Valuer’s Valuation report can be rejected by NCLT if it is patently illegal or fraud but not due to parties’ dissatisfaction

Dr. Syed Sabahat Azim (Petitioner) filed a petition u/s 399 of the Companies Act, 1956 wherein principal grievance was about the valuation of Petitioner holding in the company. Petitioner alleged that it was systematically and intentionally diluted in a malafide attempt to oppress the applicant and mismanage the affairs of the Company.

NCLT observed that during the course of hearing the Petitioner was willing to sell Respondent were keen to buy out the Petitioner shares on fair valuation. Hence, Company Law Board appointed Grant Thornton for the purpose of fair valuation of shares of the Respondent Company. Later, Petitioner filed C.A. No. 511/2014 wherein he prayed that valuation of shares to be done as per auditing standards, independent investigation and verification of information and statements provided by R1 for accuracy and completeness before arriving at the valuation for its shares.

NCLT observed that the valuation of shares was taken place on the basis of the paid up capital on March 31, 2010 and bad debts, doubtful advances, expenses and customers claims that were provided in the books of R1 Company during 2010- 11 which pertained to earlier years including unrecovered debtors above 730 days were also considered. However, Petitioner challenged Grant Thornton final valuation report wherein Petitioner contended that the valuer was required to value the shares of the company as on March 31, 2010, and that it had taken consideration figure beyond March 31, 2010 which Petitioner alleged was not permitted moreover the actual figures were from the audited balance sheet instead of the projected figures as required under the Discount Cash Flow method.

Thus, NCLT referred to the following rulings

L. Sultania and Another vs. SEBI and others, (2007) 5 SCC 133) wherein it was held,
“ that unless it is shown that some well – accepted principle of valuation has been departed from without any reason, or that the approach adopted is patently erroneous or that relevant factors have not been considered by the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter this Court would not interfere with the valuation of an expert”.

Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (1997) 1 SCC 579 wherein SC held that
“valuation of share is a technical and complex problem which can be appropriately left to the consideration of experts in the field of accountancy .” Further SC, in this case, stated that even experts may differ in their conclusion or even reasoning. Hence, court must take notice of this fact and must not interfere unless there are compelling reasons to upset the finding of the expert valuer.”

Sumana Bhasin vs. Eastern Connexion (Exports) P. Ltd. and Others, [ 2012] 171 Comp Cas 170 (Delhi) wherein Delhi HC held that
“ it is a settled law that if a valuer honestly and in good faith fixes a value, then both the parties are bound by it. It has also been held that even if the valuer makes a mistake both parties would still be bound by it because the parties have agreed to be bound by the decision of the expert valuer. It is only if there is a fraud or collusion, that the result would be different. Fraud and collusion unravel everything. Even strict principle of natural justice does not apply to a valuer as an expert, unless it is agreed otherwise, makes his own inquiries, applies his own expertise and decides on the basis of his own expert opinion.”

After considering the above ruling, NCLT held that valuer’s final valuation report can be challenged on the ground of patent illegality, fraud, collusion or partiality, which had not been proven in the present case. Hence, valuer’s report under such circumstances cannot be contested and set aside if the parties were not satisfied with the valuation. Accordingly, there was no reason to set aside the valuation report as has been submitted by the valuer.

Moreover, CLB had not given any specific direction at any point of time regarding the use of specific auditing standard to be employed by the valuer during valuation of shares of R1 company.

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