38.6c New Delhi, India, Thursday, March 28, 2024
Business

In a Big Win for Tata Sons, NCLAT Order Re-establishing Cyrus Mistry as Chairperson Set Aside by the Supreme Court

By Tanya Sehrawat      30 March, 2021 03:17 PM      0 Comments
In a Big Win for Tata Sons, NCLAT Order  Re-establishing Cyrus Mistry as Chairperson Set Aside by the Supreme Court

On Friday (March 26, 2021), the Supreme Court set aside the order of National Company Law Appellate Tribunal (NCLAT) that had re-established the role of Cyrus Mistry as the Chairperson of Tata Sons Limited. 

A lot of legal questions were answered by the Court pertaining to this dispute in the favour of Tata Sons while bringing an end to this legal battle that lasted half a decade since 2016, ultimately leading to removal of Cyrus Mistry as the Chairman of Tata Sons. 

The matter was heard by the Bench comprising Chief Justice of India SA Bobde along with Justices V Ramasubramanian and AS Bopanna. While the Bench allowed the appeal by Tata Sons, it dismissed the appeals of Mistry and Shapoorji Pallonji Group (SP Group). 

The Court said,We find all the questions of law are liable to be answered in favour of the appellants, Tata Group and the appeals file by the Tata Group are liable to be allowed and Shapoorji Pallonji group is liable to be dismissed.” It further added the Order of the NCLAT dated December 18, 2019 is now set aside. 

The judgement said, “Company petition no 82/2016 filed by two companies belonging to SP Group shall stand dismissed. Civil Appeal 1802 filed by Cyrus Investments Limited and Sterling Investment Corporation is dismissed. There will be no order as to costs."

One of the pleas of SP Group was to ask for alternate relief from the Court, thereby directing Tata Sons to separate the ownership interest of SP Group in Tata Sons by exterminating the shares that are held by SP Group in place of fair maintenance. The Court dismissed this plea explaining it cannot rule on the same and asked the parties to explore the available legal recourses to them. 

Therefore, the judgement further stated, 

“The valuation of shares of SP Group depends on the value of stake of Tata Sons in listed equities, unlisted equities, immovable assets etc. and also perhaps the funds raised by SP Group on the security pledge of the shares.

Therefore, at this stage and in this court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the article 75 route or any other legally available route in this regard."

Framing of Questions & Their Answers: Tata Sons’ Favour

The Apex Court formulated the following questions and all of these were awarded in the favour of Tata Sons. 

  • Whether the formation of opinion by the NCLAT that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts justify the winding up of the company on just and equitable grounds is in tune with the well-settled principles and parameters especially in the light of the fact that the findings of the National Company Law Tribunal (NCLT) on facts were not individually and specifically overturned by the NCLAT;
  • - Whether the reliefs granted and directions issued by the NCLAT including the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata Companies are in consonance with the pleadings made, reliefs sought and the powers available under Section 242 of Companies Act;
  • - Whether the NCLAT could have in law muted the power of the company under Article 75 of Articles of Association to demand any member to transfer his ordinary shares by simply injuncting the company from exercising such right without setting aside this Article;
  • - Whether characterisation 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 necessary approvals under the Companies Act.

Counsels for the Case

Senior Advocates Harish Salve and Dr. Abhishek Manu Singhvi represented Tata Sons. They were briefed by a team from Karanjawala & Co.

The Karanjawala team included Senior Partner Ruby Singh Ahuja, Principal Associate Tahira Karanjawala, Senior Associates Shravan Sahny, Anupam Prakash, and Arjun Sharma along with Associates Utkarsh Maria and Ashutosh P Shukla. 

Additionally, Advocates Reena Choudhary, Dhruv Dewan, Rohan Batra and Avishkar Singhvi appeared for Tata Sons as well. 

Senior Advocates SN Mookerjee along with Harish Salve went on to represent Ratan Tata in the case. 

On the other hand, SP Group was represented by Senior Counsel Shyam Divan and CA Sundaram. Cyrus Mistry was represented by Senior Advocate Janak Dwarkadas. 

Background of the Case

The December 18, 2019 order of the NCLAT was challenged by both Tata Sons and the Mistry. The said order had restored the position of Cyrus Mistry as the Chairman of the Tata Sons. 

The said order was set aside by the Supreme Court on January 10, 2020. 

In the judgement in 2019, NCLAT concluded that the proceedings of the Tata Sons’ Board Meeting, held on October 24, 2016 aiming to remove Cyrus Mistry as the Chairperson were illegal. It additionally held that a decision requiring a majority decision of the Board of Directors (BOD) or just a majority in an Annual General Meeting, must not be taken solely beforehand by Ratan Tata. 

Tenure of Mistry as the Chairperson had started in December 2012 until he was removed from the post by the majority of the BOD of the company on October 24, 2016. This was followed by an Extraordinary General Meeting that was conveyed on February 6, 2017. In the said meeting, the shareholders went on to vote for the removal of Mistry from the post. Thereafter, N Chandrasekaran was appointed as the Executive Chairman of Tata Sons. 

This led to the two Shapoorji Pallonji Firms that are shareholders in Tata Sons moving to the National Company Law Tribunal (NCLT) alleging “oppression” of minority shareholders along with “mismanagement” over the removal of Mistry. 

The said petition was dismissed by the NCLT in July 2018. An appeal was filed against this in NCLAT by Pallonji Firms. NCLAT overturned the order of the NCLT that has led to the prompting of the current appeals before the Supreme Court. 

In its petition, Tata Sons went on to highlight the fact that NCLAT granted reliefs that were not even prayed by Pallonji, as in the restoration of Mistry as the Chairman of Tata Sons and calling the appointment of the Chandrasekaran as illegal. 

Along with this, Tata also stated that the tenure of Cyrus Mistry as the Chairman and Director of Tata Sons had expired in March 2017. Therefore, issuing of a direction to let him continue beyond this would be a violation of the Articles of Association of the Company along with the established principles of Company Law. 

On the other hand, Pallonji submitted in their cross appeals that the NCLAT could not provide them with certain crucial reliefs. They had prayed that Mistry Firms must be given the right of representation in all the committees that are formed by the BOD of Tata Sons. 

Additionally, they also strived for striking down of placing the right of affirmative vote in the hands of select directors of Tata Sons which would enable them to override the view of the entire board. 

Arguments on Tata’s Behalf

Harish Salve argued for Tata Sons. His significant arguments have been listed below. 

  • NCLAT Order Gives Minority Stakeholders Reins of Tata

In the said argument, Salve highlighted how Pallonji has only 18% stake in Tata Sons while the latter owns 68%. He further explained, under the concept of ‘normal corporate democracy,’ it will not be possible for the company owning 18% stake to get even one of one single director on the BOD of the company. However, the company with the majority stake can go on to have the Board all packed with its own members. 

He pointed out the appointment of Mistry as the Executive Chairman was not under any right of the minority shareholder. He concluded by saying that NCLAT order goes against the wish of the majority and thereby gives the reins of Tata Sons to minority shareholders. 

  • Interference of NCLAT under Sec 242, Companies Act is Against Established Law

By the virtue of Sec 241, Companies Act, any member has been endowed with the power to approach the tribunal alleging oppression and mismanagement of the company. 

Section 242 states that if the Tribunal is sufficiently satisfied with the facts that it is “just & equitable” to wind up the company, however if there are chances of the members getting prejudiced by the same then the Tribunal has the option of resorting to the slew measures that are laid down further in the said section. 

This does include the removal of the Manging Director or any other director along with the appointment of new directors. 

Pertaining to this, NCLAT had decided the conduct of affairs of Tata Sons was ‘prejudicial’ and ‘oppressive’ to Cyrus Mistry along with being the same to the interests of the members of its own company and the group companies. 

Salve argued on the ground that the NCLAT had given a very narrow definition to “just and equitable” while interferingHe said, The test is whether there is lack of probity in the running of company and standards for applying the principle (of just and equitable grounds) are very high.”

He concluded his point by saying that the ground of “just and equitable” for winding up cannot be invoked pertaining to the scenario of being voted out in a Board Meeting or the personal lives of the Directors. 

  • A mere Bad Business Decision Can’t be Termed as Mismanagement

Salve also made a submission pertaining to Sec 241 by stating that a bad business decision may lead to suffering of losses, however, it cannot be termed as mismanagement. 

The issues faced by the company due to the problem of distribution of mobile spectrum by the government or the sales of a car worth 1 lakh going down cannot be the reasons to establish lack of probity. 

  • Allegations of Mismanagement Can’t be Made by a Member on Tata Sons

Salve contended, owing to the functioning of other downstream Tata Companies, a member of Tata Sons cannot make an allegation of mismanagement on the company.

“Section 241 refers to filing of 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.” 

Therefore, a member of Tata Sons cannot complain about other Tata companies. 

He further argued, “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.”

  • As per Sec 242(2)(k) NCLAT has No Absolute Power to Appoint a Director

Salve contended that as per Sec 242(2)(k), the ways of appointment of a director have been specified. 

In the exercise of power endowed by this Sec, NCLAT went on to remove Chandrasekaran from the post of Executive Chairperson, thereby re-establishing Mistry to the post. 

He thereby said that the NCLAT does not have the power to appoint a director under the said section. “The power under Section 242(2)(k) is nuanced and for specific purposes,” he said.

Arguments on SP Group & Mistry’s Behalf

The SP Group was represented by Senior Counsels, CA Sundaram and Shyam Divan. Mistry was represented by Advocate Janak Dwarkadas. Their significant submissions have been laid down as follows. 

  • A Relationship of Mutual Trust Between Pallonji & Tata

The Counsels went on to highlight the relationship between the two companies and specifying that the same ran back as long as 70 years. It is formed on mutual trust. It has developed over decades. It was argued that this relationship developed amidst the context of a statutory framework restricting the role of private trust. 

It pointed out a Public Trustee appointed by the Central Government could vote on the shares of Tata and Sons and it couldn’t do the same on its own shares between 1964 and 2000. 

It was further argued, “That was when Shapoorji Pallonji because of their relationship with Tata became a reliable partner who could vote and that is why Tata sold their shares to D Group. This continued till public trustee mandate was done away with in 2000 and Tata Trusts could vote.”

  • Functioning of Group Companies is as Significant

Sundaram contended that Tata Sons being an investment only company, invests in group companies and it should therefore, take decisions in the direction of the Group Companies.

He said, “That is why functioning of group companies becomes important. If the group companies want to take any decision, then Tata Sons as majority shareholder of those companies effectively takes that decision.”

It was further said, that incorrect decisions taken by Tata Sons affect the downstream, in turn affecting its shareholders as Tata Sons derives its income from the downstream companies.

  • Charges of Oppression & Mismanagement

The Counsel went on to argue that just being a profit making company cannot spare itself from the charges of oppression and mismanagement. Substantial changes have been made by the Companies Act, 2013. 

SP Group explained, “The test as per Section 242 is whether the affairs of company is being run in a manner which is prejudicial to members or public interest or interests of company itself. Oppression could mean any act which leads to loss of confidence in the manner in which company is being run.”

There were further submissions about the extension of scope of interference of the Tribunal by the virtue of the Companies Act, 2013 by including 'oppression' and 'prejudice' to member as a ground under Section 242.

Sundaram said, “In earlier Act, only 'oppression' of members was a ground and not 'prejudice'. Under the 2013 Act, an action can be prejudicial without being oppressive. there have been acts which have been prejudicial to us though not necessarily oppressive.”

He went on to add that the shift from public to private was to prejudice his client as the protections afforded by virtue of being public were taken away. It was lastly claimed that looking at the conduct of this shift, it could be made out that the interests of the minorities were being side lined. 

  • Articles of Association Can’t be Used to Claim Absolute Rights

SP Group highlighted the fact that Tata Sons owns listed companies that run to 65 lakh crores with public shareholders and therefore, there must be presence of independence in decision making and it cannot be a family affair. 

The Counsel submitted, “If they wanted to keep a family affair, they should have remained so instead of making it public.”

It was also submitted a public charitable trust which is the largest shareholder of Tata Sons is Tata Trusts and it cannot legally run such companies. 

“That is why it needs it be "board run". They cannot use the Articles to claim that they have absolute right over affairs of the company.”

  • Pre-consultation with Tata Trusts Nominees on Board Mandated by Article 121A, AOA

It was provided that Article 121A of the AOA of Tata Sons says consultation with Tata Trusts Nominees on Board is to be done beforehand. This was used to undermine the Board. 

Sundaram went on to say, “NCLAT said Article 121A cannot be used by Tata Trusts to demand pre-consultation. That is our argument - that TATA Sons should be a board managed company.”

He said that the pre-consultation in this case was to convey the decision of the majority shareholders and wasn’t advisory. He also added how institution of Independent Directors was included by the way of the 2013 Act in order to protect the rights of the minority shareholders. 

It was further contended, “Section 10(1) of Companies Act 2013 says Articles of company will have to be subject to the Act. This means you cannot have Articles mandating pre-consultation in a board managed company.”

  • Fiduciary Role of Director

It was emphasised by the Senior Counsel Divan the management of the company constitutes the ‘Board.’ He also argued that Director is a fiduciary and he owes fiduciary allegiance to the company alone. 

“Director cannot abdicate or yield on his/her independent judgment. Director may consult or take advice but has to act independently and cannot be compelled or coerced,”he said.

He further stated that statutory principles also include proportional representation along with representation of the minority shareholders on Board. The Director must also act in good faith of the shareholders as well as the company. 

  • Removal of Mistry is a Breach of Company Law

Lastly, Divan went on to throw light on his last argument by saying that the following sections are breached on removal of Mistry from his post: 

Section 166 - Mandatory for Directors to exercise independent judgment.

Section 118(10) – Following secretarial rules, which was not in this case including giving of notice.

Section 149 - Board has to mandatorily manage company, not majority shareholder.



Share this article:



Leave a feedback about this
TRENDING NEWS

supreme-court-orders-cbi-probe-into-alleged-murder-of-manipur-girl-emphasizes-fair-criminal-investigation
Trending Judiciary
Supreme Court Orders CBI Probe into Alleged Murder of Manipur Girl: Emphasizes Fair Criminal Investigation [Read Judgment]

Supreme Court emphasizes fair criminal investigation, warns unresolved crimes erode public trust. Orders CBI probe into Manipur girl's alleged murder.

27 March, 2024 01:09 PM
india-summons-us-diplomat-over-state-dept-remarks-on-kejriwals-arrest
Trending International
India summons US diplomat over state dept remarks on Kejriwal's arrest

After CAA, U.S. wades into Arvind Kejriwal’s arrest. Here's how India responded.

27 March, 2024 04:41 PM

TOP STORIES

global-entertainment-giants-warner-bros-netflix-amazon-get-relief-from-delhi-hc-in-copyright-protection-case
Trending Business
Global entertainment giants Warner Bros, Netflix, Amazon get relief from Delhi HC in copyright protection case

Delhi HC grants relief to global entertainment giants like Netflix, Amazon, Warner Bros, ordering takedown of copyrighted content on rogue websites.

22 March, 2024 12:13 PM
arvind-kejriwal-arrested-can-cm-administer-a-region-while-being-in-jail
Trending Top Stories
Arvind Kejriwal Arrested | Can CM administer a region while being in jail?

Will President's rule be imposed in Delhi after Kejriwal’s arrest? Read the full article to know more.

22 March, 2024 03:16 PM
merely-because-you-are-politician-cant-bypass-statutory-remedies-procedure-sc-refuses-to-consider-bail-by-kavitha
Trending Judiciary
'Merely because you are politician, can't bypass statutory remedies, procedure,' SC refuses to consider bail by Kavitha

Supreme Court denies bail to politician Kavitha in Delhi Liquor Policy Scam; ED alleges Rs 100 crore illegal gratification.

22 March, 2024 03:34 PM
ponmudi-to-be-sworn-in-as-minister-tn-governor-relents-before-sc
Trending Judiciary
Ponmudi to be sworn in as Minister, TN Governor relents before SC

Tamil Nadu Governor relents to Supreme Court's order, agrees to swear in DMK leader K Ponmudi as Minister after court's rap.

22 March, 2024 03:54 PM

ADVERTISEMENT


Join Group

Signup for Our Newsletter

Get Exclusive access to members only content by email