Cyrus Mistry won half the battle; on the other hand Tata Son is seeking more legal option to win the next battle of the Board Compilation by Kavita Dipesh Shah


On 18th December 2019 (Wednesday), Mr. Cyrus Pallonji Mistry would have been the happiest man in Mumbai’s Corporate Circle, for not only did he win back the chair he was forced to relinquish, but also elicited out of the NCLAT remarks that went sharply against Tata, his close confidant and former Tata Sons vice-chairman N.A. Soonawala and the board.

Following were the questions/ judgement by NCLT in debate which were raised in appeal by Mr. Cyrus Mistry against the Tata Group, Sir Ratan Tata, Tata Sons Limited (“Company”) :-

  • Whether the plea of Cyrus Mistry seeking waiver from the eligibility criteria of holding at least 10% shareholding in Tata Sons to maintain a case of oppression and mis-management under section 244 is maintainable ?
  • Whether the removal of Executive Chairman to be considered as the directorial complaints, and if yes, can it be considered as “Prevention of Oppression and Mismanagement” under section 241 of the Act?
  • Whether the Company had followed proper procedure as mentioned in the Act for   Conversion of “Tata Sons Limited” from Public Company to Private Company.
  • Can Article of Association (Article) of the Company restrict the majority decision by adding the provision of the affirmative vote to any particular person / director ?
  • Can the majority of Board have power to remove Mr. Cyrus Mistry (Executive Chairman) through passing the Board Resolution, without giving prior formal notice to Mr. Cyrus Mistry or mentioning same in the Agenda of the Board Meeting ?
  • Was the Board really dissatisfied with the performance of the Mr. Cyrus Mistry or because of Legacy issue he was removed from his chair?

Before Analysing the above points, lets first read the facts of the case, which will help us to understand the view point of appellants and respondents and the judgement of the NCLAT :-
  1. Share holding Pattern of the Company :-

The Tata Sons Limited is controlled by two Group : -

Tata Group -1 : Tata Trust, Tata Family and Tata Group Cos collectively hold 81% of equity share capital of the Company , - Respondents

Shapoorji Pallanji Group – 2 : Shapoorji Pallonji Group holds 0.026%, Sterling Investment Corp holds 9.18% and Cyrus Investments holds 9.18%, collectively  Shapoorji Pallanji Group hold 18% of the equity share capital of the Company  – Petitioners / Appellants

  • Further, petition to be maintainable under section 241 of the Act ; the appellants need to fulfil the criteria of holding minimum 10% of the issue share capital of the Company as per section 244 of the Act. Here issue share capital means the equity + preference shares.
  • However, After considering the preference shareholding of the Company, the Petitioners holding drops below the minimum threshold prescribed under Section 244 of the Act for maintaining an oppression and mis-management claim.
  • 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 and hence Tata Sons Limited can be called as a quasi-partnership-company, a concept well recognised in company law jurisprudence
Analysis of the Case :- 
  • Whether the plea of Cyrus Mistry seeking waiver from the eligibility criteria of holding at least 10% shareholding in Tata Sons to maintain a case of oppression and mis-management  under section 244 is maintainable ?
  • The petition was dismissed by the NCLT on 21st September 2017, on basis of the issued share capital of the Company as mentioned above, as the share holding of the Petitioner was below the threshold limited as prescribed under section 244 of the Act.
  • However, same was appealed to the NCLAT, and 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 Appellants- ‘Cyrus Investments Private Limited & Anr.’ had invested approximately Rs.1,00,000 crore held that it was a fit case for waiver and remitted petition under Sections 241-242 to the NCLT for decision on merit. Whether the removal of Executive Chairman to be considered as the directorial complaints, and if yes, can it be considered as “Prevention of Oppression and Mismanagement” under section 241 of the Act?
  • Respondent submitted that the allegations pertaining to removal of Mr. Cyrus Mistry (Executive Chairman) are in the nature of directorial complaints and hence 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. 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
  • If the NCLAT accept the stand taken by the Respondents that the removal of Cyrus Mistry is directorial in nature, in the interest of Company, in such case, there was no occasion to issue a ‘Press Statement’ by “Tata Sons Limited” dated 10th November 2016,  where it was noticed that many across the globe have raised concern in the manner Mr. Cyrus Mistry was removed. The Company and its Board also understood that such removal may lead to a sense of uncertainty of ‘Tata Sons Ltd.’ and ‘Group Companies’ and result in winding up.
  • Further, the proceedings of the minutes showed that the members of the ‘Nomination and Remuneration Committee’ which just four months’ prior to his removal on 28th June, 2016 praised the performance of Executive Chairman.
  • Furthermore, the Article 121 B of the Company, mandates advance notice of fifteen days to be given to the Company (‘Tata Sons Limited’), its Directors and the Board about any matter/ resolution which is to be placed for deliberation by the Board.
  • No such item was mentioned in the agenda of Board Meeting dated 24th October 2016. And to add more, such decision of majority of Board on such matter/ resolution was dependent upon affirmative vote of the nominee Directors of the ‘Tata Trust’.
  • It was concluded that facts of the ‘Press Statement’ and if there were reason for dissatisfying the performance of Mr. Cyrus Mistry, which were never discussed by Board. Further to put all blame on Mr. Cyrus Mistry , the Board of Directors’ majority decision of which is guided by the affirmative vote of the nominated members of the Tata Group, have failed to explain as to why the Board did not want Cyrus Mistry to continue his chair in the Company.
Whether the Company had followed proper procedure as mentioned in the Act for Conversion of “Tata Sons Limited” from Public Company to Private Company?
  • Pursuant to Section 43A (1A) of the Companies Act 1956, the Company (‘Tata Sons Limited’) which was a ‘Private Company’, due to its annual turnover, irrespective of its paid-up share capital became ‘Public Company’
  • As per sub-section (4) of Section 43A, a ‘private company’ which became a ‘public company’ by virtue of the aforesaid provisions, is to continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of the Act, again becomes a ‘private company’.
  • 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 subsection (2) of Section 14, it requires approval by the Tribunal. Only after order of approval by the Tribunal, the Company can request the Registrar together with a printed copy of the altered articles, to register the Company as ‘Private Company’ or ‘Public Company’ as the case may be.
  • Curiously, the ‘Tata Sons Limited’ 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 has been filed before the Tribunal 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 Tribunal under Section 14, it’s 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.

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

  • The proceedings of the sixth meeting of the Board of Directors of ‘Tata Sons Limited’ held on Monday, 24th October, 2016 so far as it relates to removal and other actions taken against Mr. Cyrus Mistry was declared illegal and was set aside. In the result, Mr. Cyrus Mistry is restored to his original position as Executive Chairman of ‘Tata Sons Limited’ and consequently as Director of the ‘Tata Companies’ for rest of the tenure.
  • As a sequel thereto, the person who had been appointed as ‘Executive Chairman’ in place of Mr. Cyrus Mistry, his consequential appointment is declared illegal.
  • Sir 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. 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. (Note : Article 75 of the Company empowers the ‘Tata Sons Limited’ at any time to transfer ‘ordinary shares’ of any of the shareholders without following the normal procedure of transfer)
  • 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.
  • The decision of the Registrar of Companies changing the Company (‘Tata Sons Limited’) from ‘Public Company’ to ‘Private Company’ is declared illegal and set aside. The Company (‘Tata Sons Limited’) shall be recorded as ‘Public Company’. The ‘Registrar of Companies’ (ROC) will make correction in its record showing the Company (‘Tata Sons Limited’) as ‘Public Company’.
  • However, if the case  would have been raised in the hearing, then the facts of the Case would not be changed and judgement would not differ. The decision taken by the majority board of the Company does not stand in the provision of the law, however it is fine to protect the Legacy of Tata Group.Following were developments in the aforesaid case, post the judgement passed by the NCLAT on 18th December 2019:-
  • Ministry of Corporate Affairs (MCA) moves NCLAT to seek review of Tata Sons VS Mistry Order and The NCLAT agreed to hear the matter on January 2 2020.
  • The MCA argued that the RoC decision to convert Tata Sons to a private company was in accordance with a previous judgment passed by the National Companies Law Tribunal (NCLT), which heard this case before. It further pointed out that the NCLAT did not grant a stay on the NCLT’s 2018 order allowing conversion of Tata Sons to a private company, and also the RoC’s action was bonafide in nature.
  • It added that in passing an order on the RoC’s decision without seeking its view on the matter, the NCLAT did not meet the principles of natural justice.
  • The MCA further said that since the RoC followed due procedure in the Tata Sons case and that its actions were required by law, and that any aspersions that it acted in a “hurried manner” are erroneous in nature.
  • Private companies have more relaxed compliance norms as compared to public companies. In the Tata Sons case, the private company tag also offered it specific benefits such as restricting the right of a minority shareholder (Shapoorji Pallonji Group) from freely selling their shares in the market and ‘right to first refusal’ on any such sale.
  • Further, Tata Sons has a number of legal options to turn decisions in its favour. Tata Sons is likely to challenge the order of NCLAT before the Supreme Court within four weeks and if the salt-to-steel conglomerate wins the case, N Chandrasekaran will continue to be the chairman of Tata Sons.

Reference : NCLAT Order dated 18th December 2019, News on Live Mint and Money Control.

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