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Analysis of the supreme court ruling in the TATA-MISTRY case

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Analysis of the supreme court ruling in the TATA-MISTRY case

May 18, 2021

In January, 2020, Tata Sons and Ratan Tata moved to Supreme Court and challenged the decision given by the NCLAT before the Supreme Court. The Supreme Court on March 26, 2021, pronounced its judgement. The judgement was pronounced by a bench of Supreme Court headed by Chief Justice S.A Bobde and comprising Justice V. Ramasubramanian and Justice A.S Bopanna. The judgement was pronounced in favour of the Tata Group and the bench dismissed all the charges of oppression and mismanagement against the Tata Sons Limited made by entities owned by Mr.Cryus Mistry. The Supreme Court formulated five questions of law to examine the appeal and the same will be discussed in this article.

1.First Question of Law:

Whether the formation of opinion by the Appellate Tribunal 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, especially in the light of the fact that the findings of NCLT on facts were not individually and specifically overturned by the Appellate Tribunal?”

 Analysis:

In order to understand the verdict rendered on this issue, the context of the issue is as follows:

In the petition filed by the Shapoorji Pallonji Group before the NCLT in December, 2016, the allegations made against Tata Sons with respect to oppression and mismanagement revolved around the following issues:

  1. Ousting Mr.Cryus Mistry from the position of Chairmanship and Directorship.
  2. Transactions with Mr. Siva and Sterling Group of Companies.
  3. Fraudulent transactions in the deal with Air Asia which led to financing of terrorism.
  4. Mehli Mistry receiving corporate favours due to his personal relationship with Mr. Ratan Tata.
  5. The losses suffered by Tata Motors in the Nano car project and the conflict of interest that Mr. Ratan Tata had in the supply of Nano gliders to a company where he had stakes.
  6. The acquisition of Corus Group PLC of UK, at an inflated price, and then jeopardising the talks for its merger with Thyssen Krupp.

The NCLT, upon scrutinizing each of these claims, ruled in favour of TATA Sons stating that there was no record of a prejudicial act in ousting Mr.Cryus Mistry from the post of Chairmanship and Directorship. When the ruling of the NCLT was appealed before the NCLAT, the Appellate Tribunal did not scrutinise any of the five allegations regarding the business decisions of TATA Sons and only dealt with ousting of Mr.Cryus Mistry, ruled against the TATA Sons and held that Mr.Cryus Mistry needs to be reinstated for the remainder of his tenure and held the resolution for removal was illegal.

Therefore, the Supreme Court only dealt with the issue in Appeal from NCLAT, i.e with respect to the legality of removal of Mr.Cryus Mistry and stated that the following factors need to be considered to comprehend the verdict:

a.Ousting of Mr.Cryus Mistry:

Mr.Cryus Mistry was only ousted from the post of Executive Chairman of Tata Sons as on 24th October, 2016 and was still on the board as a Director on the day he filed a petition before the NCLT the first time. He was ousted from the post of the Director in December 2016 as Tata Sons was compelled to do so after he leaked confidential information about the Company to the media, following which Mr.Cryus Mistry voluntarily resigned from other positions he held in the companies held by TATA. On the very next day i.e on 20th December 2016, the Shapoorji Pallonji Group filed a petition invoking Sections 241 and 242 of the Companies Act.

b.History of the TATA Sons:

Despite there being no statutory or contractual obligation, Tata Sons inducted Mr.Cryus Mistry’s father, Mr. Pallonji Mistry as a Director on the board in the year 1980 and continued to have him on board for a period of almost twenty-five years, after which Mr.Cryus Mistry himself was inducted, again without any reference to statutory or contractual obligation, as a Director on the Board in August, 2006. Within six years of such induction, Mr.Cryus Mistry was identified as a successor to Mr. Ratan Tata and was also appointed as Executive Deputy Chairman and elevated to the position of Executive Chairman.

Based on the above factors, the Supreme Court concluded that that the removal of a person from the post of Executive Chairman cannot be termed as oppressive or prejudicial and that the removal of Mr.Cryus Mistry from the position of a Director was due to valid and justifiable reasons and hence, the NCLAT could not have laboured so much on the removal of Mr.Cryus Mistry, for granting relief under Sections 241 and 242 of the Companies Act, as the fall of Mr.Cryus Mistry was due to the consequences of his own actions.

The Supreme Court further held that to prove a case of oppression or mismanagement the petitioner alleging the same must demonstrate that the affairs of the company of which he or she is a member of are being or have been past and on a continuous basis conducted in a manner clearly prejudicial to the interests of the members or to public interest at large or prejudicial to the interests of the company itself.

It has to be continuous and indicating of a plan to oppress the minority shareholders’ rights or a particular stakeholder group. Something that is a commercial decision or a mere change in the management cannot necessarily amount to oppression of minority interest and therefore it cannot constitute oppression and mismanagement.

2. Second Question of Law:

Whether the reliefs granted and directions issued by NCLAT including the reinstatement of Mr.Cryus Mistry into the Board of Tata Sons and other Tata Companies are in consonance with (i) the pleadings made, (ii) the reliefs sought and (iii) the powers available under Sub-­Section (2) of Section 242?”

Analysis:

The Supreme Court while examining this question of law, mainly dealt with the legality in the NCLAT’s order of the reinstatement of Mr.Cryus Mistry. It held that despite there being no prayer for reinstatement of Mr.Cryus Mistry either as a Director or as an Executive Chairman of Tata Sons, NCLAT directed the restoration of Mr.Cryus Mistry as Executive Chairman of Tata Sons and as Director of Tata Companies for the rest of the tenure.

It further held that the appointment of Mr.Cryus Mistry as Executive Deputy Chairman of Tata Sons, was for period of 5 years, extending from 1st April 2012 to 31st March 2017 and the judgment of the NCLAT reinstating Mr.Cryus Mistry was passed on 18th December, by which time, Mr.Cryus Mistry’s tenure as Executive Chairman had expired.

The Court held that unless the removal of a person as a chairman of a company is oppressive or mismanaged or done in a prejudicial manner damaging the interests of the company, its members or the public at large, the Company Law Tribunal cannot interfere with the removal of a person as a Chairman of a Company in a petition under Section 241 of the Companies Act, 2013 and is expressly barred from reinstating the person in a position held by him or her under Section 14 of the Specific Relief Act,1963. The Court held that Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement and set aside the relief of reinstatement given by the NCLAT.

3.Third Question of Law:

Whether the NCLAT could have, in law, muted the power of the company under Article 75 of the Articles of Association, to demand any member to transfer his shares, by injuncting the company from exercising the rights under the Article, even while refusing to set aside the Article?”

Analysis:

While analysing this issue, the Apex Court stated that Shapoorji Pallonji Group’s allegations against Tata sons with respect to exercising of the Right under Article 75 was never with respect to past misuse amounting to oppression and mismanagement. The SP Group challenged the Article based on the scope of the Article to be misused in the future.

The Court stated that NCLAT’s decision to neutralise Article 75 merely on the basis of likelihood of misuse in the future is beyond its power. Section 241(1)(a) the Companies Act, 2013 provides for a remedy, only with respect to past and present conduct or past and present continuous conduct and not future conduct of the company and therefore set aside the ruling given by the NCLAT on Article 75.

4.Fourth Question of Law:

Whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121   to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee directors virtually nullifying the effect of these Articles?”

Analysis:

The Shapoorji Pallonji Group sought for the deletion of the Article that necessitated the affirmative voting right of the majority of the Directors nominated by the two Trusts. There was no prayer for restraining Mr.Ratan Tata and the nominee Directors of the Trusts from taking any decision in advance.

The Court observed that if the argument relating to corporate governance is carefully scrutinized in the context of the fact that a large industrial house whose origin and creation was familial, was willing to handover the mantle of heading the entire empire to a person like Mr.Cryus Mistry(a rank outsider to the family) and that the identification of Mr.Cryus Mistry as the successor to Mr.Ratan Tata was done by the very same nominees of the two Tata Trusts (now accused of interference), then it will be clear that Tata Group was guided by the principle of Corporate Governance (even without a statutory compulsion) and not by tight fisted control of the management of the affairs of the Group.

The Court further held that the right to claim proportionate representation is not available even to a minority shareholder statutorily, both under the 1956 Act and under the 2013 Act. It is available only to a small shareholder, which the Shapoorji Pallonji Group is certainly not.

The Court also pointed out the behaviour of the Shapoorji Pallonji Group with respect to its claims on Affirmative Voting rights and stated that, in the beginning, the Shapoorji Pallonji Group had initially argued for the striking down of Article 121 and then they changed their stance to the deletion of the phrase “the necessity of affirmative voting rights” and then once again, under the guise of corporate governance, they changed their stance to accepting the existence of affirmative voting rights, provided that the nominee directors of the Shapoorji Pallonji Group.

5.Fifth Question of Law:

“Whether the re­conversion 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 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT?”

Analysis:

There are three types of companies, Private companies, Public Companies and deemed to be public companies. TATA Sons, though was incorporated as a Private company, was deemed to be a Public company within the meaning of Section 43-A of the Companies Act and companies under Section 43A cannot claim the same privileges to which private companies are entitled to.

It is important to note that by Act 53 of 2000, the concept of deemed to be a public company under Section 43A was removed. But, Sub-clause (d) was added to Section 3(1)(iii), imposing a fourth condition for a company to be considered as Private, which TATA Sons did not fulfil. However, TATA Sons fulfilled the three conditions enlisted under Section 2(68) which newly defined the meaning of a Private company in 2013. Therefore, the Court ingeniously concluded that by virtue of Section 465(3), Section 2(68) prevails over Section 3(1)(iii), thereby validating the company’s move to add Private to its name.

 Since TATA Sons by law and not by choice, on 1st February 1975, became a Public company under Section 43-A, and continued to be a Public company after suspension of Section 43-A, from 13th December 2000 till 11th September 2013 under Section 3(1)(iii)(d), conditions enlisted under Section 14(1) for conversion from Public to Private or vice-versa became irrelevant. The Court in light of the above, concluded that TATA Sons was well within its rights to do what it did with regards to its status.

Conclusion:

The five-year-long and the most high-profile corporate legal battle between Mr.Cryus Mistry and Mr.Ratan Tata has set the precise definition of Section 241 of the Companies Act, 2013 and its applicability. The Judgement also gives a brief idea concerning the power of the Company Law Tribunal under Section 241 of the Companies Act, 2013.

Author: Prashant Jain, Co-Founder & Partner  and Kavya Velagala, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at  prashant@samistilegal.in,kavya@samistilegal.in

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