Supreme Court Sets Aside NCLAT Order in the Tata-Mistry case: Big win for Tata Sons

Supreme Court Sets Aside NCLAT Order in the Tata-Mistry case: Big win for Tata Sons

The Supreme Court (SC) on 26 March 2021, has allowed the appeal of Tata Sons Limited wherein the company had challenged the order of the National Company Law Appellate Tribunal (NCLAT) that had directed for the reinstatement of Cyrus Mistry as the Chairperson of Tata Sons Ltd.

The SC bench comprising of Chief Justice of India SA Bobde, Justices AS Bopanna and V Ramasubramanian pronounced the judgment. The Court has reserved its order on 17 December 2020 in the instant matter.

The Top Court ruled in favour of Tata Sons and answered all the legal questions in detail. The Court held that the actions of Tata Sons board wherein it decided to remove Mistry from the post of Chairperson of the company did not amount to oppression of minority shareholders or mismanagement. The Top Court stated that both the parties (Tata Sons & Cyrus Mistry) can work out on their separation terms.

A long battle was going on between Tata Sons and Mistry. The order of the Appellate Tribunal dated 18 December 2019 was challenged by both the parties before the SC which had put a stay on the said order on 10 January 2020.

The NCLAT in its judgment passed in 2019 ruled that the proceedings of the Board meeting of Tata Sons wherein Cyrus Mistry was removed as Chairperson was illegal. The Appellate Tribunal had directed Tata Sons to reinstate Mistry.

As to the background of the case, Cyrus Mistry in December 2012 took over as Chairman of Tata Sons. On 14 October 2016, he was removed from the post by the majority of the Board of Directors of Tata Sons.

On 6 February 2017, an Extraordinary General Meeting was convened and the shareholders voted for the removal of Mistry from the board of Tata Sons. N Chandrasekaran took over as Executive Chairman of Tata Sons.

The present legal battle has its genesis in the company petitions filed by Shapoorji Pallonji Group (SP Group) under Sections 241 and 242 of the Companies Act. Two shareholders have moved to the National Company Law Tribunal (NCLT) over the decision of the company for removing Mistry's and they alleged that it amounted to "oppression" of minority shareholders and "mismanagement".

The NCLT had dismissed the petition of the shareholders and an appeal was filed by them before the NCLAT. The Appellate Tribunal had proceeded to overturn the order of the NCLT and against the NCLAT's order appeals were filed before the Apex Court.

Advocate Harish Salve represented Tata Sons Ltd. and Senior Counsel CA Sundaram and Shyam Divan represented Shapoorji Pallonji Group (SP Group) while Senior Advocate Janak Dwarkadas represented Cyrus Mistry.

Contentions on behalf of Tata Sons

The contentions of Tata Sons was that the Appellate Tribunal granted such a relief to Mistry that was not pleaded for and it also lack jurisdiction to declare the company as a 'Public Company' when it is a 'Private Company' u/s 2(68) of the Companies Act 2013.

It was pointed out before the SC that SP group owns 18 percent stake of the company and Tata Trusts is the holder of 68 percent stake. Hence, the order of the Appellate Tribunal gives control over companies to minority shareholders.

It was also contended that Cyrus Mistry was not appointed as Executive Chairman under any right of the minority shareholder. The order of the Appellate Tribunal of reinstating Mistry in the Tata Sons was against the majority decision of the company.

On behalf of Tata Sons it was submitted that the order of the Appellate Tribunal was against the law and cause interference with Sec. 242 of the Companies Act.

The Companies Act, 2013, Section 242 provides that if the Tribunal is of the opinion that the facts would justify that it was "just and equitable" that the company should be wound up, but such an order could prejudice the members of the company, then the Tribunal can resort to a slew of measures laid down under the said Section. It shall also include removal of Managing Director or any other director and appointment of new directors.

It was argued that bad business decisions, while they may cause loss to the company, cannot be classified as 'mismanagement' under Section 241 of the Companies Act, 2013. It was further submitted that a member of Tata Sons cannot complain about other Tata companies.

The contention on behalf of Tata Sons was that the Appellate Tribunal has limited power to appoint a director of the company according to Section 242(2)(k) of the Companies Act. Sec. 242 deals with the 'powers of the Tribunal' and appoint directors is provided under Section 242(2)(k) that is not absolute.

It was further argued that the NCLAT has removed the Executive Chairperson of the company N Chandrasekaran that was appointed by the board and it ordered for reinstatement of Mistry to the post. It was urged that it does not have such absolute powers under Section 242(2)(k) to appoint Directors.

Contentions on behalf of SP Group and Cyrus Mistry

On the other hand, the contentions were made on behalf of SP Group was regarding the relationship between Tata Sons and SP Group. The relationship was 70 years old and was one of mutual relationship and trust. It was mentioned that the developed in the context of a statutory framework which restricted the role of private trust.

Another contention was that Tata Trusts could not vote on its own shares between 1964 and 2000 due to statutory restrictions and it was a public trustee appointed by the Central Government who could vote on its shares.

On the issue of 'oppression or mismanagement' it was urged that a company that is a profit-making company is not a criterion for deciding whether or not there is oppression or mismanagement. It was pointed out that the amendment to the Companies Act has made substantial changes regarding the same.

It was submitted that the amendment to the Companies Act has expanded the powers of the Tribunal u/s 242 up to a great extent and the Tribunal has absolute power to intervene in the cases of oppression or prejudice to a member of the company under the said provision.

Another contention that was raised by the SP group was that 'Articles of Association' cannot be used by the company to claim absolute rights. It was urged that there should be some kind of independence in decision making and it cannot be a family affair. A public charitable trust (the largest shareholder of Tata Sons is Tata Trusts which is a public charitable trusts) cannot legally run such companies.

SP Group contended that the management of a company is its' 'board'. Hence, the Director may take advice but has to act independently and his acts cannot be based on any compulsions or coercions.

On behalf of Cyrus Mistry, Advocate Divan submitted that the company has violated the statutory provisions while removing Mistry from the post of Chairperson. The procedure adopted by the company was against the concept of 'corporate democracy'. It was further submitted that Ratan Tata overpowered the functioning of the company and he in between took all the major decisions himself.

Some of the provisions of the Companies Act were highlighted by the Advocate representing Mistry that was allegedly violated by Tata Sons. It includes- Sec. 166 which deals with the mandate of independent functioning of the Director. Sec. 118(10) proper secretarial rules were not followed by the company that has to be followed even while giving of notice. The company has allegedly violated mandates provisioned under Sec. 149 of the Act provides that the board has to manage the company and not the majority shareholder.

Separation Plan by SP Group:

In October 2020, the SP Group offered to settle the dispute and presented a plan of separation in the form of an affidavit in the Supreme Court. They also suggested a share-swap arrangement in listed entities of Tata Group in lieu of the shares held by them in the unlisted Tata Sons.

The SP Group in exchange, wanted grant of shares in listed companies of the Tata Sons Group. They further asserted that in case Tata Group intended to maintain a certain shareholding level and were not willing to part with stocks according to the separation proposal, SP Group was willing to accept shares of Tata Consultancy Services Ltd. or cash.

However, Tata Sons rejected the offer as acceptance of the offer would have led to spreading of the dispute to the other group companies as well.

After the win, Mr. Ratan Tata, Chairman Emeritus of Tata Group tweeted,

"I appreciate and am grateful for the judgment passed by the Honourable Supreme Court today.
It is not an issue of winning or losing. After relentless attacks on my integrity and the ethical conduct of the group, the judgment upholding all the appeals of Tata Sons is a validation of the values and ethics that have always been the guiding principles of the Group.

It reinforces the fairness and justice displayed by our judiciary."