India: Key Takeaways From The NCLT's Decision In Cyrus Mistry – Tata Sons Dispute

Last Updated: 30 July 2018
Article by Nitesh Jain and Juhi Mathur

On 12 July 2018, the National Company Law Tribunal (Mumbai) ("Tribunal") delivered its landmark judgment in the matter of Cyrus Investments Pvt. Ltd. & Anr. vs. Tata Sons Limited & Ors.

The Petitioners, minority shareholders of Tata Sons Limited, Cyrus Investments Pvt. Ltd. and Sterling Investments Corporation Pvt. Ltd. filed the Company Petition before the Tribunal alleging acts of oppression and mismanagement in the conduct of affairs of Tata Sons Limited on various grounds including on the ground of replacement of Mr. Cyrus P. Mistry as the Executive Chairman. By its judgment, the Tribunal dismissed the Company Petition, denied all reliefs, and rejected all allegations raised therein by the Petitioners.

During the course of hearings spanning several weeks, the Tribunal heard exhaustive arguments on the elements of oppression and mismanagement under section 241 and 242 of the Companies Act, 2013 ("2013 Act"). The Tribunal's decision is a key development on oppression/mismanagement jurisprudence under the 2013 Act, and an important judgment to take into consideration before approaching the Tribunal under section 241 – 242. The 15 key takeaways from the NCLT's judgment are as follows:

  1. Sections 241 and 242 are for preventive reliefs (not declaratory) to arrest the malafides ongoing in a company.
  2. To invoke the jurisdiction of the Tribunal under section 241, the company must be a going concern, there must be an action in progress and the action should be oppressive or prejudicial to any of the members complaining or the company. If these elements of section 241 are complied with, the Tribunal will then ascertain whether the proved facts would justify the winding-up of the company on just and equitable grounds. Lastly the Tribunal must arrive at the finding that the winding-up of the company on just and equitable ground would unfairly prejudice the member. Only once this entire process is achieved, the Tribunal can then pass relief under section 241 for oppression and / or mismanagement.
  3. Mere unfairness of the action complained of is not enough to invoke section 241, the action must be prejudicial to either the petitioners (i.e. members complaining), or to the company.
  4. Under the 2013 Act, oppression and mismanagement have been abridged into one section making the requirement of 'just and equitable ground that the company should be wound up' applicable to both oppression and mismanagement (earlier applicable only to oppression under section 397 of the Companies Act, 1956). Therefore, under the 2013 Act, a petitioner approaching the Tribunal under section 241 alleging mismanagement, will now have to meet the twin conditions of (i) mismanagement and (ii) the existence of just and equitable ground for winding-up the company.
  5. Minority shareholders are bound by the rule of majority. It is only when the elements of sections 241-242 are met, at the most the minority shareholder may extricate itself from the company through the exit route on fair valuation, but the minority shareholder will not get any right to impose his rule upon the shareholders who have majority in the company.
  6. The exercise of rights (including affirmative vote rights) under the Articles by majority shareholder, which rights were agreed to by the petitioners being minority shareholder, cannot be a grievance under section 241. Protecting the rights of the majority in the Articles can neither become oppression against the minority shareholders, nor be mismanagement of the affairs of the company. 
  7. The concept of a 'Shadow Director' has not been incorporated in the 2013 Act, and did not find place in the Companies Act, 1956. However, under section 2(60) of the 2013 Act, the definition of "officer who is in default" extends punishment to any person in accordance with whose advise, directions or instructions the Board of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity. The intent behind Section 2(60) is not to let the real culprit go scot free, but to impute with charges the person abetting the wrongful act. The Tribunal held that the actions of such a person directing the Board to do something that is punishable under the 2013 Act and falling within section 2(60) is not actionable under sections 241-242. This is because the causative factor for section 241 is management in relation to the affairs of the company, and does not contemplate taking action for culpability as a result of section 2(60).
  8. Advice and suggestions by shareholders of the company, as long as not fraught with malafides, should be treated as advice and suggestions for the benefit of the company and not as interference. Once the advice (solicited or unsolicited) is accomplished through the company's Board, the Board members privy to the approval cannot complain over the same.
  9. An executive chairman does not have sovereign authority over the company. In corporate democracy, decision making always remains with the Board as long as they enjoy the pleasure of the shareholders. Likewise, an executive chairman will continue as long as he / she enjoys the pleasure of the Board.  An assumption by the executive chairman that he / she would have a free hand in running the affairs of the company is incongruous to corporate governance and corporate democracy. The Tribunal held that the concept of 'free hand rule' is antithesis to collective responsibility and collective decision making.
  10. Mere closeness of relationship cannot be a ground to assail a transaction for not being at arm's length. The tests to ascertain whether transactions are at arm's length or not is to determine whether (i) there is an element of fraud involved, (ii) there is an unlawful gain, and (iii) standard practices which are in place were not followed. In the absence of such tests, just the mere closeness between two persons cannot lead to a conclusion that the deal between them is not at arm's length, and not for the benefit of the company. 
  11. It is only where the circumstances warrant lifting the corporate veil that the affairs of a subsidiary / affiliate company will be considered in a petition under section 241 against the holding company. Even if the allegations against a subsidiary / affiliate company in a section 241 petition are taken to be true, in the absence of the subsidiary / affiliated company as party respondents to the petition, the petition will be bad for non-joinder. In this regard, the Tribunal relied upon the Supreme Court's decision in Shankar Sundaram v. Amalgamations Ltd. & Ors. (Civil Appeal Nos. 4574 – 4575 of 2017).
  12. Where the subsidiary / associate company's management is different from that of the holding company, as such it is not possible to construe something that has happened in such a subsidiary / associate company as an action prejudicial to the members of the holding company. The affairs of the subsidiary / associate company have to be examined independently along with the holding company as a respondent in the same proceeding or in a different proceeding.
  13. Section 163 of the 2013 Act can only be asserted when the right of proportional representation has been incorporated in the Articles. In the absence of any rights, expectations or obligations in the Articles, the Court / Tribunal should not go behind the contractual arrangements already in place amongst the shareholders in the form of Articles on the basic principle that nobody can have a right more than what he has agreed to. 
  14. Since the removal of a director is a shareholder's right, as long as there is no understanding for the petitioner to be provided with representation on the Board, removal of a director cannot be a grievance under section 241. In the absence of any special rights, merely a person continuing as director for some time will not constitute legitimate expectation.
  15. Under the 2013 Act, there is no concept of a deemed public company (i.e. a private company which became a public company with the introduction and amendment of section 43A in the Companies Act 1956). Therefore, section 43A companies which have the characteristics of section 2(68) of the 2013 Act will become private companies. Such a company is at liberty to inform the Registrar of Companies ("RoC") under section 43A (2A) of the Companies Act, 1956 that it has become a private company. Thereupon the RoC shall substitute the word "public" into "private" and make necessary alteration in the certificate of incorporation.

Shardul Amarchand Mangaldas & Co., and the authors have successfully represented Tata Sons Limited and Mr. Ratan N. Tata in the Company Petition before the National Company Law Tribunal (Mumbai).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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