Company Law

[By Mansi Avashia] The author is a student at the Gujarat National Law University. Introduction The Tata-Mistry dispute has been one of the most controversial and hostile battles in the corporate sector of India. On March 26, 2021, the Supreme Court brought an end to this longstanding feud by setting aside the 2019 National Company Law Appellate Tribunal [“NCLAT”] order which had restored Cyrus Mistry as the Chairman of the Tata group. In this post, the author analyzes the Supreme Court judgment in detail and highlights why this decision is an important precedent in Indian jurisprudence. Facts Tata Sons was established as a private company in 1913. Over the years, the Shapoorji Pallonji group acquired 18.37% of the total share capital of Tata Sons. In December 2012, Cyrus Mistry was appointed as Executive Chairman of Tata Sons for five years.[i] Cyrus Mistry was ousted by a board resolution passed in October 2016and was removed as a director from Tata’s group companies, i.e., Tata Consultancy Services, Tata Teleservices, and Tata Industries Limited.[ii] Two companies of the Shapoorji Pallonji group, namely, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, approached the National Company Law Tribunal [“NCLT”], Mumbai alleging oppression, mismanagement, and unfair prejudice by Tata Sons. NCLT dismissed the petitions of Shapoorji Pallonji group companies and hence the matter was appealed before NCLAT.[iii] The NCLAT reversed the decision of the NCLT and found the removal of Cyrus Mistry illegal. The NCLAT also restricted Ratan Tata and the nominees of Tata Trusts from making any decisions that needed majority approval in an AGM or of the board of directors. .[iv] Tata Sons approached the Supreme Court to decide the matter. Issue The questions considered by the Supreme Court were: Whether the company’s affairs were conducted in a prejudicial and oppressive manner and whether the facts justified the winding up of the company on just and equitable grounds? Whether the reliefs granted by the NCLAT particularly with respect to the reinstatement of Cyrus Mistry, were in consonance with the power available under Section 242(2) of the Companies Act, 2013 [“the Act”]? Whether the NCLAT had the power to mute Article 75 from the Articles of Association [“AoA”] of Tata Sons? Whether the affirmative voting rights granted by the AoA were oppressive and prejudicial in nature? Whether the re-conversion of Tata Sons from a public to a private company required approval under the provisions of the 1956 Act and the Act? Findings Oppression and Mismanagement The NCLT in its decision had provided reasoning for all the allegations of oppression and mismanagement including Air Asia dealings, Nano project failure, dealings with Siva Group Company, which were not addressed by the NCLAT in its order. These findings were not appealed by Cyrus Mistry. Hence, the Apex Court considered the NCLT’s decision as final and did not make any determination on these matters. Invocation of just and equitable clause Section 242 requires the Tribunal to decide whether it was just and equitable for the company to be wound up due to oppression and mismanagement. The Court held that the grounds would be fulfilled when there was a mutual breakdown of confidence in a company that operates as a quasi-partnership.[v] In the present case, there was no quasi partnership since Shapoorji Pallonji had acquired shares decades after Tata’s inception. Moreover, some disagreements among the management were not sufficient to invoke the clause. The Court also pointed out that the NCLAT should have considered the feasibility to wind up a company with charitable trusts as its shareholders. Reinstatement of Cyrus Mistry by the NCLAT At the outset, the Court pointed that Cyrus Mistry’s behaviour of leaking confidential emails to the press and sensitive information to the tax authorities was largely responsible for the loss of confidence among the Board of Directors and his subsequent removal. With respect to the reinstatement in the NCLAT order, the Supreme Court’s observation on this finding was three-fold. First, that Section 242 did not provide for the power to reinstate persons in a case of oppression and mismanagement. Second, Cyrus Mistry had not sought reinstatement as a relief in his prayer before the Court. Third, Cyrus Mistry’s tenure had expired as it was for a period of 5 years, from 2012-2017. Thus, the NCLAT had gone beyond its powers by appointing Cyrus Mistry as the Chairman ‘for the rest of his tenure’. Further, the Court also noted that if the removal of Cyrus Mistry was illegal as found by the NCLAT, it was still an effective dismissal and could raise a claim for damages. Further, a contract of personal services could not be enforced by Courts. Thus, the NCLAT finding was found to be incorrect. Abuse of AoA Article 75 Article 75 conferred power on the Company to require any holder of ordinary shares to transfer his shares. This was rendered ineffective by the NCLAT in its order and its use was restrained on the basis of ‘likelihood of misuse’. The Court observed that Section 241 and 242 only provides for past and present prejudicial conduct and not for a future possibility of misuse. [vi]The Article had been a part of the AoA for a long time and Cyrus Mistry was himself involved in amending it. There were no instances of invocation or misuse of Article 75 by Tata Sons. Thus, the NCLAT’s decision was found to be unsustainable. Affirmative Voting Rights Article 121 of the AoA provided that all the matters which required the consent of the majority of directors had to be approved by the nominee directors appointed by the Tata Trusts. Cyrus Mistry wanted these rights to be restricted to certain matters and also be extended to the nominee directors of the Shapoorji Pallonji group. He also contested that these the presence of these rights impeded the nominee directors to make unbiased decisions in the best interests of the Tata companies. The Court held that  affirmative voting rights were commonly found in AoAs of companies all over the world

[By Digvijay Ravindar Singh] The author is a student at the National Law School of India University, Bangalore. The concept of CSR differs between developing countries and developed countries with respect to its definition as well as implementation. Additionally, there is no comprehensive, “one size fits all” global corporate governance or CSR system based on western codes and regulations that can be implemented in emerging markets. As per several writers, the rationale behind the concept of CSR also varies in developed and developing countries. In this paper, the researcher shall dissect the rationale/theory behind CSR in India, compare it with another theory called the “Stakeholder Theory”, and subsequently, suggest a confluence between both these theories using which certain reforms can be brought about in the Companies Act [“the Act”]to ensure maximum social benefit. The thesis of the paper is that amending the Companies Act through the introduction of a confluence of two different theories of CSR will result in maximum social impact. Trend of “impact approach” in India In the present time, the COVID-19 pandemic has depleted the finances of the Government. The Government anticipated such costs, and consequently:- Declared, through the Ministry of Corporate Affairs (MCA), that the funds spent on COVID-19 management would be treated as eligible CSR activity. The order stated that the CSR funds can now be used for promoting preventive care healthcare infrastructure and disaster management. The MCA notified that the items under Schedule VII will be broadly and liberally interpreted in the wake of the crisis. Amended the CSR norms to include research and development (R&D) spending on new vaccines and drugs related to COVID-19. The caveat being that such research and developmental activities should be carried out in collaboration with any of the institutions mentioned in item (ix) of Schedule VII of the Act. The reason behind such directions and amendments was solely to redirect the CSR funds for COVID-19 relief. It can, therefore, be seen that the Government is trying to direct CSR funds to sectors that can translate it to a greater impact on society in the present time. Mitra has observed that in a developing country like India, it is in the best interest of both the stakeholders (the Government and the governed) that the Government and the Corporations work together to develop the human capital of the country to bring about a glorious future. This is the rationale behind the development of CSR in developing countries. It is to aid the Government in funding sectors where it cannot invest due to budgetary constraints. Various authors state that CSR should be used for benefiting society in a form of a shared social responsibility as this maximizes social welfare and reduces the negative externality in the largest amount. This approach can therefore be termed as the Impact Approach. With the COVID-19 pandemic ravaging the country, resulting in loss of life and livelihood, it will not be a wrong assumption to make that the Government is following the Impact Approach of CSR usage, by opening up avenues for companies to invest their CSR allocations for COVID-19 eradication efforts to maximize social welfare. Offsetting of negative externality Another approach to CSR is ‘offsetting of negative externality’ or the Stakeholder Theory which differs from the ‘Impact Approach’.The term ‘Negative Externality’ has been defined as the harm that the business transaction of a corporation does to a third party. ‘Offsetting of Negative Externality’ is, therefore, the lessening or the removal of the harms caused to stakeholders of a corporation due to its actions. This approach is governed by the idea that while corporations should invest their CSR for social welfare, at the basic level they are still accountable to their stakeholders first. Hence, the CSR amount should be invested such that the stakeholders, which consist of parties directly and indirectly affected from the working of the company, are benefited. Proposal for the maximum benefit to stakeholders It is proposed that, for the maximum benefit to the stakeholders of a corporation, there must be a confluence between the two principles of impact approach and offsetting of negative externality such that the offsetting of the negative externalities of a corporation can take place with the maximum impact. This resultantly means that a corporation must identify its most negative externality and then, using the impact approach, the company should use the CSR amount where the society can have the greatest welfare. For instance, the most negative externality of a tobacco company would probably be the number of deaths that its product causes by oral cancer. By using the confluence between the Impact Approach and the Stakeholder Theory at this stage, the possible sectors for investment will be considered and the sector where social welfare will be maximized will be invested in. In this case, it will probably be the investment of the CSR amount in an oral cancer institute. The confluence between the two principles will, therefore, help achieve the maximum social welfare while offsetting the corporation’s greatest negative externality.  My proposal for the confluence of the two principles mentioned above is:- There must be an independent impact assessment firm that evaluates the business transactions of a corporation and traces its most negative externality. The corporation must be incentivized to invest in offsetting its most negative externality such that the rationale behind the CSR concept can be realized and the corporation can cause maximal positive impact to the interests of its stakeholders. Proposal for incentivizing corporations and its effect on criminality As mentioned in the previous section, corporations need to be incentivized for investing to offset their greatest negative externality. This can be achieved through the following ways- Double CSR credit (the amount invested will be counted as double for the CSR requirement) should be provided for incentivizing the investment of the corporation to offset its most negative externality. A detailed report regarding the same must be attached to the company’s annual report as prepared by an independent impact assessment firm each year. The cost for hiring

[By Aayush Akar and Aarushi Prabhakar] The authors are students at the National Law University, Odisha. The directors of a company hold a fiduciary role and are required to conduct the operation of the company in a way that is desirable to the interests of the company. Non-executive or independent directors are not responsible for day-to-day businesses and are generally active in the strategy and decision-making practices. The provisions on vicarious liability have a standardized language, provided that the person is liable if at the time of the commission of the crime he/she was accountable for the affairs of the company. However, these provisions do not differentiate between “Managing Directors (MDs) and Executive Directors (EDs) and Non-Executive Directors (NEDs) and Independent Directors (IDs)”. As a result, law enforcement agencies/trial courts were sometimes perceived to keep the whole Board accountable for all legal violations of the company. This piece of writing throws light on whether the non-executive directors be held liable for the day-to-day affairs of the company or not. Fundamental Principle  Supreme Court observed in the case of  “N Rangachari v. Bharat Sanchar Nigam Ltd”,  that unless explicitly laid out in the legislation, there would be no vicarious liability. If the provision of any statute gives rise to a criminal obligation, then the essentials set down for vicarious liability must be strictly complied with. The essentials to be fulfilled for a person to be vicariously liable of which the company is primarily accused is that he or she was involved in the incriminating act and he or she knows what is attributable to him or her to be made responsible for the incrimination. In other words, it is not appropriate to rope in an individual who has nothing to do with the issue. A company is a legal entity and all its activities and operations are the outcome of the acts of other individuals. Thus, the officers of the company responsible for the affairs of the company are made personally liable for the acts of the company. Each and every person, as well as the company accountable for the affairs of the company at the time offence, was committed is made liable. However, these essentials provide an escape route for people who are successful in proving that the crime was performed without their involvement or that they have exerted all due diligence to avoid the commission of the crime. It was observed in the case of “Gunmala Sales Pvt. Ltd v. Anu Mehta & Ors” that the directors shall not be held liable since they don’t have an active role in the day to day affairs of the company and it is essential to look upon the role of the director while deciding the liability of the director. Immunity Provided to Non-Executive Directors Section 149(12) of the Companies Act, 2013 provides immunity to non-executive directors and independent directors. But, this immunity is not available for offences under any other law and only for the offences under the Act. However, Section 149(12) of the Act doesn’t always provide a safe harbour to the non-executive directors as a director can be held liable when an offence has occurred with his consent, knowledge, and where he did not act in a diligent way.  Poonam Garg, who is an appellant in the case of “Poonam Garg v. SEBI”, was a promoter in the category of NED and Promoter, Managing director and compliance officer of the company was her husband. Securities Appellate tribunal held that Poonam Garg cannot take immunity for the breach committed by her husband ( MD, promoter and Compliance officer of the Company) by giving an excuse of ignorance about the PIT regulations. Therefore, Poonam Garg (NED of the company), was held liable for the day to day affairs of the company. The Ministry of Corporate Affairs, in March 2020, issued a circular to the Registrar of Companies directing them to not initiate civil or criminal proceedings against independent directors and non-executive directors until sufficient evidence is there against them. Non-executive directors / Independent directors are not responsible for keeping a check on the day to day affairs of the company. Accordingly, no liability can be claimed upon a non-executive director for non-performance of certain activities like minutes of meetings, filing of updates on statutory registers for such tasks that are beyond the scope of NED/ID A full-time director or KMP should be held liable for the breach of any company law since they are accountable for the day-to-day affairs of the company. Furthermore, it was directed that standard operating procedures provided by the MCA have to be followed for initiating proceedings against officials who have violated the law of the company. Vicarious Liability of NED’s for Dishonour of Cheque More often than not, the question of NED/ID’S liability for the dishonour of cheque has come under scrutiny in numerous cases before various courts of India. It was held in the case of “Sunita Palta v. M/s Kit Marketing Private Limited” that the non-executive directors are exempted from Section 138 of the Negotiable Instrument Act which attracts criminal liability for the dishonour of cheque. Vicarious liability was discussed in terms of Section 141 of the Negotiable Instrument Act by the court. It was held that an individual should be held accountable for the affairs of the company at the time crime was committed for being criminally liable under Section 141 of the Act. Each and every person associated with the company shall not fall within the scope of this Section. Henceforth, a director cannot be held liable under the provision if, at the time of the offence, he was not accountable for the affairs of the company. On the contrary, a person can be held liable even though he/she doesn’t hold any office or designation provided he/she was accountable for the affairs of the company at the time offence was committed Need for a Reform In the day-to-day business of the company, the NEDs do not continuously pay much attention and play an

[By Varun Akar and Ashuthosh V] The authors are students at the Institute of Law, Nirma University. Introduction Directors[i] and Officers[ii] (D&Os’) are considered to be the heart and soul of the company as they make crucial decisions for running the company smoothly. Such people are highly qualified, experienced, and well-versed with the affairs of the company. In the aftermath of the Kingfisher, PNB, L&T scams, etc., the role of D&Os’ has been given importance to improve corporate governance and reduce the possibility of financial fraud. They undertake the responsibilities which are in the interest of the company for maximizing its profits. However, while carrying out such functions, they are susceptible to certain risks which may make them jointly or severally and personally liable for the losses or harm suffered by the company. Moreover, they also have the duties towards various stakeholders such as shareholders, creditors, customers, etc. as mentioned under Section 166[iii], breach of which would result in claims against them. Hence, there arises a need to protect them from unnecessary claims. Companies Act, 2013 provides for D&O Liability Insurance under Sections 197(13) and 149(8) r/w Schedule IV. The provisions do not mandate a company to take the insurance, however, it is recommended to have a D&O Insurance to indemnify the injuries suffered except for fraud, wilful misconduct, bribery, insider trading, etc. Section 197(13) enables a company to take insurance on behalf of D&Os’ to indemnify them against any liability arising out of default, misfeasance, negligence, breach of duty & trust. Also, premiums paid by the company to the insurer shall not be considered as a part of the remuneration paid/payable to the D&Os’, however, if they are proven guilty for acting contrary to any provision given under the Companies Act, 2013, the same shall be considered as a part of their remuneration.[iv] Section 149(8) provides for the manner of appointment of Independent Directors which may or may not consist of D&O Insurance. Key Features of D&O Insurance Policy: A D&O Insurance covers the repercussions arising out of decisions or actions taken by D&Os’ in the natural course of business, i.e, managing trade in the normal routine[v] as per the object clause in the memorandum. However, in some cases, the benefits of these policies are extended to the employees by including them in the definition of ‘Insured Person’. Such policies are available to current, incoming and retired D&Os’ of a company or its subsidiaries. The company receives the money from the insurer only if the claim is made during the policy period within which the policy is in effect and therefore, enforceable. Such a policy period is usually for 12 months but it may extend on the mutual agreement between the parties. A D&O Insurance policy shall have the following indemnification clauses; For the protection of the personal assets of D&Os’ from being used to satisfy the claims against the company. This clause shall be enforceable when the company does not indemnify its D&Os’ against any claim. Therefore, such cover directly protects personnel from personal liability. For indemnifying a company to the extent that it covers the litigation expenses and cost incurred by the company on behalf of its D&Os’. For providing indemnification to a company for its securities claims. This is the only clause that protects a company for its liability, distinct from the liability of its D&Os’. It provides coverage only against claims made by shareholders against the company because of an action of offer, sale, or purchase of securities. Therefore, such cover is often taken by listed public companies. Benefits of D&O Insurance Policy: It enables the company to hire and retain qualified and experienced D&Os’. Protects the directors and the company from the unprecedented and high litigation cost and expenses against claims made by the stakeholders and also prevent invocation of personal liability in case of defaults. It facilitates the personnel to take risky decisions with confidence in the interest and growth of the business. Improving better corporate governance practices by providing coverage only in cases of genuine defaults or negligence, and not wilful defaults or fraud. It provides compensation for the harm caused to the reputation of the personnel during the litigation. Lastly, the amount of coverage shall vary in each D&O Insurance policy based on relevant factors such as the nature and size of the business, the line of business, industry or market conditions, associated risks, and “penalties provided in the Companies Act, 2013“. Possible Impacts on D&O Insurance after enforcement of Companies (Amendment) Act, 2020 The Ministry of Law and Justice on September 28, 2020, brought in significant changes through the Companies (Amendment) Act, 2020 in the penalties of the personnel under a variety of sections of Companies Act, 2013. Few of which are mentioned below[vi]: The penalties provided under Section 135 of the officers has been amended from the imprisonment up to 3 years and fine which may range between Rs 50,000 – Rs 5,00,000 to a new reduced penalty of 1/10th of the amount required for the CSR or Rs 2,00,000 whichever is less and with no imprisonment. The penalties in case of delay in filing of financial statements with the registrar under Section 137 has been reduced from a minimum of Rs 1,00,000 and a maximum of Rs 5,00,000 to Rs 10,000 and Rs 50,000 respectively. Penalties under Section 167 for vacation of Office of Director has been reduced from imprisonment of one year or fine of Rs 5,00,000 or both to only fine of Rs 5,00,000. For the contravention of the provisions of Chapter XI, the penalties under Section 172 have been reduced from a maximum of Rs 5,00,000 to Rs 1,00,000. Similar reductions in penalties have been made under various sections. The above reductions constitute a material change in the policy. Materiality is the basis on which the insurance company decides whether or not to go ahead with the policy. Every fact which has an impact on the risk-bearing shall constitute a material fact. Further, any

[By Aparajita Marwah and Saavni Kamath] The authors are students at the National Law Institute University, Bhopal. Introduction Gardening Leave is a measure taken by the employer when an employee is terminated or tenders resignation and denotes the period of time between service of notice of termination and actual termination. A garden leave clause may be effected at any stage of an employee’s course of employment, but is largely restricted to being imposed during the notice period. In such a scenario, companies generally take steps to ensure that during this period, the employee undergoing the process of termination is no longer an active part of their workforce and has no access to clients, co-workers, or sensitive information pertaining to the organization, while still being paid a regular salary with benefits. During such leave, the employee would bound by the employment contract nonetheless and would have to refrain from any act that could hamper the interests of the employer. The reasons for imposing a gardening leave clause upon an employee are manifold. Firstly, these clauses prevent an outgoing employee from being employed by a rival organization during that period, thereby effectively restricting the sharing of any confidential information. Secondly, limiting the employee’s access to company data, clients, or other employees during this transition period, reduces the threat of any possible informational leak once the employee is free from their contract. Further, in terms of the etymological roots of the expression, it essentially means that the employee in question would bide this period by engaging in hobbies such as gardening or could also be negatively perceived in the sense that the employee in question could not even be considered fit to garden. It is imperative to point out that employers may not place an employee on garden leave without such a clause as a part of their employment contract. In the event there is an existing clause, wrongfully place such employee under leave without any wrongdoing on the latter’s part. Alternative to Non-Compete Clauses While both Garden Leave and Non-Compete Clauses are invoked during the termination of employment in order to prevent the employee from engaging with another employer for a period of time and essentially seek to serve the same end, the means used are vastly different. The latter is utilized when employment is terminated and prohibits the employee, for a stipulated period, from being employed with a rival company or engaging in a rival practice. Non-Compete Clauses are also harsher in terms of the conditions set forth and employees are not provided with salary or bonus benefits throughout this duration, resulting in stricter judicial scrutiny regarding the fairness of these terms. In comparison, Garden Leave clauses provide greater leeway and are not particularly disadvantageous to the employee being terminated. Although the employees’ access to the market is restricted during this period, they still owe a fiduciary duty to the employer and enjoy salary benefits. This subsists until the employee in question has not been terminated. Additionally, it is pertinent to distinguish between paid non-compete periods from garden leave clauses as there is a tendency to consider the two as the same. Paid non-compete periods begin only after the termination of employment and share the same advantages that a garden leave clause might grant. Judicial Perspective within the Indian Spectrum Garden Leave Clauses along with Non- Compete Clauses are generally considered within the ambit of restrictive covenants. As a result, they are often subject to rigorous judicial scrutiny, to determine whether these clauses prohibit the freedom of trade and business granted to the employee, by way of Article 19 of the Indian Constitution. Moreover, contracts that impose restrictions upon the person’s freedom to trade or business are rendered void. While there has been no statutory recognition accorded to Garden Leave Clauses in any Indian legislation, there have been several judicial decisions discussing its validity and applicability. One of the first judgments regarding the application of Garden Leave Clauses was tendered by the Bombay High Court in VFS Global Services Private Limited v. Suprit Roy. The case was filed in lieu of execution of an agreement which contained a Garden Leave Clause. However, the errant drafting of the clause wrongfully imposed garden leave upon the employee, after the termination of employment was considered void within the ambit of Section 27 of the Indian Contracts Act, 1872. The Court added that Garden Leave Clauses themselves are not restrictive of trade and if applied in the manner prescribed, could prove to be beneficial for both the employee and the employer. In subsequent judgments such as that of Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd. and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr., the Court distinguished between garden leave and non-compete clauses, and established that the employee may be restricted during the term of employment but not after termination. Further, the Court by its decision in Kouni Travel Pvt. Ltd. v. Ashish Kishore and Tapas Kanti Mandal v. Cosmo Films Ltd., upheld the validity of Garden Leave Clauses and affirmed that they can be invoked to ensure the protection of trade secrets, as long as the employee in question is remunerated during the specified period. Effect of the COVID-19 Pandemic The ongoing health crisis has exacerbated the process of decline of both the economy and the job market. It has triggered a string of consequences including reductions in employee remunerations and large-scale layoffs. With employment rates at an all-time low, the question of applicability of restrictive covenants such as garden leave clauses is a poignant one. There are two diverging opinions with regard to whether or not a Garden Leave Clause, as a part of an employment contract, should be invoked during the current scenario. The first opinion and more widely asserted contention against invoking Garden Leave Clause is the fact that tough exit clauses make it all the more difficult for employees to seek employment elsewhere, in lieu of the current environment. Considering such clauses are widely