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CIVIL APPEAL NOs. 440441 0F 2020

INTRODUCTION

On Friday, 26^th March 2021, the Apex Court of India put aside the December 2019 order of the National Company Law Appellate Tribunal. The earlier order had re-established Cyrus Mistry as the Chairperson of Tata Sons Limited. To the 5-year-old battle between them, which started in 2016 with the elimination of Cyrus Mistry as Chairman of Tata Sons, the Supreme Court put an end to it by passing an order in the favour of Tata Sons. The bench that announced the order comprised the Chief Justice of India, S.A. Bobde, and other senior judges including A.S. Bopanna and V. Ramasubramanian. They dismissed the appeals of Mistry and Shapoorji Pallonji Group (SP Group) and allowed the appeals of Tata Sons against the judgment of NCLAT. On the plea by SP Group which prayed for alternate relief directing Tata Sons to cause the separation of ownership interest of SP Group in Tata Sons by extinguishing the shares held by SP Group in place of fair compensation, the Court said that it cannot rule on the same, instead asking parties to explore the legal options available to them. 

FACTS OF THE CASE

1. The chain of events started in 1980, when the father of Cyrus Pallonji Mistry, was a Non-Executive Director on the Board of Tata Sons. He remained at this post till 2004. In 2006, Cyrus Mistry was appointed as a Non-Executive Director after the resolution being passed by the Board of Directors dated 16.03.2012. He was chosen for five years i.e., from 2012 to 2017 or until disapproved by the shareholders at a General Meeting. Later, he was appointed as the Executive chairman starting from December 2012, contemporary to the appointment of Ratan Tata as Chairman Emeritus. 
2. In 2016, the Board of Directors (“Board”) collectively removed Cyrus Mistry as the Chairman while appointing Ratan Tata as the interim Chairman (Non-Executive). Although he was removed and replaced from the post of Executive Chairman, he was given the choice to either continue as a Non-Executive Director or leave the company. Subsequently, after a series of events Cyrus Mistry was removed from the Directorship of Tata Industries Limited, Tata Consultancy Service Limited, and Tata Teleservices Limited. 
3. Consequently, Cyrus Mistry resigned from the position of other functional companies such as the Indian Hotels Company Limited, Tata Steel Limited, etc., after witnessing the resolutions to remove him from the position of director. In consequence, the companies in which Cyrus Mistry has a governing and supervising interest, known as Cyrus Investment Private Limited and Sterling Investment Corporation Private Limited (“Complainants”) filed a petition before the NCLAT under sections 241 and 242 read with section 244 of the Companies Act, 2013, on grounds of mismanagement and oppression. The Complainants further challenged the conversion of Tata Sons from a public limited company to a private limited company. They also moved an application seeking a stay on an Extraordinary General Meeting of Tata Sons, wherein a proposal for the removal of Mr. Mistry as the Director had been moved for discussion. 

LEGAL ISSUES BEFORE THE SUPREME COURT

The questions given below were framed by the Supreme Court while deciding the case and later ordered in the favour of the Tata Sons. 

• Whether the affairs of the company have been or are being conducted in a manner prejudicial and oppressive to some members  
• Whether the facts justify the winding up of the company on just and equitable grounds is in adherence to the principles established, particularly with respect to the fact that the findings of the National Company Law Tribunal (NCLT) on facts were not individually and specifically dissected by the NCLAT;
• Whether the reliefs granted by the NCLAT and its order for the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata Companies  are in tandem with the pleadings made, reliefs sought, and the powers available under the provisions of Companies Act;
• Whether the decision of the NCLAT to mute the powers of the  company under Article 75 of Articles of its Association, which allows it to demand any member to transfer his ordinary shares by injuncting the company from exercising such right without setting aside this Article is detrimental or prejudicial to the interests of its members
• Whether characterization of the tribunal of the affirmative voting rights available under Article 121 to the director nominated by the trust in terms of Article 104B as oppressive and prejudicial is justified especially after the challenge to these Articles have been given up expressly and whether the tribunal could have granted a direction to Ratan Tata and the nominee directors virtually nullifying the effect of these Articles;
• Whether the re-conversion of Tata Sons from a public company to a private company requires the procedures prescribed under Section 14 of the Companies Act, 2013 to be mandatorily adhered to.

ARGUMENTS BY SENIOR COUNSEL HARISH SALVE

The arguments presented by the Senior Counsel on behalf of Tata sons were:

1. Senior Counsel pointed out that in the Company of Tata Sons, the majority stakeholder is Tata Trusts and Pallonji group only owns 18% of the stake in it. He further said that no minority shareholder in its capacity can get on board any single director whereas, the shareholder with 68% stake is capable of doing that since it has majority votes. Moreover, Cyrus Mistry was not given the position of Executive Chairman under any right of the minority shareholder, he was elected as well as replaced by the majority votes, therefore, NCLAT’s order went against the basic understanding and norm that whatever majority of the board decides, the company has to follow it. By considering and giving effect to the order which favours minority stakeholders while denying the decision of the majority is against the governing law.
2. Senior Counsel Salve pointed out that NCLAT’s decision is against the norms of the company law. He argued that Section 241 of the Companies Act, 2013 authorizes any member of the company to make a plea in front of the tribunal claiming oppression and mismanagement of the company by the management. Section 242 asserts that, in such a case, if the Tribunal believes that the facts would validate 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 take the course of action given under the said Section. Removal or appointment of a Managing Director or any directors is covered under this section. Mr. Salve pointed out that even when winding up of the company would have caused prejudice to the members of the company, as stated by the NCLAT, the tribunal still ordered the reinstatement of Cyrus Mistry. The order pronounced by the NCLAT is contradictory to their own beliefs.
3. Mr. Salve made a coherent argument that the grounds for interference stated by the Tribunal as “just and equitable” are ambiguous and confined in scope. Moreover, he suggested, “The test is whether there is lack of probity in the running of the company and standards for applying the principle (of just and equitable grounds) are very high”. To make his point, he further said that no personal life issues of directors, or getting voted out by the board members in a meeting cannot be used as justifications to cite and raise “just and equitable” ground for winding up a company. 
4. Mr. Salve said, subject to section 241, business decisions that might have caused monetary damages to the company cannot be categorized as ‘mismanagement’. 
5. Senior Counsel Salve referred to section 241 of the Companies Act, 2013 and stated “Section 241 refers to the filing of a 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”. He further said “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”
6. The last argument that Mr. Salve served in the court is that NCLAT has no absolute powers to appoint or remove directors in a company, it is bestowed to them for specific purposes. Since by majority vote, the board of the company removed Cyrus Mistry and replaced him with N Chandrasekaran, it was a valid alteration in the company and within the powers of the board. Therefore, it was an unnecessary step of the NCLAT to interfere in the day-to-day management of the company and to reinstate Cyrus Mistry as the Chairman of the Tata Sons. 

OBSERVATIONS OF THE APEX COURT

1. The removal of Mr. Cyrus Mistry 

• While considering the implications of the word “oppressive” used in sub-section (1) of Section 241 of the Companies Act, 2013, the Hon’ble Supreme Court referred to the case of Scottish Co-operative Wholesale Society v. Meyer,  wherein the House of Lords concluded that the word “oppressive” would mean “burdensome, wrongful or harsh”. With regard to the facts of the case, the apex court found that Mr. Cyrus was responsible for wrongfully disclosing confidential information pertaining to the company, to the media as well as divulging sensitive data to the Deputy Commissioner of the Income Tax, without authority. 
• Further, the Supreme Court observed it to be ironic for the complainants to allege oppression and prejudice on part of the Board of the company, particularly in light of the fact that Mr. Cyrus was appointed at the successor of Mr. Ratan Tata in 2012, while he held a minority stake in Tata Sons  at the time of appointment i.e., only 18.37% of the total paid up share capital.  It also delved into business decisions taken during the 10 years preceding the exit of Mr. Mistry observed several failures and successes, therefore concluding that; “… failed business decisions and the removal of a person from Directorship can   never  be  projected   as  acts  oppressive  or   prejudicial  to   the interests of the minorities.”
• Therefore, in this regard the apex court concluded that the rationale adopted by the NCLAT was flawed and since the Court found no instances of oppression or prejudicial conduct, the petition filed under Section 241 of the Act lacked merit.

2. Invocation of the ‘Just and Equitable’ clause

• With respect to the liquidation of the company, the Supreme Court referred to the case of Loch v. John Blackwood, and held that; an application for winding up must be supported with the existence of a “justifiable lack of confidence” in the management of the affairs of the company, and not merely upon the dissatisfaction at being voted out on commercial affairs or domestic policy decisions. 
• Further, upon application of the test established in the case of Baird v. Lees, the Court found that the case at hand did not fall within the ‘just and equitable’ standard, as it observed the dissatisfaction of the complaining minority whose representative was not offered a place on the Board, despite being projected as the succeeding Chairman of the organization. 
• In determining the nature of the entity, the Court, citing the case of Ebrahimi v. Westbourne Galleries Limited, the ‘just and equitable’ clause emerged from the law of Partnerships, whereas Tata Sons was incorporated as a “Company” and “a company, however small, however domestic, is a company and not a partnership or even a quasi-partnership”. 
• The apex court further referred to the cases of Rajahmundry Electric Supply Corporation Limited v. Nageshwara Rao and Lau v. Chu, and concluded that a lack of confidence amidst the shareholders would not suffice to liquidate a company. Based upon this statement and the rationale adopted in the case of S.P. Jain v. Kalinga Tubes, Court found that the justification of the NCLAT to order winding up of the company was erroneous.

3. The decision to reinstate Mr. Cyrus Mistry

• In this regard, the Court observed the error of the NCLAT to notice that the judgment for reinstatement of Mr. Mistry as the Executive Chairman was passed in 2019 i.e., seven years after he was appointed to the office for a tenure of five years. The Court referred to judgments such as Mohammad Gazi v. State of Madhya Pradesh and Raj Dey v. Tarapada Dey, and found it incomprehensible that the NCLAT ordered the reinstatement of the complainant as the Director, especially after the expiry of the term of his office as per the agreement. 
• The Court further clarified that sections 241 and 242 did not provide for the reinstatement of any personnel and thus it concluded that the order was granted without the sufficient legal basis. 

4. Mandatory requirement of Affirmative Votes of the Majority of Directors appointed by the Trust

• As per Article 121 of the Articles of Association of the company, such decisions which require a majority of the Board of Directors appointed by the Tata Trust under Article 104B, shall necessarily require their affirmative votes. The Complainants contended that every action of the Board must undergo the test of fairness, particularly in light of the shift in the regime, from “corporate democracy” to “corporate governance” after the emergence of the Companies Act, 2013. 
• However, the Court observed that the aforementioned shift applied to listed public companies, while Tata Sons was a private, unlisted company. It further held that the Tata Group was guided by the principles of corporate governance, as even without statutory compulsion, the representative of the Complainants was appointed as the successor of Mr. Ratan Tata, despite being a minority shareholder. 
• Lastly, before dismissing the contention, the Court also clarified that the right to claim proportionate representation under Section 51 of the Act, was available only to small shareholders and not minority shareholders of the company.

5. Conversion of Tata Sons from a Public to a Private Company

• While considering this issue, the Court referred to Ram Mittal v. Hillcrest Realty, wherein it was held that the status of a company is determined by its Articles of Association and the legal provisions, not by the records of the Registrar of Companies. Further, it cited the case of Darius Rutton v. Gharda Chemicals Limited, and reiterated that the legislature has always allowed the re-conversion of a deemed public company to a private company.
• With regards to the facts, the Court found that Tata Sons was originally incorporated as a private company, which was later listed on the national stock exchange in 1975, via section 43A of the Companies Act, 1956. The Articles of Association of the company sufficiently satisfied the parameters of conversion to a private company under Section 2(68) of the Act of 2013. Merely, because Tata Sons got its Incorporation Certificate amended by the Registrar, an action not prescribed within Section 14 of the Act of 2013, it does not invalidate the conversion on procedural grounds. 
• Thus, the Court decided the issue in favour of the Respondents and struck down the judgment of the NCLAT. 

CONCLUSION

In the aftermath of delving deep into various profound aspects of the company law and procedure, the Court ultimately upheld the verdict of the NCLT and decided the matter in the favour of the Respondents. It was observed that, according to the Supreme Court, the removal of Mr. Mistry, as a Director, was warranted by his actions against the company and confirmed the absence of any oppression or prejudice, whatsoever, on part of the Respondents. This judgement sets the tone for future cases pertaining to company law, and establishes strong precedent with respect to the provisions of the Act, corporate ethics and good governance as well as shareholder rights and responsibilities. 

Article by Mr. Sumer Karekar and Ms. Vartika Srivastava in April, 2021 while interning at the Chambers of Advocate Shankarlal Raheja.

Disclaimer: The views herein are personal and while careful attention has been given to ensure that the information is accurate the author assumes no liability or responsibility for any reliance thereon. This article is merely an information-sharing activity and is not a substitute to legal advice. It must be noted that we shall not be liable for any loss or damage caused due to any reliance thereof.