Background-
Both Tata Sons and Mistry had challenged a December 18, 2019 order of the National Company Law Appellate Tribunal (NCLAT) which had ordered the 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 July 2018 against which an 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 that 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.
- 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 a 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’s wish by giving minority stakeholders 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 the removal of the Managing Director or any other director and the 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 outvoted in a board meeting or personal lives of directors cannot be reasons to invoke “just and equitable” ground for winding up, he said.
A 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 the 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 that restricted the role of a 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 the 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 within 2000 and Tata Trusts could vote,” it was argued.
Functioning of group companies:-
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 decisions on what direction the group companies should take, said Sundaram.
“That is why the 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 take 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 criterion 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 the company is being run in a manner which is prejudicial to members or public interest or interests of the company itself. Oppression could mean any act which leads to loss of confidence in the manner in which the 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 members as 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 the company from public to private was to prejudice me because the protections afforded by virtue of being public were 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 board, 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 the 2013 Act to protect the interests of minority shareholders.
“Section 10(1) of Companies Act 2013 says Articles of the 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 emphasized that the management of the company is the ‘board’.
He argued that the most crucial obligation imposed on Director now is that the director is a fiduciary and the 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 the 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 the mandate that Directors have to exercise independent judgment.
Section 118(10) – secretarial rules to be followed which were not in this case including giving of notice.
Section 149 – which mandates board has to manage the company, not the majority shareholder.
