The court cannot be influenced by this high offer of the petitioners which is not based on any realities affecting the valuation of the company's worth. In the result we allow this appeal partly. Respondents Nos. 2 and 3 shall pay the petitioners for their shares at the rate of Rs. 820 per equity share ; the balance amount payable after deducting the payments made already at Rs. 600 per share, shall bear interest at the rate of 10 per cent, per annum with effect from October 1, 1988. The order of the learned company judge is modified to this extent. The contesting respondents are granted six weeks' time to deposit into court the amount payable to the petitioners as per this order, failing which the petitioners shall proceed to deposit the value of the shares of the contesting respondents at the same rate, within six weeks from the date of the expiry of the first six weeks time granted herein to the contesting respondents ; however, the question of any interest on the amount to be paid by the petitioners to the said respondents would not arise as these respondents have been running the company all these years ; the other conditions stated in the order of the learned company j ..... X X X X Extracts X X X X X X X X Extracts X X X X
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