ANALYSIS OF NCLAT ORDER IN TATA-MISTRY CASE

Posted on 25 Feb 2020

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ANALYSIS OF NCLAT ORDER IN TATA-MISTRY CASE

Background

Pursuant to decision of Board of Directors of the Tata Sons Limited (“Tata Sons”) dated 24th October, 2016, just few months prior to the completion of the period of Chairmanship, Mr. Cyrus Pallonji Mistry (“ Mistry”) was removed as ‘Executive Chairman from the Tata Sons.
The minority group of shareholders/’Shapoorji Pallonji Group’ (“SP Group“) filed a suit under Sections 241-242 of the Companies Act, 2013 (“Act”) alleging prejudicial and oppressional acts of the majority shareholders (Tata Group) of Tata Sons.
The National Company Law Tribunal (“NCLT”), Mumbai Bench, initially dismissed the petition under Sections 241-242 of the Companies Act, 2013 for being not maintainable on account of the SP Group not holding more than 10% of the issued share capital of Tata Sons and also dismissed the petition for waiver of the said requirement.
Taking into consideration the exceptional circumstances including the fact that out of Rs. 6,00,000 crores of total investment in ‘Tata Sons Limited’, the SP Group had invested approximately Rs. 1,00,000 crore, the National Company Law Appellate Tribunal (“NCLAT”) held that it was a fit case for waiver and remitted petition under Sections 241-242 to the NCLT for decision on merit.
NCLT did not find any act of oppression/mismanagement inflicted upon by the Tata Group on the SP Group. The SP Group therefore filed an appeal in the NCLAT against order of the NCLT.
The NCLAT, by its Order dated 18^th December, 2019 overruled the judgment of the NCLT and held that there was an act of oppression inflicted by the Tata Group on the minority shareholders (Shapoorji Pallonji Group) and declared the removal of Mr. Mistry as Executive Chairman of Tata Sons and as a director from some of the Tata Group companies was illegal.

2. Case and Main Arguments of Cyrus Investments

The Tata Groups and the SP Group for over -5- decades jointly conducted the affairs of Tata Sons in an environment of mutual trust and confidence.

Tata Sons was a quasi-partnership

Tata Sons is in effect is a quasi-partnership-company, a concept well recognised in company law jurisprudence. The relationship between the 2 groups though not formally reflected in the Articles of Association but is based on the mutual trust and confidence which has given rise to a legitimate expectation of being treated in a mutually just, honest and fair manner.
Tata Sons had controlling interest over a 100 operating companies (including the 29 listed companies and millions of stakeholders) which is why it is imperative that Tata Sons should effectively operate as a two group company to provide checks and balances in its conduct of business rather than applying a simple majority rule which would mean that one group can unilaterally determine the destiny of these companies.
There has always been constructive participation and engagement by the nominees of the ‘SP Group’ at the Board level and active support of the ‘SP Group’ as shareholders, in the conduct of the affairs of Tata Sons, including at a time when the voting rights of the Tata Trusts were by law vested in a public trustee.

Mr. Mistry’s removal was not only hastily done but was also in violation of Articles of Association of the Company

Mistry was selected after subjecting him to a professional selection process as ‘Executive Chairman’ on merits. When he was appointed, Mr. Cyrus Mistry was expressly referred to as a significant shareholder and both an insider and outsider, pointing to the nexus between his appointment and his status as a significant shareholder and in the same spirit of mutual confidence. However, when he was removed, none of the purported reasons provided for removing him as ‘Executive Chairman’ had ever been discussed or deliberated prior to his illegal removal. The Respondents belatedly ascribed disingenuous reasons to justify the removal of Mr. Mistry by inter alia linking it to his alleged lack of performance. In any event, such fictitious reasons were clearly belied from the record.
Mistry’s sudden and hasty removal as ‘Executive Chairman’ must be seen in the context of: (i) his efforts to remedy past acts of mismanagement inherited from the past management and opening up embarrassing issues; (ii) yet being respectful in resisting interference from Mr. Ratan N. Tata and Mr. N.A. Soonawala in the affairs of Tata Sonsand (iii) his instituting a formal governance framework to regulate the role of the Tata Trusts and specify the matters over which prior consultation would be required to prevent interference and mismanagement.
No committee was formed for removal of the incumbent Chairman as required under Article 118 of the Articles of Tata Sons.

Constant interference by Mr. Mr. Ratan N. Tata and Mr. N.A. Soonawala in the affairs of Tata Sons was abuse of powers given to them as trustees

There was widespread abuse by Mr. Ratan N. Tata and Mr. N.A. Soonawala of Article nos. 75 and 121 of the Company which included even reopening of matters already decided (as allegedly being in the interest of the company) and dictating what the minutes must contain. By vesting frill power of the Board to conclude any decision in the hands of two trustee nominee directors the authority and statutory role of Board of Directors whose composition is regulated by the Companies Act, stands undermined warranting intervention.
Ratan N. Tata and Mr. N.A. Soonawala kept interfering in the affairs of ‘Tata Sons Limited’ and demonstrating their insecurity about their legacy being undermined. The scale and depth of the involvement and interference of these two Trustees in the affairs of Tata Sons and Tata Group Companies was evident from the record which showed a range of topics over which pre-consultation was demanded under the threat of alleging a violation of the Articles of Association and went far beyond offering solicited advice or guidance.

Conversion of Tata Sons into private limited company was carried out with a malafide intention and illegal

When these proceedings were sub-judice, an attempt to convert Tata Sons into a Private Limited Company was made, in a marked departure from a long legacy of its being a public limited company having revenue in excess of USD 100 billion and involving control of over 100 operating companies including 29 listed and public companies. As a public company, Tata Sons would be subjected to a higher standard of governance and with a view to dilute these standards, an attempt was made to convert it into a Private Limited Company.

The Board of Tata Sons committed several prejudicial / oppressive acts using the affirmative voting rights of the nominated directors of Tata Trusts

Board with the affirmative vote of nominated members of ‘Tata Trusts’ granted Rs. 600 crores for procurement ‘management consultancy contracts’ without calling for bids in violation of normal procedure and standard expected of a large public company.
Board with the affirmative vote of nominated members of ‘Tata Trusts’ issued equity shares of ‘Tata Teleservices Limited’ (Tata Company) at a steep discount in comparison to the price at which shares were issued to other investors within few days. Such discounted investment was substantially funded by the ‘Tata Companies’.
Loans of Rs. 200 Crores extended to one ‘Siva’s’ companies by ‘Tata Capital Limited’ when Mr. Ratan N. Tata was Chairman. The Said ‘Tata Capital Limited’ subsequently suffered a loss of Rs. 200 crores, when ‘Siva’ defaulted to pay the loans and the shares of ‘Tata Tele Services Limited’ fully eroded in value.
Tata Tele Services Limited’, an overvalued company was purchased from the ‘Siva Group’, which had to be written off; and
A penthouse apartment at ‘IHCL’s’ apartment hotel was let out at a price significantly lower than market price; all of which caused objective, discernible and serious prejudice to Tata Sons.
Apart from such prejudicial and oppressive acts, various instances of mismanagement qua numerous decisions with regard to various group companies had also arisen where such acts of mismanagement occurred due to the use of the majority shareholding group of their strength, including the misuse of the Articles. Such acts of mismanagement not only dealt with the investments by Tata Sons, but also extended to decisions pertaining to various group companies.

Main Defences taken by Tata Sons and other Respondents

Allegations in the nature of directorial complaints cannot be raised in an oppression-mismanagement suit

Allegations pertaining to removal of Mr. Mistry are in the nature of directorial complaints which cannot be raised in a petition under Sections 241 of the Companies Act, 2013.
Directorial dispute has no nexus with the shareholders’ proprietary rights, therefore, the same cannot be agitated or entertained in a petition under Sections 241-242 of the Companies Act, 2013.

Indian Company Law recognises the concept of Affirmative Voting Rights

All actions have been taken as per the provisions of the ‘Articles of Association’, ‘Companies Act, 2013’ and the ‘Secretarial Standard on Meetings of the Board of Directors.
Even as per the ‘Secretarial Standard on Meetings of the Board of Directors’, if any special majority or the affirmative vote of any particular Director or Directors is specified in the Articles, the Resolution shall be passed only with the assent of such special majority or such affirmative vote. Therefore, Article 121 if read with Article 104A of the Articles of Association of Tata Sons, it cannot be held to be arbitrary.

For proving an oppression / mismanagement case, it was a pre-requisite to show that it was just and equitable that the company should be wound up on account of continuing oppressive conduct. Isolated acts cannot not be considered to be oppression / mismanagement

For maintaining an appropriation under Sections 241-242, it is important for a party to make out two essential points namely– (i) that the affairs of the company are being conducted in a manner prejudicial or oppressive to any member or members of the company and; (ii) that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up and this requires that events have to be considered not in isolation but as a part of a consecutive story.
There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members and the conduct must be burdensome, harsh and wrongful and not mere lack of confidence. Mere illegal termination of Directors cannot bring his grievance as to termination to winding up the company for that single and isolated act, even if it was doing good business and even if the Director could obtain each and every adequate relief in a suit in a court.

Mr. Mistry’s appointment to the Board of Tata Sons was a purely professional appointment and not in his capacity as of a nominee of the S.P. Group nor in recognition of any such right of representation of the said S.P. Group on the board of Tata Sons

Mistry was appointed as Director of Tata Sons in the year 2006 not in the capacity of a nominee of the S.P. Group nor in recognition of any such right of representation of the said S.P. Group on the board of Tata Sons. Therefore, his replacement as Chairman and removal as Director of Tata Sons cannot be canvassed as a case of oppression or prejudice to the proprietary rights of the S.P. Group since his appointment (either as Deputy Chairman or Executive Chairman or as a Director of Tata Sons) was never in recognition of any entrenched right of representation/management enjoyed by the S.P. Group as shareholders of Tata Sons.
Therefore, Mr. Mistry’s removal would also not impinge on any right enjoyed by the S.P. Group as shareholders of Tata Sons which can be protected, executed or enforced in the oppression-mismanagement proceedings.

Tata Sons is not a quasi-partnership

There is no provision in the Articles of Association of Tata Sons or any shareholders’ agreement which entitles the S.P. Group to participate in the management of Tata Sons or nominate any directors to the board of Tata Sons. Tata Sons is not quasi-partnership, by any stretch of imagination. Consequently, the S.P. Group are not permitted to make allegations regarding the removal of Mr. Cyrus Pallonji Mistry either as Chairman or as a director of the Tata Sons Limited.

The reason for Mr. Mistry’s removal as a Chairman was loss of confidence

In a span of around 4 (four) years as the Chairman of Tata Sons, Mr. Mistry had completely lost the trust and confidence of Tata Trusts as he had failed to deliver on the promises that he had made at the time of his selection as the Chairman of Tata Sons and was unable to lead the Tata Group in a cohesive manner and failed in providing proper guidance and support to the Group. He was too consumed by the so called legacy issues rather than working towards resolving them. Furthermore, there were lapses of governance observed during his tenure, including the acquisition of ‘Welspun Renewable Energy Ltd.’ by ‘Tata Power Ltd.’

Mr. Mistry’s removal was consented by 7 out of 9 directors

The Board of Tata Sons comprised of 9 directors, including Mr. Mistry. Therefore, the 3 directors nominated by the Tata Trusts could not, on their own, pass the resolution to replace Mr. Mistry. This decision was approved by 7 out of the 9 Directors with 1 Director, Ms. Farida Khambata abstaining and one of the Respondents being ineligible to vote on this matter by virtue of being interested. Thus, what this clearly shows is that apart from the 3 trust nominated Directors, 4 other independent Directors saw merit in the resolution of the trust nominated directors and agreed that Mr. Mistry should be replaced as the Chairman of Tata Sons.

The role of the Selection Committee was recommending the appointment of Chairman and not removal

Article 118 dealt with Appointment of Chairman and provided for constitution of a Selection Committee for the purpose of selecting a new Chairman of the Board of Directors of ‘Tata Sons’. The Selection Committee so constituted had to “recommend the appointment of a person as the Chairman of the Board of Directors“. Therefore, the limited role of the ‘Selection Committee’ under Article 118 is to recommend a candidate for the appointment as the Chairman of the Board of Directors. It was absurd to interpret this Article to mean that the “Selection” Committee would also take decisions regarding the removal of the Chairman. Such an interpretation would be inherently contradictory to the purpose behind the constitution of a Selection Committee and entirely counterintuitive to the express words in the Article, which, were consciously chosen to mean that a committee has to be constituted for the purposes of selection of Chairman (and not for its removal).

Conversion of Tata Sons from Public Limited Company to Private Limited was a statutory requirement

The conversion was effected by the Registrar of Companies in view of the definition of ‘Private Company’, as defined under Section 2(68) of the Companies Act, 2013.

Mr. Mistry failed to take approval of the Board of Tata Sons in the context of the acquisition of ‘Welspun Renewables Energy Limited’ by ‘Tata Power Renewable Energy Limited’, a subsidiary of the ‘Tata Power Company Limited’

The concern of Tata Sons arose from the high level of debt in Tata Power of Rs. 40,000 crores and the non-resolution of the tariff issue of its Mundra Project. As a promoter of the ‘Tata Power Company Limited’ (‘Tata Power’), Tata Sons was practically left in the dark about such a significant transaction which was agreed by Tata Power while Mr. Mistry was the Chairman of ‘Tata Power’. On 31st May, 2016 a note on the proposed Welspun Acquisition was circulated to the directors of ‘Tata Sons’ that ‘Tata Power’ (through its subsidiary) was in advanced stages of finalization of the Welspun Acquisition and definitive agreements were to be signed imminently. Soon thereafter, on 12th June 2016, ‘Tata Power’ executed definitive documents and announced the Welspun Acquisition. Mr. Mistry claimed that the Note circulated to the directors of Tata Sons, without any discussions or deliberations on the matter in a board meeting of Tata Sons, “appropriately fulfilled all requirements under the Articles“, while being aware that the financing structure of Welspun Acquisition would necessitate ‘Tata Power’ to raise debt, approval for which would be required from the board of directors of Tata Sons.
This led to a concern that proper process to seek approval for the Welspun transaction was not followed and this incapacitated the board of Tata Sons including the trust nominee directors from effectively deliberating on this issue.

Judgment of NCLAT

As per Articles of Association of Tata Sons, Tata Trusts had direct control over Tata Sons and the same is an important factor to be considered while adjudicating an oppression mismanagement suit

The NCLAT noted that as per the Articles of Association of Tata Sons, no quorum at a general meeting of the shareholders is complete in absence of authorised representative of ‘Tata Trust’ which holds aggregate of at least 40% of the paid-up ordinary share capital.
Article 121 mandated that the majority decision of the Board required affirmative vote of nominated Directors of ‘Tata Trusts’, otherwise majority decision cannot be given effect. This amply demonstrated the pre-eminent position, the Directors nominated by ‘Tata Trusts’ held on the Board of Directors.
Article 121 is depended on aggregate paid up ordinary share capital of ‘Tata Trust’. However, if it is read along with Article 121A(g), it was evident that it was difficult to change the shareholding of ‘Tata Trust’ to make it less than 40%, as in the Board’s meeting, the nominated Directors of ‘Tata Trust’ have affirmative vote (veto power). Independently, no majority decision could be taken either in the general meeting of the shareholders or by majority decision of the Board of Directors of Tata Sons.
Power of Tata Sons to transfer ‘ordinary shares’ of any shareholders including the shares of Mr. Mistry without notice can be exercised through a special resolution in the general meeting of the holders of the ordinary shares of the company which requires presence of nominated Directors of the ‘Tata Trusts’, who have affirmative vote.
Courts have 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, NCLT can notice whether the facts would justify the winding up of the Company.

There was complete confusion in the Board about the governance framework of the Tata Sons Ltd

The NCLAT took on record email correspondences exchanged between Mr. Mistry. Mr. Ratan Tata and Mr. N.A. Soonawala and observed that before deciding any matter or for taking any resolution by the Board decision used to be taken by Mr. Ratan N. Tata for ‘Tata Trusts’, in which Mr. Nitin Nohria and Mr. N.A. Soonawala, were taking active part.
The correspondences showed that Mr. Mistry was unaware and not in a position to understand as to how decisions are taken by the ‘Tata Trusts’ before the decision of the Board of Directors of ‘Tata Sons Limited’. In this background, Mr. Cyrus Pallonji Mistry reiterated the need for development of a governance framework and Mr. Cyrus Mistry formulated a governance framework after obtaining the feedback from Mr. Nitin Nohria to clarify the role of the Trustees of ‘Tata Trusts’ in the decision making processes of ‘Tata Sons Limited’.

The decision to remove Mr. Cyrus Mistry was predetermined. No agenda was circulated amongst the Board Members before taking the said decision and neither any reasons were discussed nor recorded in the minutes of the meeting in which he was removed.

The NCLAT took on record the minutes of the Board Meeting of Tata Sons in which Mr. Mistry was removed as a Chairman and observed that, – prior to the removal of Mr. Mistry, no agenda before the Board was placed nor any document was circulated relating to performance of Mr. Mistry with any of the Directors, including the independent Directors.
Ratan Tata was determined to remove Mr. Cyrus Mistry prior to the meeting of the Board and asked Mr. Mistry to step down.
Ratan Tata during the course of the meeting mentioned that there was a need to recognize what Mr. Mistry had done over the last 4 years.
The majority shareholders of ‘Tata Trusts’ represented by Mr. Ratan Tata were knowing that advance notice was required for his removal, therefore, opinion had been obtained from eminent lawyers and the Hon’ble ex-Supreme Court Judge, as apparent from the proceedings of the meeting wherein Mr. Amit Chandra said that he was not carrying the opinions which he said were given by eminent lawyers and ex – supreme court judge. Mr. Mistry asked for copies of the written opinion and wondered how the rest of the Board could sit without these opinions being made available to them, Mr. Cyrus Mistry asked for the opinions to be provided today. It was agreed to share these opinions with Mr. Mistry after checking with the lawyers.
There is nothing on the record to suggest that the Board of Directors or any of the trusts, namely– Sir Dorabji Tata Trust or the Sir Ratan Tata Trust at any time expressed displeasure about the performance of Mr. Cyrus Pallonji Mistry. On the other hand, the record suggested that on 24th October, 2016, Mr. Ratan N. Tata wanted that Mr. Mistry should step down, so Mr. Mistry was called for and in presence of Dr. Nitin Nohria was asked to step down from the post of Executive Chairman.
The proceedings of the Board of Director’s dated 24th October, 2016 also show that ‘Tata Trusts’ asked its nominee Directors to bring a motion to request Mr. Cyrus Mistry to step down from the post of the Executive Chairman on the ground that ‘Tata Trusts’ had lost confidence. Reasons were discussed or recorded in the proceeding of the meeting held in the afternoon of 24th October, 2016 for removal of Mr. Cyrus Mistry.

The allegations in the ‘Press Statement’ without any supporting evidence could be accepted.

The NCLAT took on record the Press Statement dated 10th November, 2016 which was issued by Tata Sons subsequent to removal of Mr Mistry and observed that from the opening sentence of the Press Statement, it was clear that sudden and hasty removal of Mr. Cyrus Mistry as Executive Chairman of Tata Sons Limited raised concern in the industrial group. Therefore, in the said ‘Press Statement’, it was specifically mentioned that “some have shared concerns following the decision, while many have asked questions about the future course of the group and its companies and operations“. The company in its turn had mentioned that “we understand and appreciate that a period of change like this can lead to a sense of uncertainty and would like to put forward some facts so that the decision is seen in the desired perspective“
The allegations as made in the ‘Press Statement’ dated 10th November, 2016 appears to be an afterthought as the aforesaid matter was not discussed in any of the meeting of the Board of Directors. No records have been placed by the Respondents with regard to the aforesaid loss nor any discussion took place in the Board Meeting of the ‘Tata Sons’ and Mr. Cyrus Mistry to suggest that it was of serious concern.
The language of the Company in its ‘Press Statement’ show that the Tata Sons also know that the action taken is ‘prejudicial’ and ‘oppressive’ to the interest of the members of the Company and a large number of members, investors and interested parties have raised concern and have accepted that there is sense of uncertainty at the global level.

The act of removal of Mr. Mistry was not just directorial in nature as the same had global ramifications

If one were to accept that the removal of Mr. Mistry was directorial in nature, in the interest of Company, in such case, there was no occasion to issue a ‘Press Statement’ where it is noticed that many across the globe have raised concern had asked questions about the future course of the group and its companies and operations. The Company and its Board also understood that such removal may lead to a sense of uncertainty of ‘Tata Sons’ and ‘Group Companies’ and resulted in winding up.

The failure of Tata group companies was not the sole responsibility of Mr. Mistry but was in fact a collective decision of Board of Directors of Tata Sons

If there was a failure and loss caused to one or other Tata Company which also affected the ‘Tata Sons’, the ‘Tata Trusts’ or the Board of Directors could not be absolved of its responsibility, particularly when the nominee Directors of the Tata Trusts who have affirmative vote to reverse the majority decision. Therefore, Mr. Mistry alone could not be held liable.
The suggestions made by Mr. Cyrus Pallonji Mistry for good governance by the Board (i.e. the Board of Tata Sons must have some autonomy to take major decisions and not all major decisions should be made in advance by Tata Trusts) and to take care of Tata Companies, including ‘Tata Motors’, ‘Docomo’ etc., were not taken in its letter and spirit by Mr. Ratan N. of ‘Tata Trusts’ which resulted in no confidence on Mr. Cyrus Pallonji Mistry.

Removal of Mr. Mistry had nothing to do with his performance

The NCLAT took on record the minutes of the meeting of Nomination and Remuneration Committee, convened on 28th June, 2016 i.e. just few months before Mr. Mistry was removed in which Mr. Mistry’s performance was appreciated.

NCLAT in particular observed the recording made in the said minutes which is reproduced as under: –

“Mrs. Khambata and Mr. Sen complimented Mr. Mistry on his role as Group Chairman. Mr. Sen added from his experience from site visits that Mr. Mistry had earned the respect not only of CEOs and senior management but operational personnel. After reviewing the performance of the Executive Chairman, the Members unanimously recorded their recognition of his significant contributions across Group companies and expressed their appreciation of his multifaceted initiatives aimed at preserving and promoting cohesive functioning of the Group in accordance with its distinctive values.“

Based on the above, the NCLAT observed that, – Nominee Director Mr. Vijay Singh (9th Respondent) on behalf of ‘Tata Trusts’ was well aware that performance of Mr. Cyrus Pallonji Mistry was satisfactory and there was need for a framework for operationalizing the Articles. The annual performance review of the ‘Nomination and Remuneration Committee’ was unanimously approved by the Board of Directors of ‘Tata Sons’ in its meeting held on the next day i.e. on 29th June, 2016. Besides, at the level of the Board of Directors of ‘Tata Group Companies’, the performance of Mr. Cyrus Mistry has been endorsed and praised by nearly 50 Independent Directors of Group Companies.
The NCLAT also observed that three of the Directors who voted for the removal of Mr. Mistry were appointed had been inducted into the Board of ‘Tata Sons Ltd.’ just 2 months before the meeting in which Mr. Mistry was removed and two of the other Directors who were members of the ‘Nomination and Remuneration Committee’ were appointed just -4- months’ prior to his removal and had on the contrary praised Mr. Mistry’s performance as Executive Chairman.
The fact that the nominated Directors did not use their affirmative voting right over the majority decision of the Board or in the Annual General Meeting of the shareholders allowing the ‘Tata Companies’ to function in a manner which caused loss, as accepted in the press release dated 10^th November, 2016 and the consecutive chain of events amply demonstrated that impairment of confidence with reference to conduct of affairs of company was not attributable to probity qua Mr. Mistry but to unfair abuse of powers on the part of other Respondents.

Shapoorji Pallonji Group is not just a minority shareholder but in fact in business with the Tata Group

Shapoorji Pallonji Group’ are the minority shareholders. They are in business with Tata Group i.e.– ‘Sir Dorabji Tata Trust’ and ‘Sir Ratan Tata Trust’ for more than four decades. There is mutual understanding and good relationship between them. For the said reason, earlier for a number of years’ Mr. Pallonji Shapoorji Mistry, father of Mr. Cyrus Pallonji Mistry was appointed as the Executive Chairman of the ‘Tata Sons Limited’.
‘Shapoorji Pallonji Group’ made an investment of Rs. 1,00,000 Crores out of Rs. 6,00,000 Crores. On the other the nominee Directors of the ‘Tata Trusts’ had control over the meeting of the Board of Directors, having power to annul the majority decision by refraining from exercise of affirmative vote.

There was a continuing oppression against Mr. Mistry

The prejudicial action, as noticed, did not come to an end, after 24th October, 2016, when Mr. Mistry was removed as Executive Chairman and Director of the Company, it continued even thereafter. On 12th December, 2016, Mr. Mistry was removed from the post of Director of ‘Tata Industries’. Next day, on 13th December, 2016, he was removed from the post of Director of another Group Company. The third day i.e. 14th December, 2016, Mr. Mistry was also removed from the post of Director of ‘Tata Tele Services’. It further proceeded with certain unexplained actions taken thereafter converting ‘Tata Sons Limited’ from ‘Public Company’ to ‘Private Company’, after the decision of the Tribunal and discussed below.

Conversion of Tata Sons from Public Company to Private Company was not done in compliance with law

As per Section 14 of the Companies Act, 2013, if any Company decides to alter its articles having the effect of conversion of a ‘Private Company’ into a ‘Public Company’ or a ‘Public Company’ into a ‘Private Company’; it is required to pass a special resolution and as per sub-section (2) of Section 14, it requires approval by the NCLT. Only after order of approval by the NCLT, the Company can request the RoC together with a printed copy of the altered articles, to register the Company as ‘Private Company’ or ‘Public Company’ as the case may be.
Like Section 43A (1A) of the Companies (Amendment) Act, 2000, there is no provision under the Companies Act, 2013 for automatic conversion of ‘Public Company’ to ‘Private Company’ or a ‘Private Company’ to ‘Public Company’. Therefore, on the basis of definition of ‘Private Company’ as defined under Section 2(68) of the Companies Act, 2013, there cannot be automatic conversion of a ‘Public Company’ to ‘Private Company’. Similarly, on the basis of definition of ‘Public Company’ as defined under Section 2(71) of the Companies Act, 2013, there cannot be automatic conversion of Private Company’ to ‘Public Company’.
For alteration of articles including alteration of the Company from a ‘Private Company’ to a ‘Public Company’ or ‘Public Company’ to ‘Private Company’, steps are contemplated to be taken under Section 14 of the Companies Act, 2013.
Tata Sons Limited having become ‘Public Company’ since long, for altering its Articles as a ‘Public Company’ into a ‘Private Company’, it is required to follow Section 14(1)(b) r/w Section 14(2)(3) of the Companies Act, 2013.
General Circular No. 15/2013 dated 13th September, 2013 and Notification dated 12th September, 2013 cannot override the substantive provisions of Section 14 of the Companies Act, 2013 which is mandatory for conversion of a ‘Public Company’ to a ‘Private Company’.
Curiously, the Tata Sons remained silent for more than 13 years and never took any step for conversion in terms of Section 43A (4) of the Companies Act, 1956. Even after enactment of the Companies Act, 2013 which came into force since 1st April, 2014, for more than three years, it had not taken any step under Section 14. Till date, no application was filed before the NCLT under Section 14(2) of the Companies Act, 2013 for its conversion from ‘Public Company’ to ‘Private Company’.
In absence of any such approval by the NCLT under Section 14, we hold that ‘Tata Sons Limited’ cannot be treated or converted as a ‘Private Company’ on the basis of definition under Section 2(68) of the Companies Act, 2013.
The aforesaid fact show that even after the removal of Mr. Pallonji Mistry on 24th October, 2016 from the post of Executive Chairman of the Company and the post of Directors of ‘Tata Companies’, during the pendency of the cases, in a hurried manner, the Company Tata Sons Ltd and its Board moved before the Registrar of Companies for conversion of Company from ‘Public Company’ to ‘Private Company’ to give it colour of ‘deemed conversion’ which is against the law and unsustainable.
The aforesaid action on the part of the Company, its Board of Directors to take action to hurriedly change Tata Sons from ‘Public Company’ to a ‘Private Company’ without following the procedure under law (Section 14), with the help of the Registrar of Companies just before filing of the appeal, suggests that the nominated members of ‘Tata Trusts’ who have affirmative voting right over the majority decision of the Board of Directors and other Directors/members, acted in a manner ‘prejudicial’ to the members, including minority members and others as also ‘prejudicial’ to Tata Sons.

Reliefs granted by NCLAT

In view of the findings aforesaid, the NCLT passed the following orders and directions:

i. The removal and other actions taken against Mr. Cyrus Pallonji Mistry (11th Respondent) was declared illegal and set aside. In the result, Mr. Mistry is restored to his original position as Executive Chairman of Tata Sons and consequently as Director of the Tata Companies for rest of the tenure.

As a sequel thereto, the person who has been appointed as Executive Chairman in place of Mr. Mistry, his consequential appointment is declared illegal.

ii. Ratan N. Tata and the nominee of the Tata Trusts shall desist from taking any decision in advance which requires majority decision of the Board of Directors or in the Annual General Meeting.

iii. In view of ‘prejudicial’ and ‘oppressive’ decision taken during last few years, 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 Appellants and other minority member. 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.

iv. The decision of the RoC changing Tata Sons from ‘Public Company’ to ‘Private Company’ is illegal and Tata Sons Limited shall be recorded as ‘Public Company’.

Our Comments and Key Take-aways

The NCLAT judgment has been much criticised and has come as a shock to many. Even the Hon’ble Supreme Court made a preliminary observation that the first impression of the order was not good and that NCLAT granted prayer which was not prayed for. It is however very easy to criticise the judiciary when the judgment is unconventional or contradicting public opinion; however it is only when one makes the effort to read the detailed findings made in the Order and studies it carefully that one comes to realise the position of the judges who have to give the judgment by weighing the case strictly on merits without getting swayed away with public opinion or even their own personal opinions / prejudices, or the media or with public personalities. This is the hallmark of a judiciary of any nation.
A closer look at the judgment of the NCLAT reveals that NCLAT has not rendered a decision blindly but has in fact holistically considered and taken on record substantial evidence before giving the judgment in favour of Mr. Mistry. The evidence included the recordings made in the minutes of the meetings of the Board and the Nomination and Remuneration Committee of Tata Sons, the Press Release issued by the Tatas, Articles of Association of Tata Sons, statements made in the agenda of the meetings, email conversations exchanged between the representatives of contesting parties before the dispute and the performance of Tata Sons and various companies of Tata Group.
In our opinion, one of the biggest motivating factor which led NCLAT to give this judgment in favour of Mr. Mistry was the fact that that, while on one hand, the minutes of Nomination and Remuneration Committee of Tata Sons recorded the showering of praise of performance of Mr. Mistry by the independent directors; but on the other hand, the Press Release issued by the Tatas pinned the blame of poor financial performance of the Tata Group on Mr. Mistry which led to his removal as the Executive Chairman. The judgment itself is a testimony of importance of not only following proper corporate law procedures before taking corporate actions but also emphasizes the importance of recording made in various corporate law documentations such as agenda and minutes of meetings, corporate communications, email communications and how at times such recordings can turn out to be in favour or against you when viewed from the perspective of corporate litigation.
The second important aspect which is learnt out of the NCLAT judgment is the concept and use of Affirmative Voting Rights (AVRs). It can be clearly inferred from the judgment of the NCLAT that the judiciary does not view the AVR as only ‘negative control’ but in fact looks at it as a ‘positive control’. This is because the NCLAT held that, – the Tatas could have used their affirmative voting powers to reverse / over rule the majority decision and save the companies from losses, but it did not do so. In almost all the venture capital and private equity transactions, the investor exercises indirect control over the company by way of having AVRs, albeit holding minority shareholding. This judgment is hence a precedent to be relied upon in cases where the promoters of such companies are singularly blamed for poor financial performance of these companies and have to face baseless allegations made by the VC / PE investors.
Thirdly and very importantly, the NCLAT Judgment is also a precedent to show that even when the Company is in control of a Managing Director, Manager or other key managerial personnel who run the affairs of the Company, it is ultimately the Board of Directors of the Company who is collectively responsible for the performance of the Company. Therefore, a Company cannot simply pin the blame on the Managing Director / CEO / Manager of the Company for poor financial performance.
Fourthly, the judgment has narrowed the gap between a complaint which is only directorial in nature vis-à-vis a complaint which is oppressive to minority shareholders, or a group thereof. In other words, till now in most of the cases, the trial courts (i.e. NCLT and earlier CLB) while adjudicating cases of oppression / mismanagement which dealt with allegations of removal of director, used to flatly dismiss the petitions on the ground that directorial complaints are personal in nature and cannot be considered to be “oppressive” to shareholders. Therefore, this NCLAT judgment also sets a precedent for cases where it can be shown that by stripping of the executive powers of a director or his removal is prejudicial to the company and its shareholders or oppressive to the director himself if he is also a minority shareholder of the Company.

Fallacies in NCLAT’s Judgment

With due respect to the NCLAT decision, we think that the NCLAT has overlooked a major prerequisite which is required to be considered and is in fact a sine qua non while adjudication of an oppression mismanagement suit. As per section 242 of the Companies Act, 2013, the Tribunal has to firstly form an the opinion that the Company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the Company and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up. This happens when there is continuous quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation have been held sufficient to justify a dissolution or where is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground.
In our opinion the aforesaid was not the case with Tata Sons. The grievance of some of the representatives of the Tata Group was only with respect to the actions taken by Mr. Mistry in his capacity as the Executive Chairman of the Company. This dispute was not that grave which warranted winding up of Tata Sons. The words “with a view to bringing to an end the matters complained of” in section 242 conferring wide powers on the NCLT in respect section 241 proceedings have to be interpreted to mean that the court is entitled to look at the reality and practicalities of the overall situation, past, present and future in passing an order under section 242, and the order should practical and workable; solving the problem, not complicating it.
Another point where we think that NCLAT erred is that it considered Tata Sons as a “quasi-partnership” and holding that that Tata Sons was based on the mutual trust and confidence and had given rise to a legitimate expectation of being treated in a mutually just, honest and fair manner. Whether there is an existence of quasi-partnership or not, depends upon several factors. This includes: (1) approximate equality in shareholding, (2) approximate equality in participation in the management and (3) restriction on the transferability of shares. It was held by the Hon’ble Supreme Court of India in the case of Hind Overseas Pvt Ltd v Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC):[1976] 3 SCC 259:AIR 1976 SC 565 that it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. This was not the case with Tata Sons. A quasi partnership is in substance is a partnership in the garb of a company. In such cases, the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.
In order to consider a company a quasi-partnership, one has to find special features which would unquestionably lead to the conclusion that the company is in substance a partnership. In deciding whether a particular company is in the nature of a partnership one has to consider the total relationship of the persons involved, the articles and the agreement expressed and implied between the parties. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership and if there is an irreconcilable dead-lock by reason of the very constitution of that concern.

The Firm is grateful to its associate Advocate Ms. Shivani Mathur for her contribution in the Research Update. The Firm is also sincerely grateful to Dr. K.R. Chandratre, Practising Company Secretary for providing his inputs on the concept of “Quasi-Partnership”.

Company Law