[By Prakhar Khandelwal]
The author is a third year student of National Law Institute University, Bhopal.
The National Company Law Appellate Tribunal’s (“NCLAT”) order dated 18 December 2019 (an appeal against which is pending before the Supreme Court) directed Tata Sons to reinstate Mr. Cyrus Pallonji Mistry as their Executive Chairman of the Board and as a director on the boards of Tata Sons and other group companies.
Under Section 244 of the Companies Act, 2013 (“Act”), a waiver for an application under Section 241 of the Act was granted to Mr. Mistry, on account of Shapoorji Pallonji Group’s investment of Rs.1,00,000 crores out of total investment in Tata Sons’ of Rs. 6,00,000 crores. Subsequently, the application was accepted under Sections 241 and 242 of the Act alleging prejudicial and oppressional acts of the majority shareholders (The Tatas). Mr. Mistry then moved the NCLAT, Delhi Bench against National Company Law Tribunal’s (“NCLT”) order pronounced in favour of the Tata Sons.
The Board of Directors (“BoD”) of Tata Sons includes 9 directors (1 Executive Chairman, 3 Nominee Directors nominated by Tata Trusts and 5 independent directors), which takes decisions by the way of a majority. The Tribunal adjudicated on various points of contention:
A. Legitimate Expectations
The counsel for Mr. Mistry (Appellants) contended that there has been a pre-existing relationship for over 50 years, based on mutual trust and confidence between SP Group and Tata Group, on business as well as personal levels. Such a non-formal relationship, which is a result of “factors outside of pure economic factors”[i], results in a “legitimate expectation of being treated in a mutually just & fair manner.”[ii] The Tribunal concurred with Tata’s contention that the concept of ‘legitimate expectation’ is not recognized under Sec.241 and 242 of the Act and therefore not applicable to the instant case.
B. Affirmative Voting Power akin to Veto Right
The appellants further contended that Articles 121 & 121A of the Articles of Association (AoA) of the company confer affirmative voting power to the Nominee Directors on the Board, subject to the condition that such a decision is required to be taken by a majority of the Board. This, in essence, gives veto power to the Nominee Directors, and indirectly to Tata Trusts in every decision of the Board. Before the Tribunal, even Mr. Ratan N. Tata and Mr. N.A. Soonawala themselves took a specific plea that Articles 121 and 121A mandated a ‘prior consultation’ and ‘pre-clearance’ from them.[iii]
The Tatas contention that a mere affirmative right, which is permissible by law, does not constitute veto Power as it does not confer any special rights to ensure Board approval was discarded by the Tribunal on account of their vote’s indispensability in all matters.
C. Reasons for Removal
The removal of Mr. Mistry was inter alia linked to his alleged lack of performance which had never been deliberated upon by the BoD prior to his removal, as evidenced by the minutes of various meetings placed on record. Three months prior to his removal, the Nomination and Remuneration Committee(“NRC”)formed under Section 178 of the Act which also included a nominee director of Tata Trusts to the Board had lauded his performance and recommended a pay hike to Mr. Mistry. The recommendation was unanimously endorsed by the BoD. The Appellants contended that sudden removal of Mr. Mistry on the alleged ground of ‘lack of performance’ was a result of Mr. Mistry’s inquiries into legacy hotspots and the subsequent decisions made by him for the benefit of Tata Sons, instead of the Tata Trusts (held by the Tatas). The NCLAT accepted the submission that Mr. Mistry’s alleged lack of performance had indeed never been discussed or deliberated upon prior to his removal.
D. Lack of independent judgement
Under Section 166 of the Act, the Directors are under a fiduciary duty to be independent in their judgement. The Tribunal held that a stark change in the Board’s opinion pertaining to the performance of Mr. Mistry within three months from the recommendation of the NRC clearly shows that the judgement was influenced by the majority shareholder i.e. Tata Trusts. The Tribunal also recognised the existence of a lack of clarity in the decision-making process of the Board as was evident from the email exchanges between Mr. Mistry and Mr. Tata.
E. Public to Private Company
The Tribunal held that before the filing of the instant appeal, the conversion of Tata Sons from a public to a private company in accordance with General Circular No. 15/2013 dated 13.09.2013 and Notification dated 12.10.2013 cannot override the substantive provisions of Section 14 of the Act mandatorily requiring Tribunal’s approval for such conversion from public to private company. Thereby, such fiction of ‘deemed conversion’ was held to be illegal and in contravention with law.
Analysing the decision of NCLAT
A. Corporate Democracy vs. Corporate Governance
The Supreme Court of India in LIC of India v. Escorts Ltd. upheld the sovereign prerogative of the company along with its shareholders to appoint or remove a director from office without an obligation to provide reasons for their removal under ‘Corporate Democracy’.[iv] It further upheld the ratio in Ebrahimi case[v] wherein the Supreme Court recognised the absolute right of general meeting to remove the directors.[vi] Under principles of Corporate Governance, the Board is accountable to the shareholders. Corporate Governance is, therefore, corollary to the concept of corporate democracy.
The procedure followed for removal of Mr. Mistry was in compliance with the provision of the AoA of Tata Sons. Such a decision by the BoD and shareholders of the Company regarding its matters of internal corporate affairs are governed by principles of ‘Corporate Democracy’ and cannot be superseded by the way of judicial interference
B. The supremacy of Articles of Association
A company’s AOA definesa company’s nature, objective and forms part of the company’s constitution along with the MoA. In World Phone India Pvt case, the Shareholder’s Agreement conferring affirmative rights was held to be non-binding on the company and its shareholders as it was not incorporated in the provisions of AOA of the company.[vii] In Vodafone International Holdings case SC held that even if the restrictions under SHA comply with the applicable laws, they are to be enforceable only when incorporated in the AoA.[viii] This clearly establishes that legal relationships, especially within the company cannot be binding unless incorporated and established in the AoA.
In the instant matter, the direction by NCLAT regarding rights relating to the inclusion of the minority shareholders, i.e. the SP group, in matters pertaining to the appointment of Executive Chairman of the BoD of Tata Sons has not been provided for in the Articles of Association. Further, the Tribunal’s inference that Tata Sons is a two-group company (Tata Group and SP Group) and that there exists such an understanding of the same between both the groups is unwarranted as neither the Articles of Association nor any kind of documents provides a record of the same. Conferring such rights is outside the scope of the Articles of Association and thereby cannot be enforced.
C. Deemed Public Company
Section 43A of the erstwhile Companies Act, 1956 (now repealed), provided for situations when a private company would be deemed to be a public company and required registration as a ‘deemed public company’. Subsequently, vide Section 43A (14), Section 43A (2), Section 43A (2A) and Section 43A (11)- (Amendment dated 13.12.2000), it can be understood that
- Section 43A shall not be applicable from 13.12.2000,
- the private company already registered as a public company under 43A (2A) can revert to the status of a private company on an application to the ROC, without any time limit put on the filing of an application under the same,
- unclear on the future categorisation of such companies as either public or private.
The private companies by virtue of Section 43A have become public only under law but continued with the characteristics of a private company. Mere inapplicability of Section 43A post 13.12.2000 does not construe them as public companies.
Further in Darius Rutton Kavasma case, SC held such deemed public companies to be hybrid companies with characteristics of a private company as defined under Section 3(1)(iil) of the Act, 1956.[ix] This judgment, passed on 28 October 2014, after enforcement of the CA, 2013 recognizes such hybrid companies with characteristics of a private company, and therefore, these companies cannot be equated to public companies. Moreover in Ram Parshotam Mittal case, SC held that definition under the Companies Act and AOA/MOA determine the nature of the company, not the records of the RoC.[x]
Tata Sons, a private limited company since 1917, was deemed to be a public company in 1976 according to Section 43(A) of the CA, 1956. But, the Companies Act, 2013, recognises only two classes: public company and private company. If the Articles of Tata Sons are looked into, it falls within the definition of a private company under the new regime as well. The MCA’s General Circular No.23/2002 which states that if the private company that had become deemed public company when Section 43A of the CA was in force, does not approach for reconversion, it is deemed to have chosen to remain as a public company, also states that putting a time limit on application for conversion is not feasible. But whether this puts a bar on an application for conversion is unclear.
D. Problems with Implementation
The inclusion of certain Articles through the Amendment of the AoA has been contested by Mr. Mistry. His plea to ‘strike them off entirely’ is difficult to accept as such amendment was incorporated in presence of atleast one SP Group member at the Annual General Meeting. Further, the consequential appointment of Mr. Chandrashekar as the Executive Chairman, which has been declared illegal by the NCLAT, puts into question the effectiveness and the status of the decisions made by Mr. Chandrashekar in his ‘deemed’ official capacity, all of which would lead to turmoil and confusion.
On January 2, 2020, Tata Sons then moved the Supreme Court against the impugned order of the NCLAT, wherein the two-judge bench of the SC stayed the operation of the order and deferred the matter to a subsequent date, stating the need to review the order in detail.
End Notes
[i] Company Appeal (AT) No. 254 of 2018.
[ii] Id.
[iii] Id.
[iv](19eG) TSCC 264.
[v] 1972 (2) All E, R. 492.
[vi]Supra note (iv).
[vii][2013] 178 Comp Cas 173 (Del).
[ix] (2O13) 14 SCC 277.
[x] (2009) 8 SCC 709.