The Supreme Court of India (Court), recently on 26 March 2021, has delivered a breakthrough decision in the realm of Indian company law and corporate governance. The decision concerns one of the biggest corporate shareholder legal battles involving Tata Sons - the promoter of Tata companies and the Shapoorji Pallonji Group, which was extensively contested, both in terms of facts and law. However, this is not the reason why this decision assumes great significance. The decision attracts enormous attention since it explores every nook and corner of Section 241 & 242 of the Indian Companies Act, 2013 (2013 Act) and illuminates on various elementary concepts, in extraordinary precision.
Two companies being Cyrus Investments Private Limited and Sterling Investments Corporation Private Limited (SP Group), in which Mr. Cyrus P. Mistry held a controlling interest, filed a company petition in capacity as the minority shareholders against Tata Sons, its directors and trustees of certain Tata Trusts (Tata Group) before the National Company Law Tribunal, Mumbai (NCLT) on the grounds of oppression and mismanagement under Section 241 and 242 of the 2013 Act. The Tata Trusts are the majority shareholders of Tata Sons. The SP Group claimed that the affairs of Tata Sons are carried out as though it was a proprietary concern of Mr. Ratan N. Tata and the oppressive conduct was such that it would be just and equitable to wind up Tata Sons, but such winding up would unfairly prejudice the interest of the SP Group and therefore, the NCLT should pass such orders so as to bring to an end, the acts of oppression and mismanagement.
In the first round, on 9 July 2018, the NCLT ruled in favour of the Tata Group. In the second round, the SP Group challenged the order of the NCLT before the National Company Law Appellate Tribunal, New Delhi (NCLAT) wherein the NCLAT on 18 December 2019, ruled in favour of the SP Group. The decision of the Supreme Court arises out of a batch of appeals filed by the Tata Sons, Tata Trusts, Mr. Tata and three Tata group companies challenging the order of the NCLAT. Even the SP Group had filed an appeal before the Supreme Court against the order of the NCLAT seeking additional reliefs.
Avoiding further sermonising, this article straightaway deals with the analysis and the principles laid down by the Court, since it is not feasible to completely set out the mountainous facts and the history of litigation herein.
Analysis, Observations & Principles laid down:
Re: NCLAT – a final court of facts
- The Court pointed out an important difference between the approach adopted by the NCLT and the NCLAT. It observed that NCLT dealt with every allegation and rendered reasoned reasonings thereto, whereas, the NCLAT, despite being a final court of facts, neither dealt with the allegations nor rendered any opinion on the correctness of the findings recorded by the NCLT. None of the findings, except the one which relates to Mistry’s removal was specifically and individually overturned by the NCLAT. NCLAT being an Appellate Tribunal, conferred with the power under Section 421(4) of the 2013 Act, to confirm, modify or set aside the order of the NCLT, can be taken to be a final court of facts. The findings of the NCLT which stand un-addressed or un-modified have attained finality. It was on this ground, the Court being solely concerned with question of law, focussed on the only issues which were expressly overturned by NCLAT.
Re: Removal of Mistry – a basis for an oppression & mismanagement petition?
- The Court held that mere termination of a directorship cannot be projected as something that would trigger the just and equitable clause for winding up for grant of relief under Sections 241 and 242 of the 2013 Act. In this context, the Court relied on Hanuman Prasad Bagri & Ors. v. Bagree Cereals Pvt. Ltd., [(2001) 4 SCC 420]. The law is well settled that failed business decisions and removal from directorship cannot be projected as oppressive and prejudicial to the interest of the minorities.
- In a Section 241 petition, the Tribunal cannot ask the question whether the removal of a Director was legally valid and/or justified or not. The right question is whether such removal tantamount to an oppressive and prejudicial conduct. Even in cases where the Tribunal finds that the removal of a Director was not in accordance with law or was not justified on facts, the Tribunal cannot grant a relief under Section 242 unless the removal was oppressive or prejudicial.
- The Tribunal can grant a relief under Section 242 in cases where the removal of a Director might have been carried out perfectly in accordance with law and yet may be part of a larger design to oppress or prejudice the interests of some members. A Tribunal is not a labour court or an administrative tribunal to focus entirely on the manner of a removal of a person from directorship.
- The Court reiterated that the justification of the removal of a person can never be the primary focus of a Tribunal under Section 242 unless the same is in furtherance of an oppressive or prejudicial conduct.
Re: The ‘Just and Equitable’ standard under the 2013 Act
- The NCLAT had recorded a finding that the facts of this case otherwise, justify the making of winding up order on just and equitable ground. The Court relied on the celebrated judgment of the Privy Council in Loch v. John Blackwood, [(1924) AC 783] which held that, for winding up, there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs. The Privy Council observed that the lack of confidence must not spring from dissatisfaction at being out voted on the business affairs or on what is called the domestic policy of the company. The Court further placed reliance on a passage authored by Lord Clyde in Baird v. Lees, [(1924) SC 83], as also quoted in Loch, discussing the tests to be applied and certain situations in which it may be just and equitable for the Court to wind up the company. The test of just and equitable ground in Baird is set on a high threshold which held that a shareholder invests in a company on certain conditions. Such conditions are that the business in which he invests shall be limited for a specific purpose and the business shall be conducted in accordance of the principles of probity and efficiency etc. It is only when these conditions are being consistently and deliberately violated, a situation may arise that it may be just and equitable to wind up the company. The Court applied the above test and observed that the facts of this present case do not fall anywhere near the settled just and equitable standard.
- Much importance and attention, rightly so, were further rendered by the Court while discussing the just and equitable clause. The Court relied on the House of Lords decision in Ebrahimi v. Westbourne Galleries Ltd., [(1972) 2 WLR 1289] to discuss the origin of just and equitable clause which is traced to the law of partnership had further developed the concepts of probity, good faith and mutual confidence. Ebrahimi was relied on to reach a conclusion that a company, however small, however domestic, is a company and not a partnership or even a quasi-partnership. The Court further relied on Lau v. Chu, [(2020) 1 WLR 4656] wherein the House of Lords pointed out that the functional deadlock of a paralysing kind was first clearly recognised as a ground for just and equitable winding up in Re: Sailing Ship Kentmere Co., [(1897) WN 58]. Then comes a second type of case where a company is a corporate quasi partnership and an irretrievable breakdown in trust and confidence between the participating members have taken place. The Court observed that in the first type of these cases, where there is a complete functional dead lock, winding up may be ordered regardless whether the company is a quasi-partnership or not. But in the second type of cases, a breakdown of trust and confidence is enough even if there is not a complete functional dead lock.
- Premised on the above precedents, the Court concluded that there is no quasi partnership between the Tata Group and the SP Group and no functional deadlock has been proved or pleaded.
- Alluding to the Indian precedents qua the just and equitable clause, the Court relied on Rajahmundry Electric Supply Corpn. Ltd. v. Nageshwara Rao, [(1955) 2 SCR 1066] that for the invocation of just and equitable clause, there must be a justifiable lack of confidence on the conduct of the directors. Further reliance was placed on S.P.Jain v. Kalinga Tubes Ltd., [AIR 1965 SC 1535] which observed that a mere lack of confidence between the shareholders would not be sufficient.
- Further, to conclude on the just and equitable standard, the Court noted that Tata Sons is a principle investment holding company which is majorly held by philanthropic Trusts. The Court concluded that the NCLAT’s findings that the facts otherwise justify the winding up of the company is completely flawed and observed that the NCLAT should have raised a more fundamental question whether it would be equitable to wind up Tata Sons which would starve the charitable trusts.
Re: Reinstatement of Mistry – Power of Tribunals to direct reinstatement under Section 242 of the 2013 Act
- The NCLAT, despite there not being any reliefs sought pertaining to reinstatement of Mistry, directed the restoration of Mistry as Executive Chairman of Tata Sons and as Director of three Tata companies for the rest of the tenure. The Court noted that by the time when NCLAT passed its order on 18 December 2019, the tenure of Mistry’s chairmanship has already passed. Therefore, NCLAT could not have (a) granted a relief not apparently sought for; and (b) there is no question of reinstatement “for the rest of the tenure” after the tenure of office had already run its course, which is a settled position.
- The Court said that even a labour court / service tribunal would not have the power to grant such remedy of reinstatement. A dismissal even if found to be wrongful and mala fide is an effective dismissal and may give rise to a claim in damages. In this context, the Court relied on Dr. S.B.Dutt v. University of Delhi., [1959 SCR 1236].
- Sections 241 and 242 of the 2013 Act do not specifically confer the power of reinstatement, nor there is any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred. In this context, the Court analysed the scope of the words at the end of Section 242(1) “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit” and held that the same cannot be interpreted as conferring on the Tribunal any implied power of directing reinstatement. Section 242(2) confers the power to make an order directing several actions. The words at the end of Section 242(1), can be held to mean the power to make such orders to bring an end, matters for which directions are given under Section 242(2).
- Sections 241 and 242 do not permit the Tribunal to read into the Sections, a power to make an order for reinstatement which is barred by law vide Section 14 of the Specific Relief Act, 1963. A Tribunal does not have the power to enforce a contract which is dependent on personal qualifications such as those mentioned in Section 149(6) of the 2013 Act.
Re: Article 75
- Article 75 of Tata Sons deals with Company’s power of share transfer. The Court said that NCLAT could not have muted Article 75 by holding that it cannot be invoked except in exceptional circumstances. After all, Article 75 just provides for an exit option to the unwilling partner.
- Article 75 has been there for nearly a century in one form or other in the Articles of Tata Sons. Further, the SP Group, a willing shareholder who was party to the amendments made to Article 75 back in the year 2000 cannot turn around and challenge the same. The Articles of a company constitute a contract between among the shareholder is the bedrock of company law.
- The purpose of an order both under the English Law and under the Indian Law, is to bring to an end the matters complained of by providing a solution. The object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders.
- SP Group did not make a grievance out of Article 75 on the ground that it was misused in the past and that such misuse tantamount to oppression and mismanagement. The sine qua non for Section 241 of the 2013 Act, is that the affairs should have been or are being conducted in an oppressive and prejudicial manner. Thus, the Court held that NCLAT could not have or should not have made Article 75 completely ineffective by passing an order of restraint. Further, it was sufficient to disregard the challenge to Article 75 as it did not co-relate to an actual conduct but the possibility of a future conduct. Section 241 is not intended to discipline a management in respect of a possible future conduct.
Re: Legality of Affirmative voting rights qua oppression and mismanagement
- Article 121 of Tata Sons provides that the matters which require to be decided by a majority of the Directors, shall require the affirmative vote of the majority of Directors appointed by the Tata Trusts. The SP Group sought a similar affirmative right to be conferred on the nominee directors of the SP Group. By relying on Sections 135, 149, 151, 161, 166 and 177 of the 2013 Act, the SP Group also contended that the company law in India over the years have shifted from corporate majority to corporate governance and that every action of the Board has to pass the test of fairness. The affirmative voting rights, according to the SP Group, disabled the nominee Directors from acting independently in the best interests of the company.
- While the shift under the 2013 Act is focussed on listed and unlisted public companies, insofar as Tata Sons is concerned, the Articles of the company continue to contain the prescribed restrictions which make it a private company and hence the above provisions do not apply to Tata Sons.
- Qua the corporate governance arguments, the Court observed that Tata Sons, whose origin was familial, was willing to handover the mantle of heading the entire empire to Mistry, an outsider. Hence, it is clear that the Tata Group was guided by the principle of corporate governance, even without a statutory compulsion.
- The Court held that the directors nominated by the Tata Trusts are not like any other directors who get appointed in terms of Section 155(2). Accordingly, it is paradoxical to claim that by virtue of Sections 166(2) and 166(3), every Director is bound to act in good faith in order to promote the objects of the company and yet mandate the appointment of independent directors under Section 149(1). The Court observed that if the directors are required under Section 166(3) to exercise independent judgment, it is unknown as to why there is a separate provision in Section 149(4) for listed public company to have independent directors. The Court raised a question that whether the prescription in Section 149(4) is a tacit acknowledgment that all the Directors appointed in a general meeting under Section 152(2) may not be independent in practice, though they may be required to be so in theory.
- Coming to the trust nominated directors, the Court said that such directors also hold a fiduciary relationship with the Tata Trusts and duty towards the nameless beneficiaries of the Tata Trusts. Section 166(2) talks about the duty of a director to protect the environment, in addition to its duties towards the object of the company. The Court made an interesting observation that it is common knowledge that industries which take good care of its shareholders also runs polluting industries. Thus, there always remains a conflict and statutes cannot resolve this effectively.
- Coming to the issue of affirmative voting rights, the Court said that such is an accepted global norm. A majority shareholder can always seek to be in the driving seat by reserving affirmative voting rights. What is important is that, so long as these special rights are incorporated in the Articles and not in contravention of any of the provisions of the company law, the same cannot be attacked on these grounds. There is nothing abhorring about the validity of affirmative voting rights.
- Regarding the allegation of pre-consultation and preclearance by the Tata Trustees, even before the Board took a call, the Court said that whenever an institution happens to be a shareholder and a notice of a meeting either of the Board or of the General body is issued, it is normal for the institution to have an idea about the stand to be taken by them in the forthcoming meeting.
Re: Proportionate representation
- The Court held that the right to claim proportionate representation is not available even to a minority shareholder statutorily, under the Companies Act, 1956 Act (1956 Act) and under the 2013 Act. The right to claim proportionate representation is not available for the SP group even contractually, in terms of the Articles. Neither the SP Group nor Mistry can request the Tribunal to rewrite the contract, by seeking an amendment of the Articles.
- The SP Group claimed that there existed a quasi-partnership between the Tata group and SP group. It was contended that there existed a personal relationship between those in management of the SP Group. The Court held that there was no relationship in the nature of quasi partnership in existence. The Court factually noted that SP Group became a shareholder after 50 years of incorporation of Tata Sons in 1917. Therefore, there is nothing on record in the form of pleadings or proof, to show that there was either (i) a pre-existing relationship before the incorporation of the company or (ii) a living in relationship picked up half way through, by entering into an agreement in the nature of a partnership.
- Placing reliance upon Section 163 of the 2013 Act, it was contended by the SP Group that proportionate representation is statutorily recognised. However, the Court found this argument as completely misconceived. Section 163 corresponds to Section 265 of the erstwhile 1956 Act which enables a company to provide in their Articles of Association, for the appointment of not less than two thirds of the total number of Directors in accordance with the principle of proportionate representation by means of a single transferable vote. Proportionate representation by means of a single transferable vote, is not the same as representation on the Board for a group of minority shareholders, in proportion to the percentage of shareholding they have. It is only an enabling provision and it is up to the company to make a provision for the same in their Articles. Therefore, the Court held that there is no statutory compulsion to incorporate such a provision.
Re: Conversion of Tata Sons
- The issue before the Court was whether the re-conversion of Tata Sons from a public company into a private company, required the necessary approval under Section 14 of the 2013 Act.
- Tata Sons was originally incorporated as a private limited company but was deemed to have become a public company in the year 1975 by virtue of Section 43-A(IA) of the 1956 Act. However, the Articles continued to retain the provisions relating to matters specified in sub-clauses (a), (b) and (c) of Section 3(1)(iii) of the 1956 Act. By Act 53 of 2000, the deeming fiction in Section 43A was removed and the whole concept of private companies becoming public companies disappeared.
- The 2013 Act did not include any provision similar to Section 43A of the 1956 Act. Therefore, Tata Sons passed a resolution on 21 September 2017 to alter its Memorandum and Articles so as to insert the word “private” in between the words “Sons” and “Limited” in its name. On 9 July 2018, the company petition was dismissed by the NCLT and hence, Tata Sons approached the Registrar of Companies on 19 July 2018 seeking an amendment to its incorporation certificate. The Registrar issued an amended certificate on 6 August 2018. According to the NCLAT, this action of the Registrar in issuing the amended certificate of incorporation was illegal and directed to make necessary corrections in the record showing Tata Sons as a public company. Further, the NCLAT was of the view that Tata Sons was required to alter its articles by following the procedure prescribed under Section 14 of the 2013 Act for converting the company as a private company.
- The Court analysed the complete history of amendment in relation to conversion and held that the 2013 Act puts an end to the concept of deemed public companies and restores the definition of the expression ‘private company’ to the position that prevailed before Act 53 of 2000. Section 2(68) of the 2013 Act defines a ‘private company’ to incorporate the original three prescriptions contained in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) of Section 3. The stipulation inserted as sub-clause (d) by Act 53 of 2000, is omitted in Section 2(68).
- Different provisions of the 2013 Act came into force on different dates. Section 465 of the 2013 Act, in so far as it relates to the repeal of the 1956 Act is concerned, came into force on 30 January 2019. Therefore, the provisions of 1956 Act continued to be in force till repealed on 30 January 2019 and as such the criteria for a ‘private company’ under sub-clauses (a), (b), (c) and (d) of clause (iii) of sub-section (1) of Section 3 of the 1956 Act did not stand repealed until 30 January 2019. But the new definition of a ‘private company’ under Section 2(68) of the 2013 Act had already come into effect on and from 12 September 2013.
- While relying upon Section 465(3) of the 2013 Act, the Court held that Section 2(68) of the 2013 Act will prevail over Section 3(1)(iii) of the 1956 Act and from 12 September 2013 (i.e. the date appointed for the coming into force of section 2(68) of the 2013 Act), the question whether a company is a private company or not, will be determined only by the definition of the expression ‘private company’ found in Section 2(68) of the 2013 Act. As the Articles of Tata Sons satisfy the requirements of Section 2(68) of the 2013 Act, the Court held that ‘it was and it continues to be a private company’.
- Tata Sons did not become a public company by choice but became one by operation of law and therefore, such a company should not be asked to follow the rigors of Section 14(1). Section 14(1) does not ipso facto deal with the issue of conversion of private company into a public company or vice versa. Primarily, Section 14(1) deals with the issue of alteration of Articles of Association of the company. Incidentally, Section 14(1) also deals with the alteration of Articles “having the effect of such conversion”.
- The NCLAT mixed up the attempt of Tata Sons to have the certificate of incorporation amended, with an attempt to have the Articles of Association amended. The Court relied on Ram Parshotam Mittal v. Hillcrest Realty, [(2009) 8 SCC 709] wherein it was observed that “it is not the records of the Registrar of Companies which determines the status of the company”. The status of the company is determined by its Articles. The Court held that the request made by Tata Sons and the action taken by the Registrar of Companies to amend the Certificate of Incorporation were perfectly in order.
Re: Amendments of reliefs before the NCLT / NCLAT – a procedural observation
- While deciding the larger lis, the Court commented on the manner how applications for amendments by way of memos seeking incorporation, modifications of prayers were filed by the SP Group in the present proceedings. The Court observed that the rigors of the Civil Procedure Code or the Evidence Act are not applicable to the Tribunals and the purpose of such concession was to avoid delay in the dispensation of justice. However, in facts and circumstances of the case in hand, the Court observed that instead of eliminating delay, it has eliminated discipline in pleadings and procedure.
Re: Supreme Court to decide only questions of law
- While dealing with the application filed by SP Group praying for alternate relief seeking separation of ownership interests of SP Group in Tata Sons, the Court declined to decide the same as the Court is concerned with questions of law under Section 423 and this application was filed for the first time before the Court and involved adjudication on facts. The Court left it to the parties to take the Article 75 route or any other legally available route.
The decision cements and meticulously deals with almost all facets and the statutory prescriptions under the Indian company law qua Oppression & Mismanagement. Needless to say, this decision will be a ready reckoner handbook for all such parties who will rush to the courts, while instituting or defending any shareholder- oppression & mismanagement dispute.
The Authors were part of the team that successfully represented the Tata Group across all the forums.