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Tata’s tata to Mistry? Not if the NCLAT has anything to say about it

Legacies, while the sturdiest, are often the most vulnerable to that harsh cousin of time, change. The battle royale being played out between Tata Sons and Cyrus Mistry, of the Shapoorji Pallonji Group, certainly seems to echo the thought, and is being closely monitored, as the outcome will set the way forward for one of the biggest conglomerates in India. Presently it would seem that Cyrus Mistry has come out victorious in view of the judgment rendered by the National Company Law Appellate Tribunal (“Appellate Tribunal” or “NCLAT“) on December 18, 2019, however Tata Sons filed a petition in the Supreme Court challenging the judgment rendered by the Appellate Tribunal, which is set to be heard by the Apex Court on January 10, 2020. As it stands, Cyrus Mistry has asserted that he is not seeking to return to his erstwhile position at Tata Sons but intends on insisting for a seat on the board in a bid to bolster the corporate governance at the company[i].

It would not be inaccurate to state that Tata Sons is a familiar name. For the sake of perspective, Tata Sons Limited(Tata Sons Private Limited as per records of the Ministry of Corporate Affairs) is the primary holding company and promoter of the Tata group of companies (“Tata Group“) which comprises over 100 (One Hundred) companies in more than 160 (One Hundred and Sixty) countries. Tata Sons was founded as a private company on November 08, 1917 but was “deemed” public with effect from February 01, 1975 as per the provisions of Section 43(1A) of the Companies Act, 1956 which mandated the conversion of any private company with the threshold turnover into a public company. Cyrus Mistry was appointed as Executive Chairman of Tata Sons in 2012 and he continued in that position until his sudden removal on October 24, 2016 wherein he was also dismissed from the board of directors of Tata Sons and from several operating companies of the Tata Group. In the wake of Mistry’s dismissal from his role at the helm, N. Chandrasekaran was appointed as the new chairman on February 21, 2017. In the meantime, Tata Sons also received shareholder’s approval to convert itself back into a private limited company, Soon after the removal, Mistry filed a petition alleging mismanagement and oppression of minority shareholders before the National Company Law Tribunal (“Tribunal“), Mumbai which delivered its judgment on July 12, 2018 (“Impugned Judgment“), dismissing the petition. The Impugned Judgment has been subsequently set aside by the Appellate Tribunal in its decision dated December 18, 2019 (“Judgment“).

Various crucial aspects of corporate governance as well as the conduct of private companies have been elaborated in the Judgment, Chapter IX of the Companies Act, 2013 (“Act“) deals with the oppression and mismanagement and grants the Tribunal the right to pass the necessary orders in the event it perceives that the company’s affairs have been conducted in a manner ‘prejudicial’ or ‘oppressive’ to any member or members, or prejudicial to the public interest or to the interests of the company. It is prudent to note that ‘prejudicial’ has not been defined and is for the respective judicial authority to evaluate. The Tribunal and Appellate Tribunal have taken divergent routes while interpreting whether the actions, including the dismissal of Cyrus Mistry, of the board of Tata Sons and the other respondents were indeed oppressive. Interestingly, this exercise has been predicated on the lens through which the nature of the company and the accompanying complaint, are viewed.

The above question has arisen in light of the concept of “quasi-partnerships” brought to the fore by Mistry’s assertion that despite the fact that Tata Sons comprises various shareholders belonging to different companies of the Tata Group, it has, in effect, been run as a two-group company since its inception, with the two groups being mainly Tata group consisting of Tata Trusts and ‘Tata Group Companies’along with ‘Tata family members’and the Shapoorji Pallonji group. Closely linked with the same is the allegation of legality, or lack thereof, of certain articles of association (“Articles“) of Tata Sons, especially Article 75 which allows Tata Sons to transfer ordinary shares of any shareholders (including of the Shapoorji Pallonji Group) without notice through special resolution. Tata Sons has alleged that the Appellate Tribunal lacks the jurisdiction to declare the Articles and/or any Article illegal or arbitrary since the provisions of the Articles are agreed upon by the shareholders.

The Tribunal, in the Impugned Judgment elaborated on the principle of quasi-partnerships. It approved the judgment rendered by the Hon’ble Supreme Court in Life Insurance Corporation of India vs. Escorts Ltd[ii] in favour of the free will of the company and upheld the “sovereign prerogative of the company to appoint or remove a director from office without the shareholders giving any reason for the removal of such director”[iii]. It reiterated the absolute nature of corporate democracy and further upheld the ratio in Ebrahimi v. Westbourne Galleries Ltd[iv] wherein the Supreme Court recognised the absolute right of general meeting to remove the directors.  On the issue of the nature of the ouster, the Tribunal quoted the judgment in S. P. Jain vs. Kalinga Tubes (7965) 2 SCR Pg 72O, Hanuman Prasad Bagri and Ors. vs. Bagri Cereals Pvt Ltd.[v] and Atmaram Modi vs. ECL Agrotech Ltd[vi], in which the courts held that where a directorial dispute has no nexus with the shareholder’s proprietary rights, the same cannot be entertained under oppression and mismanagement.

In contrast to the Impugned Judgment, the Appellate Tribunal in its turn, has viewed the dispute as arising from the partnership-like nature of Tata Trusts and Shapoorji Pallonji group.The Appellate Tribunal has relied on S.P. Jain v. Kalinga Tubes Ltd[vii] and echoed the principle that while “a company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in”[viii]. On the legality of the Articles, the Appellate Tribunal held that “The Tribunal and the Appellate Tribunal has no jurisdiction to hold any of the Articles illegal or arbitrary, the terms and conditions being agreed upon by the shareholders. However, if any action is taken even in accordance with law which is ‘prejudicial’ or ‘oppressive’ to any member or members or ‘prejudicial’ to the Company or ‘prejudicial’ to the public interest, the Tribunal can notice whether the facts would justify the winding up of the Company and in such case, if the Tribunal holds that it would unfairly prejudice member or members or public interest or interest of the Company, may pass appropriate order in terms of Section 242[ix]“.

Another interlinked facet of the matter is the conversion of Tata Sons into a private limited company. The Appellate Tribunal highlighted the fact that under the Act, the only method of such conversion is under Section 14, which requires special resolution and subsequent approval by the Tribunal of the conversion, after which the company can request the Registrar of Companies (RoC) (which comes under the ambit of the Ministry of Corporate Affairs) to register the company as a private company. The Appellate Tribunal found that procedure had not been followed and no approval had been taken by Tata Sons from the Tribunal in its conversion from a public company to a private company, and therefore it held that Tata Sons could not be treated as a private company. It also found fault with the action of the RoC Mumbai to register the company as a private limited company in the absence of the Tribunal’s approval of the same. The ‘hurried’ manner in which the company was sought to be converted into a private company has been seen by the Tribunal as ‘prejudicial’ to the Company, including the minority members, and specifically pointed out Tata Trusts, who have affirmative voting rights over the majority decision of the board of directors and other director/members, as being at fault[x].

In addition to striking down Tata Sons’ status as a private company, the Appellate Tribunal in its judgment has laid restrictions on the wielding of Article 75 and has stated that the company, its board of directors and shareholders, which has not exercised its power under Article 75 since inception, will not exercise its power under Article 75 against the Shapoorji Pallonji Group and other minority members.Such power can be exercised only in exceptional circumstances and in the interest of the company, but before exercising such power, reasons should be recorded in writing and intimated to the concerned shareholders whose right will be affected.[xi]” The Appellate Tribunal has granted Tata Sons four weeks to reinstate Cyrus Mistry as the chairman.

The ripples of this critical Judgment by the Appellate Tribunal has been received with tentativeness. Foremost, RoC Mumbai sought to be impleaded in the case and moved a review petition citing factual and legal errors in the Judgment[xii] which has promptly been dismissed by the Appellate Tribunal. It is aggrieved at the usage of words “with the help of the RoC” in the context of conversion of Tata Sons to a private company. Various opinions have surfaced on the controversial conclusions reached by the Appellate Tribunal, with debate surrounding the fact of the jurisdiction of the Appellate Tribunal and exceeding the same thereof. The Supreme Court’s decision in the matter has the potential to mark a watershed moment in dealing with cases of oppression and mismanagement.

[i]https://www.livemint.com/companies/news/cyrus-mistry-says-not-interested-in-getting-back-into-tata-group-in-any-capacity-11578225738160.html
[ii] (1986) 1 SCC 264
[iii] Para 481, Cyrus Investments Pvt. Ltd. &Anr vs. Tata Sons Ltd. &Ors., C.P. No. a2(MB)/2O16
[iv][1973] AC 360
[v] (2OO1) 4 SCC 42O
[vi] (7999) 98 Comp Cas 463 (CLB)
[vii] AIR 1965 SC 1535
[viii] Para 138, Cyrus Investments Pvt. Ltd Vs. Tata Sons Ltd. &Ors, Company Appeal (AT) Nos. 254 & 268 of 2018
[ix] Para 119, ibid
[x] Para 178, ibid
[xi] Para 187(iii), ibid
[xii]https://www.business-standard.com/article/companies/tata-vs-mistry-roc-moves-review-plea-seeks-modifications-in-nclat-order-119122301379_1.html

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