This article is written by Aditi Banerjee, a student of B.B.A. LL.B. (Hons.) from Chanakya National Law University, Patna.
Introduction
Recently, the Supreme Court has pronounced its judgement in the high-profile corporate dispute case, Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd. & Ors., popularly known as the Tata-Mistry dispute. The Tata-Mistry dispute, which started from a boardroom coup in 2016, which led to the removal of Cyrus Mistry from the position of the Chairman of Tata Sons, was one of the biggest corporate law battles of the country.
The Bench led by the Chief Justice of India, S.A. Bobde set aside the order of NCLAT and upheld the order of NCLT, ruling in favour of the Tatas. This judgement is a significant judgement in the domain of Corporate Law as it deals with issues like the rights of minority shareholders, corporate governance, re-conversion of a public limited company to a private limited company, etc. The Supreme Court has also interpreted various provisions of the Companies Act, 2013 and Companies Act, 1956.
Facts of the Case
The Sapoorji Pallonji Group (SP Group) led by Cyrus Mistry held 18.37% of the total paid up share capital in the Tata Sons Limited. In 2012, Cyrus Mistry was appointed as the Executive Deputy Chairman of the Tata Sons for a period of five years. By the end of the year, Cyrus was appointed as the Executive Chairman of Tata Sons by the Board of Directors, w.e.f. 29/12/2012, while Ratan Tata was designated as the Chairman Emeritus. On 24th October 2016, a resolution was passed by the Board of Directors of Tata Sons, which removed Cyrus from the position of Executive Chairman of the company.
Later, Cyrus was removed from Directorship of Tata Industries Ltd., Tata Consultancy Services Ltd. and Tata Teleservices Ltd. by separate resolutions passed by the shareholders of the respective companies. Thereafter, Cyrus resigned from the Directorship of few other companies. After that, two companies of SP Group named Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd. filed a company petition under S. 241, 242 and 244 of the Companies Act, 2013, on the grounds of mismanagement, oppression and unfair prejudice. The complainants also challenged the conversion of Tata Sons from Public Ltd. to Private Ltd. Company.
Before the NCLT
Before the NCLT, the complainant companies of SP Group had contended oppression and mismanagement on the grounds of abuse of Article of Association of the Company, illegal removal of Cyrus from the position of Executive Chairman, Ratan Tata treating the company as proprietorship while other directors acting as puppets, dubious transactions, and disastrous projects of the Company.
In response to the allegations made, Tata Sons Ltd. contended that Cyrus had lost the confidence of the directors of the company, Ratan Tata was designated as Chairman Emeritus at the instance of Cyrus to guide the board, the Board had agreed for the continuance of Cyrus as director after his removal from the position of Executive Chairman but his later actions compelled them to remove him from directorship, and that Cyrus never raised any concern regarding mismanagement and oppression before his removal as the Executive Chairman. Tata Sons also contended that the petition while talking about failed projects has omitted to talk about phenomenal success of the company, that commercial misjudgement of the board cannot be regarded as mismanagement or oppression, and that Cyrus was director when decisions regarding failed projects were taken and that his father was part of the board when Article of Association was amended.
The NCLT dealt with all the contentions elaborately. On the issue of oppression, it held that the argument that the Article of Association has been used as a tool for mismanagement and oppression is unacceptable since SP Group was represented in the board when the Article of Association was amended. NCLT further observed that removal of Cyrus as the Executive Chairman cannot be projected as oppression of minority shareholders.
The removal of Cyrus as Executive Chairman of Tata Sons and his removal as the Director was on account of trust deficit, not account of purported legacy issues. The NCLT also did not find any merit in the contention that the re-conversion of Tata Sons from Public to Private falls for consideration. With this, the NCLT ruled in the favour of Tata Sons Ltd.
Before the NCLAT
The NCLAT reversed the order of NCLT. It observed that there was nothing on record to suggest that the Board at any time expressed displeasure about the performance of Cyrus. It also observed that Ratan Tata was determined to remove Cyrus even prior to the meeting of the board and the majority shareholders of the Tata Trust knew that there was a requirement of advance notice before the removal of Cyrus, and if all major decisions are taken in advance by the Tata Trust, the independence of the board becomes irrelevant. The NCLAT also held that the removal of Cyrus had nothing to do with his performance as the Executive Chairman of the company. NCLAT also observed that the lack of confidence on Cyrus was not due to his lack of performance, but due to abuse of powers by the Respondents.
Further, NCLAT observed that the hurried conversion of Tata Sons Ltd. from Public Company to Private Company in 2017 without following the procedures laid down under Section 14 of the Companies Act, 2013 suggest that the majority directors acted in a manner prejudicial to the minority directors and the company. Holding the company’s affairs prejudicial and oppressive to the Appellants, NCLAT held the removal of Cyrus as Executive Chairman and from the Directorship of the company as illegal. NCLAT also directed the majority shareholders, i.e. Tata Group, to consult the minority shareholder SP Group for all future appointments of Executive Chairman or Directors.
Questions of Law before the Supreme Court of India
Following questions of law arose before the Hon’ble Supreme Court:
- Whether the company’s affairs have been conducted in a manner prejudicial and oppressive to some members?
- Whether the winding up of the company on just and equitable grounds is in tune with the well-settled principles and parameters?
- Whether the order of reinstatement of Cyrus into the Board of Tata companies justified?
- Whether the setting aside of Article 75 of the Article of Association on the grounds of oppression and prejudice justified?
- Whether affirmative voting rights available to the majority Directors appointed by the Tata Trust oppressive and prejudicial?
- Whether the re-conversion of Tata Sons from public to private company required the procedures to be followed under Section 14 of the Companies Act, 2013?
Observations of the Supreme Court
In the matter of removal of Cyrus
The Supreme Court referred to the case of Scottish Cooperative Wholesale Society v. Meyer, where the House of Lords had construed the meaning of ‘oppressive’ as ‘burdensome, harsh and wrongful.’ The Court also referred to Sections 241 to 246 of the Companies Act, 2013, which deal with prevention of oppression and mismanagement. The Court observed that Cyrus was first removed from the position of Executive Director, but later he leaked confidential mail of the company to media and passed on sensitive information of the company to the Income Tax Department, which led to his justified removal from the Directorship of the company.
The Court referred to the case of Hanuman Prasad Bagri v. Bagri Cereals Pvt. Ltd., and observed that mere termination of Directorship cannot trigger the just and equitable clause for winding up and grant of relief u/s 241 and 242. The Court further observed that it is ironical on the part of complainant to accuse the Board of being oppressive to the interests of minority shareholders, after being appointed as the successor of Ratan Tata in 2012 while having only 18.37% of shares in the company. The Court also observed that removal from Directorship cannot be projected as the acts of oppression and unfair prejudice to the minority shareholders. The Court further observed that NCLAT cannot grant relief u/S 242 unless the removal was oppressive or prejudicial.
Invocation of Just and Equitable Clause for Winding Up
The Court referred to the case of Loch v. John Blackwood, in which it was held that there must lye a justifiable lack of confidence in the management of the company’s affairs at the foundation of the application for winding up. The Court also referred to the test laid down in Baird v. Lees and observed that the present case does not fall anywhere near the just and equitable standard, as Cyrus, being a minority shareholder, was appointed as the Executive Chairman of the company. The Court further observed that the just and equitable clause has emerged from the Law of Partnership, while a company like Tata Sons is not even a quasi-partnership.
The Court also referred to the cases of Lau v. Chu, and Rajahmundry Electric v. Nageshwara Rao, and observed that lack of confidence between majority and minority shareholders would not be sufficient for winding up as held in the case of SP Jain v. Kalinga Tubes. The Court then observed that the observation of NCLAT justifying winding up is completely flawed.
Reinstatement of Cyrus
The Court observed that NCLAT failed to see that Cyrus was appointed Executive Chairman only for a term of five years ending 31.03.2017. The judgement for reinstatement was passed in 2019, i.e. seven years after his appointment. The Court referred to Rajkumar Dey v. Tarapada Dey, and Md. Gazi v. State, in which it was settled that reinstatement cannot arise after the completion of tenure of office. It was further observed that Sections 241 and 242 do not confer the power of reinstatement. Therefore, it was observed that the reinstatement was granted without any basis in law.
Article 75
Article 75 of the Article of Association of Tata Sons empowers the company to purchase shares from a minority shareholder at a fair market value. It was observed that NCLAT neutralized Article 75 merely on the basis of ‘likelihood of misuse’, while S. 241(1)(a) does not provide remedy for future conduct. Further, the Court observed that SP Group subscribed to the Article of Association and consented to amendments, therefore they cannot challenge it.
Necessary Requirement of Affirmative Votes of Majority Directors appointed by Tata Trust
Article 121 of the Article of Association provides that decisions which require majority of directors shall require affirmative votes of the majority of directors appointed by the Trust under Article 104B. Complainants contended that with the paradigm shift from corporate democracy to corporate governance with the advent of the 2013 Act, every action of the Board should pass the test of fairness. But, the Court observed that the shift is only focused on listed public companies, while Tata Sons is a private company. The Court also observed that Tata Group was guided by the principles of Corporate Governance, even without a statutory compulsion, as Cyrus was appointed as the successor of Ratan Tata, even after being a minority shareholder.
On the contention that Ratan Tata was acting as shadow director, the Court observed that Cyrus himself sought the guidance of Ratan Tata and Tata was appointed Chairman Emeritus to guide the company, therefore this contention is not acceptable. The Court also observed that the right to claim proportionate representation is only available to small shareholders, not minority shareholders, under Section 151 of the Companies Act, 2013.
Re-conversion of Tata Sons from Public to Private Company
It was observed that Tata Sons was incorporated as a Private Company, which was later converted to a Public Company by virtue of Section 43A of the Companies Act, 1956 in 1975. It was observed that the Article of Association of Tata Sons satisfied the parameters of Section 2(68) of the Companies Act, 2013, i.e. of Private Company. Tata Sons merely got its Certificate of Incorporation amended by the Registrar of companies, which is not covered by Section 14 of the 2013 Act. The Court referred to Ram Parshotam Mittal v. Hillcrest Realty, in which it was held that the records of the Registrar do not determine the status of a company, but company’s Article of Association and statutory provisions do. In Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd., it was held that the Parliament always recognised the re-conversion of deemed Public Company into a Private Company. Therefore, this issue was also decided in the favour of the Respondents Tata Sons.
Conclusion
The Supreme Court decided all the issues in favour of the Respondents and reversed the judgement of NCLAT. This judgement dealt with various aspects of Company Law. The Supreme Court deeply dealt with the issue of oppression of minority shareholders and referred to the origin of the concept in English Law as well as the Indian Corporate Law. The Court also found the removal of Cyrus Mistry from the Board as justified due to his actions of breaching fiduciary relationship with the company and held his removal not to be a case of prejudice and oppression.
The Court then observed that the Companies Act, 2013 only provides the right to proportionate representation to small shareholders of listed companies, not to minority shareholders like SP Group. The Court also held that SP Group does not have right to proportionate representation even contractually, owing to the Article of Association of the Company. Although Cyrus Mistry had a somewhat weak legal case and a somewhat stronger sympathetic case against the Tata Group, this judgement, likely to become a landmark precedent, has negative impact on minority shareholders as they will now have to ensure that they have the right to proportionate representation contractually as they do not have such statutory right.
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