The Firm is grateful to its partner, Advocate & Solicitor Chirag Sancheti for his inputs in connection with this Research Update.
INTRODUCTION
The National Company Law Appellate Tribunal (“NCLAT”), recently give a landmark decision in the case of Cyrus Investments Pvt. Ltd. and Ors Vs. Tata Sons Ltd. and Ors.
The said case came up before the NCLAT from an appeal filed by Cyrus Mistry controlled companies (being the petitioners) from the decision given by the National Company Law Tribunal (“NCLT”). The issue involved in the case was that while the petitioners alleged oppression and mismanagement, they did not have the requisite qualification to maintain the petition alleging oppression and mismanagement (which is holding of minimum 10% of the issued share capital of the Company, i.e. Tata Sons Ltd, as required under section 244 of the Companies Act, 2013).
Although the petitioners did not meet the requirements of maintainability under section 244 of the Companies Act, 2013, taking into consideration the exceptional circumstances of the case, the NCLAT nevertheless granted a ‘waiver’ to the petitioners to enable them to apply for oppression and mismanagement under Section 241. The NCLAT accordingly set aside the order of the NCLT and remitted the case to the NCLT to decide the application on merits.
This ruling of the NCLAT is an important one as it clarifies the threshold issues pertaining to the maintainability of an action for oppression and mismanagement, and the invocation of the waiver provision, and very importantly throws light on the factors which NCLT must consider before granting a waiver under section 244 of the Act, because the statutory provisions are silent in this regard.
Under the said judgement, the NCLAT has also adjudicated on a couple of other connected important issues such as, – (i) Can the NCLT entertain allegations pertaining to affairs of ‘oppression and mismanagement’ of a related or a third Company if a third company’s issue may have direct relation to the company of which ‘oppression and mismanagement’ has been alleged? and (ii) whether the civil Court has jurisdiction to adjudicate on a suit relating to oppression and mismanagement, when a member is not eligible to apply under section 241 of the Act?
APPLICABLE LEGAL PROVISIONS (SECTION 244 OF THE COMPANIES ACT, 2013)
Section 244 of the Act, lays down the eligibility criteria which is required for filing an application alleging oppression/mismanagement under section 241 of the Act. As per the said section, only following categories of members have the right to approach NCLT for the purpose of making the said application:-
(i) Minimum one hundred members of the company or one-tenth of the total number of its members, whichever is less and
(ii) Any member or members (jointly) holding not less than one-tenth of the ‘issued share capital‘ of the company.
BACKGROUND (FACTS OF THE CASE)
Post removal of Mr. Cyrus Mistry as the Chairman of the Tata Group, the companies controlled by Cyrus Mistry’s family), being the petitioners, filed a suit against Tata Sons before the NCLT alleging oppression and mismanagement.
The petitioners held 18.37 percent of the equity shares in Tata Sons, which however represented only 2.1 percent of the total share capital (including preference shares) in Tata Sons.
Before the NCLT, the Petitioners sought waiver from the requirement of holding at least 10% of issued share capital of the company under Section 244.NCLT rejected the waiver application as petitioners did not have the requisite qualification (minimum 10% shares required under section 244 as mentioned above) to maintain the petition; and since the 10% requirement under section 244 is with reference to the total issued “share capital” of the company and not the total issued “equity share capital” of the company.
NLCT also held that the petitioners failed to establish any cause of action and accordingly dismissed the main petition itself. The petitioners filed an appeal before the NCLAT against the aforesaid decision of NCLT.
ISSUES BEFORE THE NCLAT
Issue no. 1 – Whether the petition preferred by the petitioners was maintainable under sections 241, 242 and 244 of the Act? Whether the petitioners qualified the condition of holding minimum 1/10th of the ‘Issued Share Capital’ of Tata Sons [taking into consideration that the petitioners held 18.37 percent of the equity shares in Tata Sons, which however represented only 2.1 percent of the total share capital (including preference shares)] in Tata Sons)?
Issue no. 2 – If not, then whether the petitioners has made out a case for a waiver under the proviso to section 244?
MAIN ARGUMENTS OF THE PETITIONERS
On Issue no. 1
The reference to “Issued share capital” in Section 244 has to only refer to the “relevant share capital” otherwise it would lead to an absurdity that holder of shares who are completely disinterested in an action, or even have a conflicting interest to a Petitioner qua such action would necessarily have to join in with the aggrieved party and their percentage of shareholding would also be taken into account for the resolution of such a dispute. This would lead to an absurdity apart from rendering the relief contemplated in Section 241 nugatory.
If the intention of the Legislature by the use of the term “issued share capital” was an aggregate of the equity and preference share capital of a company, the Legislature would have provided some kind of an indicator with respect to this. This is more so, when in just the preceding words, while referring to the strength of members to qualify as being eligible, the Legislature thought it fit to use “total”, while dealing with “not less than one-tenth of the total number of its members,” therefore, it has to be presumed that the Legislature, being conscious of the different kinds of share capital, chose to not describe the “issued share capital” as being, the “total”, the “sum” or even the “whole” of the issued share capital of the company.
Preference and Equity shares are mutually exclusive classes. Preference being “debt” not intended to be part of “issued share capital” in Section 244 when a class has to be restricted, the principle has to be founded on homogeneity and commonality of interest. It must be seen that dissimilar classes with conflicting interests are not put in one compartment to avoid any kind of injustice. Such treatment of unequal’s as equals would as well offend the doctrine of equality as enshrined in Article 14 of the Constitution.
A construction that results in hardship, serious inconvenience, injustice, absurdity or anomaly or which leads to inconsistency or uncertainty and friction in the system which the Statute purports to regulate has to be rejected and preference should be given to that constructions which avoids such results. Section 241 is a beneficial provision included in the interest equity, justice and good conscience in order to protect the minority shareholders of a company. It is imperative that such beneficial provision be given a liberal construction and not be restricted to eliminate a class that would otherwise fall with the category of classes to be protected under such beneficial legislation.
On Issue no. 2
If it is found that the Appellants’ interest in the company is substantial; the Tribunal is the most appropriate forum to deal with the issues raised; if the issues raised are substantial in nature substantially affecting the interests of the member, class of members, the company or the public, then waiver ought to be granted and the aim would be to further a remedy rather than prevent it since the object of clothing the Tribunal with the power of waiver is to sub-serve such purpose.
The affairs of the 1st Respondent company was at the apex of the Tata Group of Companies and the Tata Group itself is involved in manifold activities affecting every member of the public and has become a household name. Hence, a fortiori any issue as regards the 1st Respondent company has widespread ramifications and consequences and such issues would therefore be widespread in their effect.
The Appellants holding 18.37% of the equity shareholding having a present market value of more than Rs. 1 lakh crores would have a substantial interest in the Company and not an insignificant one.
MAIN ARGUMENTS OF THE RESPONDENTS
On Issue no. 1
Section 241 of the Act gives locus to a member make a complaint to the NCLT in respect of matters specified in Section 24(1)(a) & (b) of the said Act. This locus is subject to the specified in Section 244 of the Act. Neither the locus provisions nor the eligibility provisions make any reference to “class of membership”. That being the case, no question arises of reading the expression “issued share capital” as “relevant share capital”, depending on the class of member applying for the relief.
Section 244 embodies a clear legislative policy of allowing, as a matter of right, only members holding specified numerical or shareholding numbers, to avail the remedy under Section 241 of the 2013 Act. Clearly, the Parliament did not want all members of the company to be armed with the right to make an application under Section 241. It would be unjust, and unfair to interpret Section 244 in any other manner than the literal rule of interpretation, as otherwise it would be nullity.
The expression “issued share capital” under section 244 of the Act included both ‘issued equity share capital’ and ‘issued preference share capital’, which is self explicit and clear.
On Issue no. 2
The first enquiry should be to see if the case made out in the petition falls within the contours of Section 241. A case which does not ex facie disclose a cause of action under Section 241 cannot merit the grant of waiver. For this purpose, the NCLT should examine whether the allegations in the petition:
– pertain to the affairs of the company with respect to which the petition has been filed?
– do not concern continuing acts of oppression but instead call into question ‘past and concluded’ transactions or transactions which are ex facie time barred under Section 433 of the Act?
– are not directorial complaints or complaints for the loss of office which are not related to the rights of the petitioners as shareholders?
Exercise of jurisdiction by the NCLT under Section 241 is equitable in nature, conduct of the petitioners who approach the Tribunal seeking waiver should always be above board. Consequently, petitioners should be disentitled to waiver under the Waiver Proviso if:
– the petitioner(s) have approached the NCLT with ‘unclean hands’, for instance by deliberately suppressing material facts; or, if it appears that the litigation is not a bona fide shareholder dispute but is actuated by malice and/or intended to achieve an oblique purpose; or initiated by a publicity driven petitioner.
– The petitioners are ex facie estopped from raising the allegations raised in the petition, say for instance, on account of acquiescence to the matters complained of in the petition.
Members satisfying the eligibility criteria of Section 244(1) have an exclusive forum in the form of the NCLT for matters under Section 241 and members who don’t satisfy such criteria (except members who are given waiver under the Waiver Proviso) have to approach ordinary civil courts. In essence, Section 430 operates as a bar on the jurisdiction of civil courts only against members who satisfy Section 244(1) and not with respect to other members who do not.
Majority of the allegations in the Petition did not pertain to affairs of Tata Sons and instead relate to affairs of five companies in which Tata Sons holds shares.
The allegations in the Petition which pertain to past and concluded transactions and were patently time barred.
Petition is not a genuine shareholder action. In fact, the petition was a vindictive action filed to espouse Cyrus Mistry’s cause after he was removed as Executive Chairman.
There is not a single document/correspondence on record from the Appellants which demonstrates that the Appellants have at any point of time raised any grievances with respect to the matters complained of in the Petition before the Petition was filed. There was no record in any minutes of board and shareholder meetings of Cyrus Mistry ever objecting to or dissenting from any decision taken at the board of directors or general meeting. The applicant having approached seeking to urge personal grievances or a proxy litigation.
The petition seeks sweeping and far reaching reliefs against Tata Sons (such as the supersession of the existing board of directors, the appointment of an administrator, investigation, appointment of independent auditors, striking off certain article of association etc.) which would disproportionately affect the operations and affairs of Tata Sons and destabilize its affairs.
NCLAT JUDGMENT
On Issue no. 1
Relying upon several precedents, NCLAT observed that is well settled that where legislative intent is clear, it is the duty of the courts to give full effect to the same without scanning its wisdom or policy, and without engrafting, adding or implying anything which is not consistent with the legislative intent.
The legislature where it thought fit to give a particular class of members a right under the Act, it has expressly provided for the same. Since the legislature has consciously chosen to insert the class aspect in certain provisions and decided not to do so in Section 244(1), such intention must be respected.
It is clear that the legislature neither omitted nor incorporated something in the analogous law in the subsequent statute (Section 244(1) of the Companies Act, 2013 herein) and, therefore, the literal interpretation which continued for last 57 years since 1956, cannot be avoided.
It would be unjust, and unfair to interpret Section 244 in any other manner than the literal rule of interpretation, as otherwise it would be nullity. The expression “Issued Share Capital” as mentioned in Section 244(1) of the Companies Act, 2013 only refer to both ‘Equity Share’ and “Preferential Share Capital” of the company.
As admittedly, the Appellants had less than 1/10th of the “Issued Share Capital of the company” (2.17%), the NCLAT held that the Appellants did not qualify under Section 244(1) to file a petition under Section 241 of the Companies Act, 2013 and the petition without waiver was not maintainable.
On Issue no. 2
On whether the Tribunal goes deep into the merits of the case to decide an application for ‘waiver’
NCLT cannot deliberate on the merit of a (proposed) application under Section 241, while deciding an application for ‘waiver’ under proviso to sub-section (1) of Section 244.
On whether an application under Section 241 is barred by limitation
The question whether an application under Section 241 is barred by limitation is a mixed question of law and facts. The same is also dependent on the cause of action and continuous cause of action, if any. As the merit of the case cannot be deliberated in an application for ‘waiver’ the Tribunal cannot decide the question whether (proposed) application under Section 241 is barred by limitation or not while deciding the application for ‘waiver’.
On whether the NCLT can entertain allegations pertaining to affairs of another Company if third company’s issue may have direct relation to the company of which ‘oppression and mismanagement’ has been alleged. =
The allegation of ‘oppression and mismanagement’ pertains to the related company or a third company is dependent on the facts of the case.For example, on bare perusal of the application, if it appears that the allegation relates to a third company then it is a different issue, but in some cases even third company’s issue may have direct relation to the company of which ‘oppression and mismanagement’ has been alleged. For example, Company ‘A’ which has substantial shareholding say 50% in another Company ‘B’, as shareholder and the Company ‘A’ takes part in the Board’s meeting or Extraordinary General Meeting of Company ‘B’ and takes decisions, which is against the interest of Company ‘A’. In such case, any aggrieved member of the Company ‘A’ can allege ‘oppression and mismanagement’ qua Company ‘A’, if its interest is compromised in favour of another Company ‘B’. In such case, it cannot be stated that the matter pertains to another Company ‘B’ and therefore, member(s) of Company ‘A’ have no right to allege ‘oppression and mismanagement’. In fact, it is a case of ‘oppression and mismanagement’ qua Company ‘A’, if the right of the Company ‘A’ is compromised. As the aforesaid disputed question is dependent on facts and merit of a case, it cannot be decided nor can be taken into consideration while deciding an application for ‘waiver’.
Whether the allegation is in the nature of Directorial Complaint or whether (proposed) application under Section 241 is barred by acquiescence or waiver or estoppel can be decided at the stage of hearing the application for waiver
Whether the allegation is in the nature of Directorial Complaint or not can be decided by the NCLT only at the stage of deciding merit of an application under Section 241 after taking into consideration the reply, if any, and hearing the parties and cannot be decided by NCLT while deciding an application for ‘waiver’.
Factors to be taken into consideration for granting of waiver
The order of ‘waiver’ (under Section 241 of the Act) being judicial in nature, cannot be passed by NCLT, in a capricious or arbitrary manner and can be passed only by a speaking and reasoned order after notice to the (proposed) respondent(s). The basic principle of justice delivery system is that a court or the NCLT while passing an order is not only required to give good reason based on record/evidence but also required to show that after being satisfied itself the Court/ NCLT has passed such order.
To form an opinion as to whether the application merits waiver, the NCLT is not only required to form its opinion objectively, but also required to satisfy itself on the basis of pleadings/evidence on record as to whether the proposed application under Section 241 merits consideration.
The NCLT is not required to decide merit of (proposed) application under Section 241, but required to record grounds to suggest that the applicants have made out some exceptional case for waiver of all or of any of the requirements specified in clauses (a) and (b) of sub-section (1) of Section 244. Such opinion required to be formed on the basis of the (proposed) application under Section 241 and to form opinion whether allegation pertains to ‘oppression and mismanagement’ of the company or its members.
The following factors are required to be noticed by the NCLT before forming its opinion as to whether the application merits ‘waiver’ of all or one or other requirement as specified in clauses (a) and (b) of sub-section (1) Section 244:-
(i) Whether the applicants are member(s) of the company in question? If the applicant(s) are not member(s), the application is to be rejected outright. Otherwise, the NCLT will look into the next factor.
(ii) Whether (proposed) application pertains to ‘oppression and mismanagement’? If the Tribunal on perusal of proposed application under Section 241 forms opinion that the application does not relate to ‘oppression and mismanagement’ of the company or its members and/or is frivolous, it will reject the application for ‘waiver’. Otherwise, the Tribunal will proceed to notice the other factors.
(iii) Whether similar allegation of ‘oppression and mismanagement’, was earlier made by any other member and stand decided and concluded?
(iv) Whether there is an exceptional circumstance made out to grant ‘waiver’, so as to enable members to file application under Section 241 etc.?
The aforesaid factors are not exhaustive. There may be other factors unrelated to the merit of the case which can be taken into consideration by the NCLT for forming opinion as to whether application merits ‘waiver’.
Whether the civil Court has jurisdiction to adjudicate on a suit relating to oppression and mismanagement, when a member is not eligible to apply under section 241 of the Act?
The plain reading of the provision of section 430 of the Act makes it clear that Civil Court has no jurisdiction to entertain any suit or proceeding in respect of alleged act of ‘oppression and mismanagement’, if preferred by any member of a company.
The fact that one or other member is ineligible to apply under Section 241 relating to allegation of ‘oppression and mismanagement’ will not empower the Civil Court to grant such relief, as can be granted by the NCLT under Section 242.
Whether the petitioners’ case was strong enough to be awarded a waiver
The NCLAT observed the shareholding of Tata Sons Ltd, and found that except Mr. Ratan Naval Tata having issued shareholding of 31.43% and Mr. Narotam S. Sekhsaria, having 17.01% shareholding capital of the company, none of the 49 member(s) were eligible to file an application under Section 241, individually having less than 10% of the shareholding.
Therefore, except that the minority shareholders join together, i.e. either six in numbers or such numbers of members whose joint shareholding will come up to 10% of the issued share capital of the Company, which will be also not less than 3 to 4 members, none of the 49 shareholders could file an application under Section 241 alleging ‘oppression and mismanagement’. It would remain only in the hands of major shareholders, namely Mr. Ratan Naval Tata or Mr. Narotam S. Sekhsaria, who only have right and their prerogative to file such application.
The valuation of the company being in the region of at least ‘Six lakhs Crores’. The interest of the appellants in the overall value of the company was over ‘one lakh crore’. Therefore, the interest of the appellants in the overall value of the company was 1/6th of the total value of the company. On the other hand, the value of the preference share holding would be only Rs. 291 crores, who do not carry voting rights other than in the exceptional circumstances found in Section 47(2) of the Companies Act 2013. The interest of the appellants to the extent of ‘one lakh crores’ of the overall value of the company whose valuation being in the region is about six lakhs crores, was another factor, which had to be kept in mind to answer the application for ‘waiver’ in favour of the appellants.
Taking into consideration the aforesaid exceptional circumstances of the case the NCLAT held that the appellants have made out a case for ‘waiver’ to enable them to apply under Section 241. The NCLAT accordingly set aside the order of the NCLT and remitted the case to the NCLT to decide on the application on merits.
Analysis & Comments (in Brief)
This ruling of the NCLAT is an important one as it throws light on the factors which NCLT must consider before granting a waiver under section 244 of the Act, considering that the statutory provisions are silent in this regard. The judgement kindles hope for the shareholder(s) who face(s) oppression/mismanagement, but is / are unable to move the NCLT because of shareholding being less than 10% of the total share capital of the company.
An important remark made by the NCLAT is that factors which are mentioned by it in its judgment are not exhaustive and there may be other factors unrelated to the merit of the case which can be taken into consideration by the NCLT for forming opinion as to whether application merits ‘waiver’.
Even while the NCLAT has held that for the purpose of deciding on a waiver application, the NCLT does not have to go deep into the merits of the case, but at the same time, the NCLAT has also held that that there could be other factors which NCLT should take into consideration before granting a waiver. We are of the opinion here that the ‘other factors’’ may involve cases where serious allegations of oppression / mismanagement are made and which prima facie appear to be genuine, or where the petitioner’s may have initially held 10% shareholding, but their shareholding would have been diluted for malafide purpose of preventing them to approach the NCLT for a potential mismanagement suit. For such cases, the NCLT would have to necessarily probe into the merits of the case for evaluating the genuineness of claims made by the petitioners and to satisfy itself of a prima facie This may include ascertaining (at least at a preliminary level) whether or not the petitioner’s claim is barred by limitation / acquiescence. Here, the judiciary would encounter a very thin line of demarcation between what could be considered as only a preliminary probing as opposed to probing deep into the merits of the case to decide on an application for waiver.
Another important issue which was addressed by the NCLT is that shareholders of even a third company may allege oppression/mismanagement if such third company and its shareholders are affected by the decisions taken by the company of which ‘oppression and mismanagement’ has been alleged. This opens up the doors for the indirect shareholders of the company to file a suit of oppression/mismanagement in the form of a representative action through the company in which they are the shareholders.
NCLAT has also clarified that the Civil Court has no jurisdiction to entertain any suit or proceeding in respect of alleged act of ‘oppression and mismanagement’, even when a shareholder, holds less than 10% of the share capital of the company. This may lead to hardship for petitioners whose claims are genuine, as they are effectively rendered remediless and may have to file a writ petition in the High Court against the judgement given by the NCLAT (rejecting the waiver). The arbitrators also do not have the jurisdiction to adjudicate on issues relating to oppression/mismanagement.
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