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The mystery behind Mistry’s reinstallation

The decision of the NCLAT is not the end of the story. This dispute will likely lead to new principles being laid down by the Supreme Court on the scope and powers of specially-constituted tax tribunals.

Any reader of Enid Blyton would have enjoyed ‘The Mystery Series’ during their childhood. The last few years saw the print and the visual media devote significant space and time to the battle of giants that moved from the boardroom to the courtroom.

The latest dispute stems from the removal of Cyrus Mistry from the position of Executive Chairman of Tata Sons Ltd. by the Board of Directors of Tata Sons on 24 October 2016.

Cyrus Investments Pvt. Ltd., a group company of the Shapoorji Pallonji Group, which holds shares in Tata Sons moved an application before the National Company Law Tribunal, Mumbai (‘NCLT’) accusing Tata Trusts and its trustees of oppression and mismanagement in Tata Sons. Rejecting the claims of Cyrus Investments and Mistry, the NCLT ruled in favour of the Tata Trusts by its order dated 9 July 2018. On appeal, the National Company Law Appellate Tribunal (NCLAT)delivered its decision on 18 December 2019, reversing the order of the NCLT. The NCLAT has held:

(i) The decision of the Board of Directors to remove Mistry as Executive Chairman and other actions against him is illegal.
(ii) Mistry has to be restored to his original position as Executive Chairman of Tata Sons and also as Director of other Tata group companies.
(iii) The appointment of an Executive Chairman in place of Mistry is illegal.
(iv) Ratan N Tata and the nominee directors of Tata trusts should desist from taking any decision in advance, which requires the majority decision of the Board of Directors or the shareholders in an Annual General Meeting.
(v) The company, the Board of Directors and the shareholders are restricted from exercising their powers to transfer ‘ordinary shares’ of any of the shareholders without following the normal procedure of transfer.
(vi) The decision of the Registrar of Companies changing the company, Tata Sons, from a ‘Public Company’ to ‘Private Company’ is illegal.

While the NCLAT suspended a limited portion of its decision for a period of 4 weeks to ensure smooth functioning of the company an appeal against the order to the Supreme Court is inevitable; critical and interesting issues flow out of this decision. These are discussed in the following paragraphs.

Directorial Complaint Vs Oppression and Mismanagement

Section 242 of the Companies Act, 2013 empowers the Tribunal to pass an order in a case where it is of the opinion that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in any manner prejudicial to the interests of the company.” In the instant case, the NCLAT has concluded on the above lines and has passed the aforementioned orders. The contention of Tata Sons to the effect that the complaint of Mistry is only a complaint as a director and does not tantamount to oppression and mismanagement of shareholders was not accepted by the NCLAT.

It is trite law that the directorial complaints cannot be raised in a petition under Section 241 of the Companies Act, 2013. The Tata Trusts argued that allegations pertaining to Mistry’s removal are in the nature of directorial complaints and it has no nexus with the shareholder’s proprietary rights.

While considering this argument, the NCLAT observed from the press statement issued by Tata Sons that many across the globe have raised concerns in the manner Mistry was removed. The NCLAT further observed that the removal of Mistry has raised concerns in the industrial group which resulted in Tata Sons issuing press statement. It, therefore, concluded that Mistry’s removal is not in the nature of a directorial complaint.

With due respect, with the size at which the Tata Group operates and given the times that one lives in where every comment, tweet and social media post is debated in the television media and flashed as headlines, a press statement is the barest minimum that is expected to avoid unnecessary speculation. Further, when there is such a major change at the top, from an organisation perspective, it is imperative an appropriate communication was made. A press statement which is but a basic requirement in the modern corporate world, seems to have been given credence to dispel the argument of a directorial complaint.

Interestingly, Government of India issues press statements on every matter pertaining to tax, including GST Council decisions. The object of these statements is communication and dissemination of information and nothing beyond that. The same rationale should apply to corporate communications. Further, in the instant case, Tata Sons is an unlisted entity. Assuming it was a listed entity, the removal would have been significant information that would have been communicated to the stock exchanges and SEBI. When the group chairman is removed from that post, it is only natural that the information and background behind the decision is communicated to the public at large. In fact, an act of transparency has been interpreted differently by the NCLAT.

The A.P. High Court in the case of R. Khemka vs Deccan Enterprises Pvt. Ltd. (2000) 100 Comp. Cas. 211 had held that directorial complaints are not admissible in oppression and mismanagement cases. The court held that it is not open to the court to interfere with management and administration of a company in each and every issue but it can interfere only when the company has been acting to the detriment of the interest of the shareholders in general. While the argument based on this decision is seen in the order, this decision has not been referred to in the judgment.

Violation of Articles of Association

An article can be considered to have been violated if any action is taken which runs contra to the rule or procedure set out in the article. The NCLAT concluded that the procedure adopted for removal of Mistry from the position of Executive chairman is in violation of Article 118 of the Articles of Association of Tata Sons. The counter argument was that Article 118 dealt with appointment of chairman and provided for constitution of a ‘Selection Committee’ for the purpose of selecting a new chairman of the Board of Directors of ‘Tata Sons.’

While both the arguments were recorded without major deliberations on these aspects, the NCLAT concluded that the removal of the chairman was in violation of Article 118. Even under the Companies Act, 2013, appointment of directors and removal of directors are dealt through different provisions with different conditions and procedures. However, when removal is made under one section, the removal cannot be questioned based on provisions pertaining to appointment.

Role of Nominated Directors

One of the reasons that was given by the Board of Tata Sons for Mistry’s removal from his position was that under Mistry’s leadership the Tata companies faced losses. The voting rights of Tata Sons at a general meeting of any Tata group company are vested with the Board of Directors of Tata Sons. The Articles of Association of Tata Sons grant the nominated directors of Tata Trusts (‘Nominated Directors’) affirmative voting rights (veto rights) over the majority decision of the Board.

Drawing an inference from the above, the NCLAT concluded that the loss suffered by the different Tata Companies was not due to the mismanagement of Mistry and went on to question as to why the Nominated Directors with their veto rights had allowed the Tata Companies to function in a manner which caused loss. Further, the NCLAT has also placed the blame of losses on the nominated directors of Tata Companies.

Profits and losses are outcomes of the running of a business. Even if Nominated Directors had veto rights, they cannot change the decisions of the Board of a loss-making company to make it profitable. At best, in shareholders meeting. They can cajole the management to take steps to reverse the trend. Mere existence of veto rights doesn’t mean that the same should be exercised just because it exists.

Inherent Powers

Does the NCLAT have the power to restore Mistry’s directorship in other Tata group companies or the power to give directions to other directors from taking decisions or restrict powers of the company, board and directors from using the power to transfer ordinary shares?

The oppression and mismanagement petition has been filed complaining about the prejudicial and oppressive acts in Tata Sons. No doubt, the Tribunal has wide powers under Section 242 of the Companies Act, 2013 to pass orders as it thinks fit with a view to bring to an end the matters complained of. However, the orders can be passed only with regard to the company in respect to which the complaint of oppression and mismanagement is made and not on any other company.

The decision does not indicate a similar claim of oppression and mismanagement in other Tata group companies. If that is the case, a key legal question would be whether Section 242 permits the Tribunal to pass orders to restore directorships in companies which are not even party to the Section 241 application. A High Court under Article 226 may have enough powers to give directions. However, the question is whether inherent powers available to the Appellate Tribunal under Rule 11 of the NCLAT Rules 2016 are enough to give directions with reference
to restoration of directorships in other companies. An allied question would be whether power exists to direct an individual from taking decisions given the fact that the said individual is a Chairman of Tata Trusts which holds 81 per cent of the equity share capital of Tata Sons.

When the NCLAT expressed its view that it cannot exercise its inherent power under Rule 11 to allow a compromise under the IBC after admission of the matter, the Supreme Court in the case of Lokhandwala Kataria Construction Pvt. Ltd. vs Nisus Finance and Investment Managers LLP (2018) 15 SCC 589 held that the position adopted by NCLAT is correct.

Clearly the decision of the NCLAT is not the end of the story. This dispute will likely lead to new principles being laid down by the Supreme Court on the scope and powers of specially-constituted Tribunals.

The author is a lawyer and tax consultant E-mail: vaithilegal@yahoo.co.in

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