TaxTMI 
TaxTMI 
2001 (3) TMI 926
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....ments and business machines. Originally it was registered at Bombay. Subsequently, the provisions of memorandum of association with respect to the place of registered office were amended and the registered office was changed from the State of Maharashtra to the Union Territory of Delhi. The authorised capital of the company is Rs. 6 lakhs divided in 60,000 equity shares of Rs. 10 each. It is also relevant to point out that 2,000 equity shares in the first respondent company were subscribed by the petitioner constituting 33.33 per cent of the shareholding. Similarly, 20,000 equity shares were subscribed by the second respondent and the remaining 20,000 were subscribed by the third respondent and his family members, Shri Om Prakash Sharma and Smt. Kailash Devi Sharma collectively. The first respondent commenced commercial production of modems in the year 1987 from its registered office at Anand Niketan, New Delhi. In August 1989, the first respondent company applied for allotment of land in Udyog Vihar, Gurgaon, for setting up of a factory. The land was allotted in the year 1990 over which construction has been carried out. In February 1990 the manufacturing operations were shifted t....
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....ontrol of the company. It is claimed that in January 1994 the second respondent along with his relatives passed resolutions to reduce the emoluments of the petitioner and his entitlement to share in the profits of the company in contravention of the agreement. It is alleged that the petitioner offered to withdraw from the company provided he was given his share. The petitioner claims that it was agreed between the parties that a sum of Rs. 1 crore in full and final settlement of all the claims would be paid by the first respondent to the petitioner and the petitioner would withdraw from the company by the close of 31-3-1994. In view of the agreement, a statement was released to a computer magazine, namely, 'Dataquest', that the petitioner and the respondents have resolved their disputes and the respondents have agreed to take over the share of the petitioner in the Indian company. The petition alludes to the fact that in view of the agreement between the parties the petitioner tendered his resignation on 18-2-1994 to the Board of Directors of the first respondent stating that his resignation shall be effective from 31-3-1994. After tendering the resignation the petitioner found tha....
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....ompany called by the Respondent No. 3 by notice dated July 28, 1994; 3. pass such other order/orders as this Hon'ble Court may deem fit and proper in the circumstances of the case; 4. grant cost of the present Petition." During the course of the proceedings of the company petition the parties resolved their disputes and filed a joint application under Order 9 of the Company Court Rules being C.A. No. 804 of 1995, which in the first instance was returned under some objection and subsequently re-filed on 12-10-1995. The above compromise application was taken on record. According to the aforesaid application, the petitioner agreed to transfer his entire shareholding of 33.33% in the Indian company to the respondents. In lieu of the transfer the petitioner agreed to receive value of the shares. For the purposes of valuation and settlement of petitioner's share and stock in the Indian company it was agreed to appoint M/s. Arthur Anderson & Co. In anticipation of the report, the respondents deposited a sum of Rs. 10 lakhs with the Registrar of this Court and the petitioner deposited his 20,000 shares and 21 scrips along with 5 blank transfer deeds in accordance with the compromise. Th....
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....nditioner - 3 Nos. (vi)Time Keeping Machine. (vii)Personal Computer PC286 with monitor & Keyboard. (viii)Printer. (ix)Fax Machine. (x )Taxes due on the transfer of assets will be paid for by the company. 5. (a) The petitioner will be paid upon determination of valuation, salary up to 31-3-1994 and commission/bonus for the year ending 31-3-1994 on the basis of the board resolution passed on 15-1-1994. 5. (b) The computation of salary and commission/bonus and tax deductible at source, therefrom shall immediately be made by the statutory Auditors of MTCPL and shall be paid to the petitioner upon valuation of shares. 6. Rent payable to Mr. C.L. Sawani for the residence at C-14, Westend Colony, New Delhi - 110021, occupied by the petitioner will be made and borne by MTCPL upto the date of payment to the petitioner for the shares and shall be made at such rate as MTCPL settles with Mr. C.L. Sawani. Thereafter the petitioner is liable to pay the rent and all other charges and hereby indemnify the company against any claim or demand by the said Landlord. 7. (a) Payment for the shares of the Petitioner will be made within three weeks of completion of the valuation by the Valuer and....
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....ether with amount payable to him, under clause 5(c) herein-before, less the amount to be deducted for the cards and other articles, the winding up petitioner shall automatically stand dismissed without any further orders and all stay orders passed therein stand vacated. Respondents may, however, if they think necessary, apply for formal orders. 14. Both parties retain the liberty to apply to this Hon'ble Court for appropriate direction to enforce the terms and conditions of this compromise. 15. That this Hon'ble Court on the application of the respondents may vacate or vary the injunction Orders either, either unconditionally or on such terms as it thinks fit, if it considers that same is working oppressively, either on account of delay by the Petitioner in the proceedings relating to valuation or otherwise for any just reason. 16. The Petitioner will not institute any litigation relating to the affairs of the company arising from his association with the Company as shareholder, director or Managing Director. 17. The parties will bear their own cost. 18. During the intervening period the petitioner will not act as a shareholder nor claim to be Director or Managing Director." ....
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....ermination or opinion. The learned counsel further argued that the aforesaid principle has been discarded in England and the position, as made clear by the House of Lords, is that an expert can be sued for damages when he acts negligently in performance of his duties. In support of his submissions, Mr. Khanna relied on the following decisions : 1.Sutcliffe v. Thackrah [1974] 1 All ER 859 (HL) (Pages 29 to 57) 2.Burgess v. Purchase & Sons (Farms) Ltd. [1983] 2 All ER 4 (pages 58-66) 3.Jones v. Sherwood Computer Services plc. [1992] All ER 170 (Pages 67 to 79) Mr. Khanna also submitted that the position in India is no different from the one which is prevailing in England. In this regard he referred to the decision of the Supreme Court in K.K. Modi v. K.N. Modi [1998] 92 Comp. Cas. 30. 7. On the other hand, Mr. Sanghi, the learned counsel for the petitioner, contended that the court can go behind the valuation report and look at the reasons offered by the valuer in support of the valuation arrived at by him. He contended that since the valuation made by the valuer was based on erroneous principles, the same can be challenged in these proceedings. In aid of his submissions he cite....
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....e opinion of the referee either way would be a binding decision on the matter; and for any mistake which he might make he clearly would not be liable.' Brett J. 'The ruling upon that was, not that the defendant was in the strict sense of the term an arbitrator, but that he was a person filling a position which brought him within an exception well know to the law of England, viz., that a person who is appointed and is acting as an arbitrator to determine a matter in difference between two or more persons does not enter into an implied promise to bring to the performance of the duty entrusted to him a due and reasonable amount of skill and knowledge. The question is merely one of implied undertaking; and the law says there is none such. Was, then, the defendant within that exception ? I apprehend that every person falls within it who has taken upon himself to determine a disputed matter between two person who have agreed to be concluded by his opinion. The parties had so agreed here: and that opinion could not be called for until the fact was in dispute.' Bovil CJ. 'It by no means follows that, when two persons submit a matter of difference to the arbitration of a third, they agr....
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....t alone as against that of the contractor's. He owed a duty to both of them. His task was not merely ministerial or clerical or one of arithmetic, but involved technical skill and knowledge; and therefore his position was that of a quasi-arbitrator between the owner and the contractor who had undertaken to exercise judicial functions impartially between the parties in determining the matters specified in the clause. In this regard, the majority observed as follows :- Per Sir A.L. Smith, M.R.- "'In my judgment, the present case is covered by those words. When acting under clause 20 of this building contract, the plaintiff was in the position of one who had undertaken to exercise judicial functions with regard to the questions that had arisen between the owner and the builder, and, therefore, he is not liable to an action for negligence in respect of the way in which he exercised those functions.....' Per Henn Collins, L.J.- '......The case seems to me to come exactly within the decision of Stevenson v. Watson (1879) 4 C.P.D. 148, which was decided in 1879......Lord Coleridge, in delivering the judgment said...... He then continued : .....I think this case is within the authorit....
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.... this time Romer, L.J.'s dissenting judgment in Chamber's (supra ) was probably the only judgment which clearly took the view that the architect was liable to be sued for negligence as he owned a duty of care in the performance of his duties towards the owner of a building while certifying the work done by the contractor in terms of money. Then several decades later came the decision in Arenson's case (supra) which was sort of a repeat of the decision in Chamber's case (supra). The question raised before the Court of Appeal was whether an auditor appointed to value shares could be sued for negligence. In this case Lord Denning MR followed the line adopted by Romer, L.J., but it was a voice of dissent as the majority still followed the rule which prevailed in the aforesaid decisions. Before adverting to the principle enunciated by the Court of Appeal in this case it will be necessary to refer to the factual matrix of the case. The first defendant was a furniture maker. He floated a private company in which he employed his nephew and gave him a few shares of the company. The first defendant and his nephew agreed that in case the latter ceased to be employed in the business of the com....
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....y and impartially but negligently. However, the other members of the Bench, Buckley LJ and Sir Seymour Karminski took the view that experts cannot be sued in negligence and the claim of the nephew as it stood then disclosed no cause of action against the auditors. While concluding, the two judges held as follows :- Per Buckley LJ - "...The position of cassons in the present case is in my view indistinguishable in essentials from the position of the defendant in Finnegan v. Allen [1943] 1 All ER 493. It follows in my judgment that they cannot be sued in negligence and that the statement of claim as it stands discloses no cause of action against them." [Emphasis supplied] Per Sir Seymour Karminsky, J- "The duty of a valuer or arbitrator in a case of this kind is to give an impartial judgment and an honest decision between the parties: See Finnegan v. Allen [1943] 1 All ER 403. So far it has not been suggested that the arbitrator here was either partial or dishonest. The allegation against him is that he was negligent in making his valuation of the shares, and in my judgment he cannot be sued for negligence here." 16. Thus, the position which prevailed in England according to the....
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....e basis of the certificates the appellant paid the aforesaid amount to the contractors. Shortly thereafter the contract of Walbank was terminated by the appellant on good ground. Later it was discovered that the interim certificates of the architects even covered the defective work executed by Walbank. The cost incurred by the appellant in removing the defects could not be recovered from Walbank as in the meantime Walbank became insolvent with the result the appellant in 1968 sued the architects for the loss caused to him by their negligence in issuing the certificates. The architects pleaded that while issuing the certificates they were functioning in an arbitral capacity and were not liable to the owner, assuming that they had been negligent. The House of Lords overruled the decision rendered in Chamber's case (supra) and held that the valuer would be liable in tort for negligence. While holding thus, it observed as follows :- Per Lord Morris- "....The fact that a building owner and contractor agree that they will treat the certificates of the owner's architect as conclusive evidence that work had been duly completed does not of itself establish that the architect was an arbitr....
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.... accordingly be accorded the same immunity. I confess that I can see no more reason for regarding the architect as being in the same position as a judge or arbitrator than there is for so regarding the valuer. No reason has ever been suggested. I suspect that this is because none exists. The descriptions 'quasi-arbitrator' and 'quasi-judicial functions' have been invoked but never defined. They cannot mean more than in much the same position as an arbitrator or judge. In reality, however, there are the most striking differences between the roles of the valuer and architect in the circumstances to which I have referred and the role of a judge or arbitrator. Judges and arbitrators have disputes submitted to them for their examination and consideration. They then give their decision. None of this is true about the valuer or the architect who were merely carrying out their ordinary business activities. Indeed, their functions do not seem to me even remotely to resemble those of a judge or arbitrator. Moreover, in the case of the architect, the contract provided that the certificate was not binding and that in the event of any dispute arising in relation to it, that dispute could be sub....
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....he valuer made a mistake. It was further observed that the valuation was binding on the parties in the absence of allegation of fraud and collusion. Again in Jone's case (supra), where the parties expressly agreed that certain matters arising in relation to the contract were to be determined by an independent expert whose determination was to be conclusive and final and binding for all purposes, it was held that in absence of fraud or collusion, the expert's determination could only be challenged on the ground of mistake if the same was clear from the evidence. 18. At this stage it will be convenient to summarize the legal position prevailing in England. 19. For a long period of time English courts held the view that a valuer while determining the valuation of shares of a company, or property, or an article was not liable to be sued for negligence. What applied to a valuer also applied to an auditor, broker, an architect, a surveyor, etc. In the opinion of the English judges an expert was not liable to an action unless it was shown that he acted in a dishonest and fraudulent manner. The earlier theory of immunity was based on the hypothesis that the task of the said experts was n....
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.... not liable for negligence) the courts used to look for some way of upsetting a valuation which was shown to be wholly erroneous. They used to say that it could be upset, not only for fraud or collusion, but also on the ground of mistake. See for instance what I said in Dean v. Prince [1954] 1 All ER 749. But those cases have to be reconsidered now. I did reconsider them in the Arenson case [1973] 2 All ER 235. I standby what I there said. It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is because they have agreed to be bound by it. If there were fraud or collusion, of course, it would be different. Fraud or collusion unravels everything. It may be that, if a valuer gives a speaking valuation - if he gives his reasons or his calculations - and you can show on the face of them that they are wrong, it might be upset. But this not such a case. Messrs Chesterton simply gave the figure. Having given it honestly, it is binding on the parties. It is no good for e....
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.... protection which the law does not deny him. That example seems to me to be the clearest exposure of the plaintiff's plight and the surest ground for saying that the suggestion cannot be correct." 23. Mr. Khanna, the learned counsel for the respondents, contended that the challenge to the valuation report of the valuer should be thrown out in view of the decision of the Supreme Court in K.K. Modi's case (supra), since it has taken a view which is in tune with the decisions of the House of Lords in Sutcliffe's case (supra) and Arenson's case (supra). 24. K.K. Modi's case (supra) represents a case where disputes arose between members of a family having controlling interest in number of public limited companies. Negotiations took place between two warring groups of the family with the intervention of the financial institutions which had considerable stake in the companies. The memorandum of understanding was reached between the two groups. The memorandum of understating, inter alia, provided for division of the companies. For this purpose the shares of the companies were required to be transferred to the respective groups after valuation. Under clause 5 of the memorandum of understa....
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....e learned Single Judge all the disputes were settled through the memorandum of understanding and the only thing which remained was valuation of shares and the division of the companies as agreed to in the memorandum of understanding. As per the learned Single Judge the parties had agreed that the Chairman and Managing Director, IFCI, would issue clarifications and render his decision in relation to the valuation under clause 9 of the memorandum of understanding. The learned Single Judge held that the application was not maintainable as the impugned decision was not an award within the meaning of the Arbitration Act, 1940. He also found that the allegations contained in the arbitration application and the plaint were identical. He was of the view that the filing of the suit was an abuse of the process of the court. In appeal the Supreme Court held that the Chairman, IFCI, acted as an expert and not as an arbitrator and, therefore, it upheld the order of the High Court rejecting the aforesaid application under section 33 of the Arbitration Act, 1940. This decision on which strong reliance was placed by the learned counsel for the respondents is also of no avail to him. As already not....
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....rce it. According to the appellants, in the suit there is an alternative plea that if the impugned decision of the Chairman and Managing Director, IFCI, is not considered as an award, then that decision as a decision should be set aside. It is contended that the suit, in so far as it challenges the decision of the Chairman and Managing Director, IFCI, as a decision and not as an award is maintainable. In support, the appellants have relied upon the submissions in paragraph 55 of the plaint which we have set out earlier. The plaint in the suit, to the limited extent that it challenges the decision as a decision, would not amount to abuse of the process of court. We are not called upon to examine whether this alternative submission is supported by proper averments and whether there is a proper cause of action framed in the plaint in support of such an alternative plea. This is a matter which the court hearing the suit will have to examine and decide. But in the suit, the decision cannot be challenged as if it were an award and on the same grounds as if it were an award. The court will also have to consider the binding nature of such a decision particularly when no mala fides have be....
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.... were wrong, and, in my judgment, the valuation cannot stand. I propose, therefore, to declare that the valuation is not binding on the plaintiff, and, if necessary, to restrain the defendant company from acting on the valuation. The plaintiff desires the court to take on itself the burden of ascertaining the value of the shares, i.e., to make a declaration of the basis on which the valuation should be made, and then direct an inquiry on that footing. I decline to do either of those things. I do not see what jurisdiction the court has to put itself in the place of the valuer whom the parties have chosen. I do not propose to do more at this stage than to relieve the plaintiff of any obligation that may be on her to accede to the present valuation. Accordingly, I declare that the valuation is not binding and restrain the defendant company from acting on it." The defendant appealed against that part of the judgment whereby the valuation was held to be not binding on the parties being invalid. Though the court of appeal allowed the appeal and upheld the valuation, it did not differ from the opinion of the Chancery Division that in case valuation is made under a mistake it will not be ....
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....on of the valuer in arriving at the valuation of the shares of the company can be challenged in these proceedings. Therefore, the preliminary objection of the respondents fails and is hereby rejected. 28. The learned counsel for the respondents argued that the challenge to the report of the valuers cannot be made in the absence of the valuers, namely Coopers & Lybrand P. Ltd. who are not party respondents in the case. Elaborating his submission, the learned counsel contended that it is the valuer who is the best person to explain its decision relating to valuation of various assets of the company. The learned counsel also submitted that the valuer has adopted break up method which is beneficial to the appellant. He, however, stated that he does not wish to challenge the report of the valuer even though it is heavily loaded in favour of the petitioner in order to close the controversy. On the other hand, learned counsel for the petitioner submitted that the valuation report suffers from various infirmities. He in his written submissions dated 11-10-2000, while responding to the contention of the learned counsel for the respondents that the valuer cannot be condemned unheard, has ur....