Background
On March 26, 2021, a three-judge bench of the Supreme Court of India (SC), led by Chief Justice determined there was no case of oppression and mismanagement against Cyrus Mistry at Tata Sons.
Cyrus Mistry is Tata Sons’ former chairman. Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited (Complainant Companies) belong to the Shapoorji Pallonji Group in which Mr Mistry holds a controlling interest. The Complainant Companies held about 2 per cent of the issued share capital of Tata Sons.
The dispute started in 2016, when Cyrus Mistry was dismissed as chairman of Tata Sons and also lost his seat on the board. This prompted the Complainant Companies to file a case of oppression and mismanagement against Tata Group before the Mumbai Bench of the National Company Law Tribunal (NCLT). Through order dated March 6, 2017, the NCLT held the Petition to be not maintainable at the instance of persons holding just around 2% of the issued share capital.[1] Through order dated April 17, 2017, the NCLT dismissed the application for waiver of this criteria.
The Complainant Companies filed appeals before the National Company Law Appellate Tribunal (NCLAT) against both these orders. The appeals were allowed on September 21, 2017 by the NCLAT. It waived of the requirement under Section 244 (1)(a) and remanded the matter back to NCLT for disposal on merits. The NCLT heard the case on merits and dismissed the same through an order dated July 9, 2018.
This order was challenged before the NCLAT, which, through a final order dated December 18, 2019 granted reliefs to the Respondents (Cyrus Investments Pvt. Ltd. and Others). The SC’s judgment deals with 15 Civil Appeals, 14 of which were filed by the Appellants (Tata Consultancy Services, Ratan Tata, Trustees of Sir Ratan Tata Trust and Sir Dorabji Tata Trust, Companies of the Tata Group such as Tata Teleservices Limited, Tata Industries Limited and Tata Sons), assailing the order of NCLAT in its entirety. The remaining appeal was filed by the Respondents, seeking more reliefs than what had been granted by the NCLAT.
The arguments in this case touched upon the principles of independence of board of directors, acts that constitute oppression of minority shareholders, manner of removal of Cyrus Mistry in 2016 and the conversion of Tata Sons from a public limited company to a private limited company. The two sides also differed on the valuation of Cyrus Mistry’s shares in Tata Sons to the tune of around Rs. 1 lakh crores (15.38 billion USD).
In this high-profile and publicised dispute and the Supreme Court has laid down an important precedent on the various points raised by the respective parties.
Key Takeaways
NCLAT, being the final court of facts, the Supreme Court limited itself to addressing issues that the NCLAT had specifically overruled from NCLT’s order:
- Whether NCLAT’s finding that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters;
- Whether the reliefs granted and the directions issued by the NCLT were in consonance with the powers available under Sub-section (2) of Section 242;
- Whether the NCLAT could have, in law, muted the power of the Company under its Articles of Association and grant a direction to nullify the effect of Articles that could potentially be oppressive and prejudicial;
- Whether the re-conversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A (4) of the Companies Act, 1956.
After an exhaustive consideration of the evolution of the English and Indian Company laws in general and provisions of oppression and mismanagement in particular, the SC addressed these questions and in doing so confirmed the contours of the following concepts.
- Winding up and the Just and Equitable Clause
In addressing whether Cyrus Mistry’s removal could have been the basis for the allegation that the company’s affairs have been or are being conducted in a manner oppressive or prejudicial to the interests of some of the members, the Court clarified aspects of just and equitable clause under the Companies Act, 2013.
Deriving from jurisprudence from the United Kingdom and Privy Council’s decisions on the issue[2] the Court stated that it is a well settled point 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. At the foundation of applications for winding up there is a need for a justifiable lack of confidence in the conduct and management of the company’s affairs. More importantly, the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company, but wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter.
From the perspective of Indian case law, the Court stated that for the invocation of just and equitable clause, there must be a justifiable lack of confidence on the conduct of the directors.[3] Reinforcing the strength of findings in S.P. Jain v. Kalinga Tubes Ltd.[4], the leading case on the issue, the Court reiterated that a mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient cause. It stated that in the present case NCLAT failed to see that the “just and equitable clause” is triggered only in two situations namely: (a) wherever there was a functional deadlock; and (b) wherever there was a corporate quasi partnership in which there was a breakdown of trust and confidence.
Towards acts that constitute oppressive action the SC confirmed the finding in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Ltd. and Ors.[5] another preeminent case on the issue of oppression and mismanagement, that the test of oppressive action is not whether it is lawful, rather whether it is oppressive in nature.
Finally, given the charitable nature of Tata Trusts the Court pointed that the NCLAT should have raised the most fundamental question whether it would be equitable to wind up the Company and thereby starve to death those charitable Trusts, especially based on un-charitable allegations of oppressive and prejudicial conduct. Considering the above the SC held that the finding of the NCLAT that the facts otherwise justify the winding up of the Company under the just and equitable clause, was completely flawed.
- Powers of the Courts Under Section 242 of the Companies Act 2013
These powers were considered with respect to the directions issued by NCLAT regarding the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata Companies. Noting that Mr Mistry’s tenure had come to an end at the time of institution of the petition, the Court stated that the question of reinstatement would not arise after the tenure of office had run its course, is a settled position.Following the words at the end of sub-section (1) of Section 242 of the Companies Act 2013, the Court stated that the same cannot be interpreted as conferring on the Tribunal any implied power of directing reinstatement of a director or other officer of the company who has been removed from such office.[6] These words can only be interpreted to mean as conferring the power to make such order as the Tribunal thinks fit, where the power to make such an order is not specifically conferred but is found necessary to remove any doubts and give effect to an order for which the power is specifically conferred. The position in law that a contract of personal services cannot be enforced by Court is a long-standing principle of law and cannot be displaced by the existence of any implied power.
The SC emphasised that the purpose of an order both under the English Law and under the Indian Law, irrespective of whether the regime is one of “oppressive conduct” or “unfairly prejudicial conduct” or a mere “prejudicial conduct”, is to bring to an end the matters complained of by providing a solution. The object cannot be to provide a remedy worse than the disease. The object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders. The Tribunal should therefore always keep in mind the purpose for which remedies are made available under these provisions, before granting relief or issuing directions.
- Altering Articles of Association
Commenting on the relief passed by the NCLAT regarding Article 75 of the Articles of Association, the SC noted that as a matter of fact, the NCLAT itself had agreed on first principles that it has no jurisdiction to declare any of the Articles of Association illegal. However, after having set a benchmark correctly NCLAT neutralised Article 75 merely based on likelihood of misuse. Highlighting that Section 241(1)(a) of the Companies Act, 2013 provides for a remedy, only in respect of past and present conduct or past and present continuous conduct which the NCLAT had stretched to cover the likelihood of a future bad conduct, which is impermissible in law.Establishing the sanctity of the Articles of Association of a company, the SC set straight that “Articles of Association of a company constitute a contract among shareholders, is the bedrock of Company Law.”
- Other Issues
The Supreme Court’s decision was also expected to impact Mistry’s shareholding since late in 2020 Mistry decided to part ways with the Tata Group and proposed a separation plan. The Court left that issue open stating that at that stage and in the Court, it could not adjudicate on fair valuation.
[1] Under Section 244 (1)(a) of the Companies Act, 2013, an application for relief in cases of oppression and mismanagement must be made “in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares” .
[2] Cases considered included Loch v John Blackwood, [1924] AC 783; Baird v Lees, (1924) SC 83 Scottish Supreme Court; Ebrahimi v Westbourne Galleries, [1972] 2 WLR 1289; Lau v Chu, [2020] 1 WLR 4656.
[3] Rajahmundry Electric Supply Corpn. Ltd. v. Nageshwara Rao, (1955) 2 SCR 1066
[4] (1986) 3 SCC 310
[5] (1981) 3 SCC 333
[6] Citing section 14 of the Specific Relief Act, 1963 the SC stated that not only had Cyrus Mistry himself not prayed for reinstatement, the NCLAT was in overreach of its powers as under the said section specific performance of a contract dependent on personal qualifications cannot be enforced.