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Supreme Court sets aside NCLAT order which had reinstated Cyrus Mistry as Chairperson of Tata Sons

The Supreme Court on Friday set aside the December 2019 order of National Company Law Appellate Tribunal (NCLAT) which had reinstated Cyrus Mistry as the Chairperson of Tata Sons Limited.

The top court answered all the legal questions involved in the dispute in favour of Tata Sons bringing quietus to the half-decade old legal battle which started in 2016 with the removal of Mistry as Tata Sons Chairman.

The Bench of Chief Justice of India, SA Bobde and Justices AS Bopanna and V Ramasubramanian allowed the appeal filed by Tata Sons against the NCLAT judgment and dismissed the appeals filed by Mistry and Shapoorji Pallonji Group (SP Group).

“We find all the questions of law are liable to be answered in favour of the appellants, Tata Group and the appeals file by the Tata Group are liable to be allowed and Shapoorji Pallonji group is liable to be dismissed,” the Court said.

The order of NCLAT dated December 18, 2019 is set aside, the Court added.

“Company petition no 82/2016 filed by two companies belonging to SP Group shall stand dismissed. Civil Appeal 1802 filed by Cyrus Investments Limited, and Sterling Investment Corporation is dismissed. There will be no order as to costs,” the judgment said.

On the plea by SP Group praying for alternate relief directing Tata Sons to cause the separation of ownership interest of SP Group in Tata Sons by extinguishing the shares held by SP Group in lieu of fair compensation, the Court said that it cannot rule on the same instead asking parties to explore the legal options available to them.

In this regard the judgment said:

“The valuation of shares of SP Group depends on the value of stake of Tata Sons in listed equities, unlisted equities, immovable assets etc. and perhaps the funds raised by SP Group on the security pledge of the shares.

Therefore, at this stage and in this court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the article 75 route or any other legaly available route in this regard.”

Questions framed and answered in favour of Tata Sons

The following were the questions formulated by the Supreme Court all of which were answered in favour of Tata Sons.

– Whether the formation of opinion by the NCLAT that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts justify the winding up of the company on just and equitable grounds is in tune with the well-settled principles and parameters especially in the light of the fact that the findings of the National Company Law Tribunal (NCLT) on facts were not individually and specifically overturned by the NCLAT;

– Whether the reliefs granted and directions issued by the NCLAT including the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata Companies are in consonance with the pleadings made, reliefs sought and the powers available under Section 242 of Companies Act;

– Whether the NCLAT could have in law muted the power of the company under Article 75 of Articles of Association to demand any member to transfer his ordinary shares by simply injuncting the company from exercising such right without setting aside this Article;

– Whether characterisation of the tribunal of the affirmative voting rights available under Article 121 to the director nominated by the trust in terms of Article 104B as oppressive and prejudicial is justified especially after the challenge to these Articles have been given up expressly and whether the tribunal could have granted a direction to Ratan Tata and the nominee directors virtually nullifying the effect of these Articles;

– Whether the re-conversion of Tata Sons from a public company to a private company requires necessary approvals under the Companies Act.

Lawyers

Tata Sons was represented by Senior Advocates Harish Salve and Dr. Abhishek Manu Singhvi who were briefed by a team from Karanjawala & Co.

The Karanjawala team comprised of Senior Partner Ruby Singh Ahuja, Principal Associate Tahira Karanjawala, Senior Associates Anupam Prakash, Arjun Sharma and Shravan Sahny, and Associates Ashutosh P Shukla and Utkarsh Maria.

Advocates Dhruv Dewan, Avishkar Singhvi, Rohan Batra and Reena Choudhary also appeared for Tata Sons.

Senior Advocates Harish Salve and SN Mookerjee appeared for Ratan Tata.

Senior Counsel CA Sundaram and Shyam Divan represented Shapoorji Pallonji Group (SP Group) while Senior Advocate Janak Dwarkadas represented Cyrus Mistry.

Background

Both Tata Sons and Mistry had challenged a December 18, 2019 order of National Company Law Appellate Tribunal (NCLAT) which had ordered reinstatement of Cyrus Mistry as the Chairperson of Tata Sons Limited.

The Supreme court had on January 10, 2020 stayed the NCLAT order.

The NCLAT, in its December 2019 judgment, had held that the proceedings of the Board meeting of Tata Sons held on October 24, 2016 removing Cyrus Mistry as Chairperson was illegal.

It had also directed that Ratan Tata should not take any decision in advance which requires majority decision of the Board of Directors of Tata Sons or a majority in the Annual General Meeting.

Mistry took over as Chairman of Tata Sons, in December 2012 and was removed from the post on October 24, 2016 by the majority of the board of directors of the company. Subsequently, at an Extraordinary General Meeting convened on February 6, 2017, the shareholders voted for the removal of Mistry from the board of Tata Sons. Subsequently, N Chandrasekaran took over as Executive Chairman of Tata Sons.

Two Shapoorji Pallonji firms, who are the shareholders in Tata Sons, moved National Company Law Tribunal over Mistry’s removal and alleging “oppression” of minority shareholders and “mismanagement”.

In July 2018, NCLT dismissed the petition in July 2018 against which appeal was filed by Pallonji firms before the NCLAT. The NCLAT proceeded to overturn the NCLT order prompting the current appeals before the Supreme Court.

Tata Sons claimed in its petition that the NCLAT granted reliefs which were not prayed for by restoring Cyrus Mistry to his “original position” as the Executive Chairman of Tata Sons and declaring the appointment of Chandrasekaran the incumbent Executive Chairman of Tata Sons as illegal.

The plea highlighted that the tenure of Cyrus Mistry as the Chairman and Director of Tata Sons expired in March 2017 and a direction by the NCLAT to allow Mistry to continue as a functionary beyond the term would be contrary to the articles of association of the company and the established principles of company law.

Shapoorji Pallonji firms in their cross appeals contended that the NCLAT failed to give certain crucial reliefs to Mistry

It was prayed that the Mistry firms should be entitled to representation in all committees formed by the board of directors of Tata Sons.

Further, they also sought striking down of placing the right of affirmative vote in the hands of select directors of Tata Sons which would enable them to override the view of the entire board.

Arguments on behalf of Tata

Senior Counsel Harish Salve argued on behalf of Tata Sons.

Below were his important arguments

NCLAT order gives minority shareholder control of Tata companies

Salve pointed out that the Pallonji group owns only 18 percent stake in Tata Sons while Tata Trusts holds 68 percent stake.

It was his argument that under “normal corporate democracy”, a shareholder with an 18 percent stake would not be able to even get a single director on the Board of the company while the one with 68 percent stake will be able to pack the Board with his persons.

Further, Mistry was not appointed as Executive Chairman under any right of the minority shareholder, it was pointed out.

But by reinstating Mistry, the NCLAT has gone against majority wish by giving minority stakeholder the reins of the company, he submitted.

NCLAT interference under Section 242 of the Companies Act against established law

Section 241 of the Companies Act, 2013 empowers any member of the company to make an application before the tribunal alleging oppression and mismanagement of the company by the management.

Section 242 states that, in such a case, if the Tribunal is of the opinion that the facts would justify that it was “just and equitable” that the company should be wound up, but such an order could prejudice the members of the company, then the tribunal can resort to a slew of measures laid down under the said Section.

This includes removal of Managing Director or any other director and appointment of new directors.

The NCLAT held that Tata Sons’ affairs have been or are being conducted in a manner ‘prejudicial’ and ‘oppressive’ to members including Cyrus Mistry and it was also ‘prejudicial’ to the interests of Tata Sons and its group companies. However, since winding up would prejudice the members of the company, the NCLAT found it fit to pass orders including reinstatement of Cyrus Mistry.

It was Salve’s case that the ground for interference by tribunal citing “just and equitable” reasons is narrow in scope.

“The test is whether there is lack of probity in the running of company and standards for applying the principle (of just and equitable grounds) are very high,” he submitted.

Being out voted in a board meeting or personal lives of directors cannot be reasons to invoke “just and equitable” ground for winding up, he said.

Bad business decision is not mismanagement

With reference to Section 241, Salve also submitted that bad business decisions, while they may cause loss to the company, cannot be classified as ‘mismanagement’ under Section 241.

Therefore, sales of Rs 1 lakh car taking a downturn, or issues faced by company due to problems in the distribution of mobile spectrum by the government cannot be reasons which establish lack of probity.

No allegation of mismanagement of TATA Sons

On a related note, Salve also submitted that a member of Tata Sons cannot make allegation of mismanagement based on the functioning of other downstream Tata companies.

“Section 241 refers to filing of complaint against ‘the company’ which in this case is Tata Sons. So, a complaint under 241 cannot be based on a litany of allegations against downstream companies like Tata Motors, Corus, Tata Steel etc”

It was, therefore, his case that a member of Tata Sons cannot complain about other Tata companies.

“There has never been a single allegation of mismanagement of Tata Sons. The company has been run amazingly. During the tenure of Mr. Ratan Tata between 1991 and 2012, the market cap of Tata went up 500 times. When there is a growth story of 500 percent, there will be some winner projects and some losers,” he argued.

NCLAT has no “absolute” power to appoint Director under Section 242(2)(k)

Section 242 provides for various steps which the tribunal can resort to in order to remedy the situation faced by a company. Among those are the powers to remove directors under section 242(2)(h) and appoint directors which is provided under section 242(2) (k).

The NCLAT, in exercise of that power, had removed N Chandrasekaran from the post of Executive Chairperson. Chandrasekaran was the person whom the Board had appointed as Executive Chairperson after Mistry’s exit in 2016. The NCLAT reversed this and reinstated Mistry to the post.

Salve argued that the NCLAT does not have such absolute powers under Section 242(2)(k) to appoint Directors.

“The power under Section 242(2)(k) is nuanced and for specific purposes,” he said.

Arguments on behalf of Shapoorji Pallonji Group and Cyrus Mistry

Senior Counsel CA Sundaram and Shyam Divan represented Shapoorji Pallonji Group (SP Group) while Senior Advocate Janak Dwarkadas represented Cyrus Mistry.

Following were the important submission made by them:

Relationship between Tata Sons and Pallonji group of mutual trust

One of the foremost arguments by SP Group was regarding the relationship between Tata Sons and SP Group.

It was pointed out that relationship went back 70 years and was one of mutual relationship and trust.

The long relationship between the two groups developed over decades. It developed in the context of a statutory framework which restricted the role of private trust, it was argued.

Tata Trusts could not vote on its own shares between 1964 and 2000 due to statutory restrictions and it was a public trustee appointed by Central government who could vote on its shares.

That was when Shapoorji Pallonji because of their relationship with Tata became a reliable partner who could vote and that is why Tata sold their shares to SP Group. This continued till public trustee mandate was done away with in 2000 and Tata Trusts could vote,” it was argued.

Functioning of group companies important

It was contended by CA Sundaram that Tata Sons is only an investment company. It invests in the group companies and Tata Sons board takes decision on what direction the group companies should take, said Sundaram.

“That is why functioning of group companies becomes important. If the group companies want to take any decision, then Tata Sons as majority shareholder of those companies effectively takes that decision,” he said.

Decisions taken by Tata Sons if not made correctly affect the downstream companies and that in turn will affect Tata Sons shareholders because Tata Sons’ only income is the income from the downstream companies, it was submitted.

On oppression and mismanagement

It was argued that a company being a profit-making company is not a criteria for deciding whether or not there is oppression or mismanagement.

Companies Act 2013 made substantial changes.

“The test as per Section 242 is whether the affairs of company is being run in a manner which is prejudicial to members or public interest or interests of company itself. Oppression could mean any act which leads to loss of confidence in the manner in which company is being run,” SP Group submitted.

It was further contended that the Companies Act of 2013 expanded the scope for the tribunal to interfere by including ‘oppression’ and ‘prejudice’ to member as a ground under Section 242.

“In earlier Act, only ‘oppression’ of members was a ground and not ‘prejudice’. Under the 2013 Act, an action can be prejudicial without being oppressive. there have been acts which have been prejudicial to us though not necessarily oppressive,” Sundaram said.

The act of converting company from public to private was to prejudice me because the protections afforded by virtue of being public was taken away, he added.

The whole conduct by which the company was made a private limited company showed that minority was being sidelined, it was claimed.

Cannot use Articles of Association to claim absolute rights

Another aspect highlighted by SP Group was that Tata Sons that owns many listed companies running to 65 lakh crores with public shareholders. So there should be some kind of independence in decision making and it cannot be a family affair.

“If they wanted to keep a family affair, they should have remained so instead of making it public,” the counsel submitted.

A public charitable trust (the largest shareholder of Tata Sons is Tata Trusts which is a public charitable trusts) cannot legally run such companies.

“That is why it needs it be “board run”. They cannot use the Articles to claim that they have absolute right over affairs of the company.”

On the mandate of pre-consultation with Tata Trusts nominees on Tata Sons board

Another major submission by SP Group was that Article 121A of the Articles of Association of Tata Sons, which provides for pre-consultation with Tata Trusts nominees on broad, was used by Tata Trusts to undermine the board.

“NCLAT said Article 121A cannot be used by Tata Trusts to demand pre-consultation. That is our argument – that TATA Sons should be a board managed company,” Sundaram said.

The pre-consultation in this case was not advisory but to convey the decision of the concerned majority shareholder (Tata Trusts), he said adding that the institution of independent directors was incorporated by way of 2013 Act to protect interests of minority shareholders.

“Section 10(1) of Companies Act 2013 says Articles of company will have to be subject to the Act. This means you cannot have Articles mandating pre-consultation in a board managed company,” it was contended.

Director’s role is fiduciary

Senior Counsel Shyam Divan emphasised that management of company is the ‘board’.

He argued that the most crucial obligation imposed on Director now is that the director is a fiduciary and fiduciary’s allegiance is to the company alone.

“Director cannot abdicate or yield on his/her independent judgment. Director may consult or take advice but has to act independently and cannot be compelled or coerced,” he said.

Proportional representation and representation of minority shareholders on board are well established statutory principles and Directors should act in good faith of the company and its shareholders, he underscored.

Breach of company law provisions in removal of Mistry

Divan said that the following provisions of the Companies Act were breached while removing Mistry from the post of Chairman.

Section 166 – on mandate that Directors have to exercise independent judgment.

Section 118(10) – secretarial rules to be followed which was not in this case including giving of notice.

Section 149 – which mandates board has to manage company, not majority shareholder.

 

 

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Via Bar & Bench
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