[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 and it did not violate any provisions of the Act. Tata Sons was a Principal Investment Holding company and a majority of its shareholders were philanthropic trusts. The affirmative voting rights were valid since the nominated directors were acting purely in the public interest.
Proportionate representation
Cyrus Mistry had requested for proportionate representation of the Shapoorji Pallonji group since they were minority shareholders. However, the Court held that such protection was conferred by the 2013 Act only for listed companies and public companies. Since Tata Sons was a Private Investment Holding Company and its AoA did not contain any such provisions, this relief could not be granted.
Conversion from a public company to a private company
The main contention was that Tata Sons had not followed the requisite procedure to convert it to a private company. The Court held that apart from fulfilling the contours of a private company under Section 2(68) of the Act, Tata Sons had amended its certificate of incorporation and not its AoA. Thus, there was no need to follow the procedure under Section 14 of the Act.
Important Precedent
Apart from ending the highly publicized dispute, the judgment has clarified various crucial aspects of the law. For instance, this decision has established the supremacy of the AoA, and the Court has clarified that once it has been accepted by the shareholders, it cannot be subsequently challenged.
It has also laid down a higher threshold for oppression and mismanagement, by declaring that poor business decisions and ouster as a Chairman and Director were not sufficient to grant a remedy under Section 241 and 242 of the Act. It is clear that a case of oppression and mismanagement does not exist simply by virtue of certain issues faced by the minority shareholders.
With respect to the issue of affirmative voting rights, the Court held that a majority of Tata Sons’ shareholders were philanthropic trusts. Thus, the nominee directors were allowed to prioritize their duties towards the trusts. . It is unclear how this would apply if Tata Sons did not have primarily philanthropic trusts as its shareholder. Further, the Court has not clarified how the nominee directors should act if the interests of the Trusts were at loggerheads with the interests of the company.
Conclusion
The 3-judge bench of the Supreme Court has refused to interfere in the terms and conditions of the exit of Shapoorji Pallonji group from Tata Sons. The settlement may take a long time due to the lack of clarity regarding the path ahead. The Supreme Court’s judgment is undoubtedly a crucial precedent in Indian Company Law. However, there are still certain aspects that remain in the grey area, such as issues concerning affirmative voting rights and oppression and mismanagement.
Endnotes:
[i] Tata Consultancy Services Limited v. Cyrus Investment Private Limited and Ors., 2021 SCC OnLine SC 272, ¶¶8, 9 [“SC judgment”].
[ii] Id. at ¶15.
[iii] Cyrus Investment Private Limited and Ors. v. Tata Consultancy Services Limited, 2018 SCC OnLine NCLT 24460.
[iv] Cyrus Investment Private Limited and Ors. v. Tata Consultancy Services Limited, 2019 SCC OnLine NCLAT 858, ¶187.
[v] SC judgment, supra note 1, at ¶140.
[vi] Id. at ¶¶185, 189.