The Tata-Mistry Feud: Oppression and Mismanagement Perspective

Picture Courtesy: http://images.newindianexpress.com/uploads/user/imagelibrary/2016/11/7/original/Ratan-Cyrus-PTI2.jpg

This article was written by Yash Bhagwat, a student of NALSAR.

Introduction

In October last year, Cyrus Mistry was ousted as the Chairman of ‘Tata Sons Limited’ (“Tata Sons”) and was replaced by Ratan Tata as the Interim Chairman.[1] This set into motion one of the fiercest boardroom battles in recent times, popularly known as the ‘Tata-Mistry Feud’.[2] More than a year after the ouster, there still remain numerous unanswered legal questions relevant to the corporate world. This article intends on discussing one of those questions, viz. the maintainability of petitions seeking relief against ‘oppression and mismanagement’ filed under Chapter XVI (Sections 241 to 245) of the Companies Act, 2013 (the “Act”).

Brief description of the relevant provisions of Chapter XVI of the Act

Section 241 of the Act empowers all members of a company to apply to the National Company Law Tribunal (“NCLT”) for seeking relief when the company’s affairs are being conducted in a manner oppressive to them or to any other member, or prejudicial to public interest, inter alia; provided conditions stated under Section 244 are complied with. Section 244 sets out the qualifications of members required in order to entitle them to apply to the NCLT under Section 241. Section 244(1)(a) provides that any member holding less than 10% of the ‘issued share capital’ (“ISC”) of the company cannot apply to the NCLT. Further, the proviso to Section 244(1) enables the NCLT to waive all or any of the requirements specified under Section 244(1). Therefore, in order for such a petition to be maintainable, it either (a) has to fulfil the eligibility criteria mentioned under Section 244(1) or (b) the fulfilment of conditions under Section 244(1) must be waived by the concerned Tribunal. The threshold set out in Section 244(1) aims at saving companies from being parties to frivolous litigation while the proviso makes room for possibilities where protecting the rights of ineligible minority shareholders making genuine claims of oppression and mismanagement would become necessary.[3]

Analysis of the Orders of the NCLT

On December 21, 2016, ‘Cyrus Investments Private Limited’ and ‘Sterling Investment Corporation Private Limited’ (together referred to as the “petitioner companies”), the two investment companies owned by Cyrus Mistry’s family, filed a petition before the NCLT seeking relief against oppression and mismanagement by Ratan Tata and other directors and officers of Tata Sons.[4]  The petitioner companies together owned 18.34% stake in the form of equity shares in Tata Sons and thus, they contended that they were eligible to file the petition. The respondents, i.e. Tata Sons argued that the petitioners had narrowly interpreted the term ‘ISC’ because when the equity capital and preference capital are both taken into consideration, the petitioner companies held 2.17%[5] of the ‘ISC’.[6]

The Bombay High Court had, while interpreting Section 397 to 399 of the Companies Act, 1956 (the “Act of 1956”), resorted to a wide interpretation by observing that the legislature intended to include both equity and preference capital under the definition of ‘ISC’.[7] This stance has been also affirmed by the Supreme Court.[8] Accordingly, following the sole precedent[9], the NCLT in its order dated March 6, 2017 adopted the wide interpretation by dismissing the petition as non-maintainable, stating that the technical requirement of holding atleast 10% of ‘ISC’ was not fulfilled. The NCLT did not find any material differences between the texts of the relevant corresponding sections of the two Acts and thus refused to purposively interpret the unambiguous Section 244(1) of the Act as there clearly was no departure in the legislative intent from the Act of 1956. The NCLT also quashed the petitioners’ argument that ‘redeemable preference shares cannot be considered at par with equity shares as they are treated as debts[10]’ by observing that Accounting Standards can neither override statutory provisions nor change concepts of Company Law.

Aggrieved with the order, the petitioner companies filed a separate waiver application requesting the NCLT to waive the technical requirement of minimum 10% shareholding and instead, focus on the serious and supposedly well-founded allegations of oppression and mismanagement against Tata Sons. It was one of the pleas of the petitioners that the addition of the proviso to Section 244(1), which was missing in the erstwhile Act of 1956, made the provision of minimum threshold requirement ‘directory’ and not ‘mandatory’. This plea sounds absurd because it juxtaposes and runs inconsistent with their main petition where they had tried to prove that they fulfilled the eligibility criteria under Section 244(1). On the other hand, the respondents claimed that any waiver sought after filing the main petition is non-maintainable because the waiver application has to be filed simultaneously with the main petition.[11] The NCLT ruled in favour of the Tatas again on April 17, 2017, which resulted in the dismissal of their petition entirely. This came as a shock to many legal experts who believed that there was a valid reason for a waiver because Tata Sons was a public company holding several public companies, making public interest a major point of consideration.[12] The NCLT was of the opinion that the petitioners failed to disclose any cause of action and the issues raised by them were in the nature of directorial complaints which did not seek “shareholder action in relation to their economic interest.”[13]

Analysis of the Order of the Appellate Tribunal

In order to seek relief against the above-mentioned NCLT orders, the petitioner companies appealed to the National Company Law Appellate Tribunal (“NCLAT”) on April 19, 2017.[14], The NCLAT, in its order dated September 21, 2017, dealt with two major questions, viz.

• Whether the petition was maintainable?
• If not, whether the waiver provision can be invoked?

The NCLAT upheld the NCLT’s wide interpretation of the term ‘ISC’ to conclude negatively on the maintainability question because the appellants failed to demonstrate any locus standi to initiate action. However, the NCLAT did exercise its judicial wisdom by setting aside the NCLT’s order dated April 17, 2017 and waiving the minimum threshold requirement.[15] This allowed the appellants’ action to proceed before the NCLT on its merits and the NCLAT further directed the NCLT to pass an order over the same within three months.[16]

While dealing with the first question, the NCLAT adopted a straight-forward and technical approach in the sense that it preferred a plain reading and literal interpretation of the relevant sections of the Act. In that regard, it is notable that the expression ‘any class of members’ has been added to Section 241(1)(b) of the Act of 2013 which was not present in Section 398(2) of the Act of 1956 [i.e. the corresponding identical provision to Section 241(1)(b) of the Act of 2013.] The NCLAT ruling has cleared the confusion surrounding this addition by highlighting the distinction between the ‘subject matter of the petition’ and the ‘eligibility/locus standi of the petitioner.’ It has now been clarified that Section 244(1) determines whether the petitioner has a locus standi to maintain the petition before the tribunal whereas Section 241(1) sets forth the subject matter of complaints that can be raised in the petition. In this case, it was the appellants’ contention that the addition of the expression ‘any class of members’ clearly conveys the legislative intent to stipulate that the statutory requirement of 10% was in relation to ‘any class of members’ as distinguished from the ‘total ISC’. However, the contention was rejected because even before satisfying the eligibility criteria to file petition in the first place, the appellants were arguing about the subject matter of the complaints raised in their petition. The NCLAT further observed that the addition of the aforementioned expression was intended to broaden the horizons of the subject matter of the grievances raised in the petition and had no relation whatsoever with the provisions governing eligibility of the petitioner because there was no such addition made in Section 244(1).

The second question consequently arose before the Tribunal because it answered the former question in the negative. The NCLAT observed that only when an exceptional situation has arisen and the facts, circumstances and evidence are compelling enough can a waiver be granted. The NCLAT also provided a non-exhaustive list of factors and set out a step-by-step procedure to be adhered to by the tribunals while considering the second question, which can be summarised as follows:

• Ensuring that the petitioners are members of the respondent company.
• Ascertaining whether the petition relates to ‘oppression and mismanagement’ and is not a frivolous litigation.
• Making sure that there are compelling circumstances which give rise to an exceptional situation for waiving any or all of the requirements under Section 244(1), while avoiding decision upon the merits of the case.

Applying the above-listed guidelines in the case at hand, the following observations can be made:

• The petitioners companies together owned 18.34% stake in the respondent company, i.e. Tata Sons.
• Three acts amounting to ‘oppression and mismanagement’ were brought to light in this case, each of which related to (i) the acquisition of DoCoMo by ‘Tata Teleservices Limited’ (“TTCL”), (ii) fraudulent fund diversion towards ‘Air Asia India Private Limited’ (“Air Asia”), and (iii) violation of Article 118 of the Articles of Association of Tata Sons respectively. The violation of various corporate governance norms was also highlighted, most of the incidents taking place in 2016. Thus, it was not a frivolous litigation but it directly pertained to well-founded claims of oppression and mismanagement.
• Following are some of the ’exceptional’ factors and circumstances which would merit the invocation of waiver in favour of the petitioners:
• Out of the 51 shareholders of. Tata Sons (as on December 21, 2016),[17] only Ratan Tata (holding 31.43% of the ‘ISC’) and Narotam Sekhsaria (holding 17.01% of the ‘ISC’) would have been eligible to file a petition under Section 241 of the Act individually.[18] This meant that the aggrieved parties out of the other 49 shareholders (if any) would have to form groups amongst themselves so as to fulfil the minimum threshold requirement. This limited the protection of the interests of minority shareholders of the company against the brute force of the majority, which was one of the chief objectives of the enactment of the Act. [19]
• In 2016, Tata Sons was valued at a whopping amount exceeding ‘Six Lakh Crore’ Rupees, and the interest of the petitioners amounted to more than ‘One Lakh Crore’ Rupees, i.e. more than 1/6^th of the overall market value of the company.[20] The preference shareholding value of the company amounted to Rupees 297 Crore only (approximately), which was less than 0.3% of the total interest of the petitioners in the respondent company. Thus, it would have been a complete mockery of justice if the comparatively negligible preference shareholding value were allowed to incapacitate the Mistry Group from filing the petition under Section 241.
• The allegations of oppression and mismanagement have been levelled against companies such as TTCL and Air Asia, and not against the respondent company Tata Sons. However, ‘Article 121-A(h)’ of the Articles of Association of Tata Sons read with ‘Article 104B’ states that the Board of Directors of Tata Sons exercises complete control over the affairs of all companies constituting the ‘Tata Group Companies’; TTCL and Air Asia being two of them. Thus, the allegations were not levelled against third parties.

Conclusion

In conclusion, the NCLT adopted a hyper-technical approach in dismissing the main as well as the waiver petition. The NCLAT, however, by adopting a more pragmatic approach, ensured that no arbitrary dismissal of petitions would take place, but that there would be an objective and well-reasoned judgment. The absence of precedents and the silence of the Act on the issue of when a waiver can be granted allowed the NCLAT to lay down guidelines on such a grant. However, by declaring the list to be a non-exhaustive compilation of factors, the NCLAT has left scope for ambiguity as well as for future judicial developments. With the contentions of both the parties to the legal tussle looking equally strong, only time can tell in whose favour the NCLT swings.

[1] Was this the reason for Cyrus Mistry’s ouster?, MoneyLife (Nov 09, 2016), accessible at: http://www.moneylife.in/article/was-this-the-reason-for-cyrus-mistryrsquos-ouster/48766.html

[2] Tata-Mistry feud: A Timeline, The Hindu (Jan 12, 2017), accessible at: http://www.thehindu.com/business/article17029564.ece

[3] Sanjay Buch, Maintainability of Petition Seeking Relief in Cases of Oppression and Mismanagement vis a vis Tata-Mistry Dispute, Law Street India (Jul 12, 2017), accessible at:  http://lawstreetindia.com/experts/column?sid=202

[4] Ashish Rukhaiyar and Piyush Pandey, Mistry initiates legal action against Tata Sons for ‘oppression and mismanagement, The Hindu (Dec 21, 2016), accessible at: http://www.thehindu.com/business/Industry/Mistry-initiates-legal-action-against-Tata-Sons-for-%E2%80%98oppression%E2%80%99-and-%E2%80%98mismanagement%E2%80%99/article16915223.ece

[5] J Upadhyay, Why Cyrus Mistry’s NCLT petition was rejected, LiveMint (Apr 24, 2017), accessible at: http://www.livemint.com/Companies/QDKeGSvdnVqZDtIYryjFcK/Why-Cyrus-Mistrys-NCLT-petition-was-rejected.html

[6] Suhas Tuljapurkar and Apurv Sardeshmukh, The unresolved mystery behind Sec 241 and 244 in the Tata-Mistry case, Law Street India (Mar 03, 2017), accessible at: http://lawstreetindia.com/experts/column?sid=201

[7]  Northern Projects Ltd. v Blue Coast Hotels and Resorts Ltd (2009) 148 Company Cases 279 (India)

[8] J.P Srivastava v Gwalior Sugars (2010) 2 Comp LJ 361 (India)

[9] Umakanth Varottil, NCLT rules on Maintainability in the Tata-Mistry Case, India Corp Law (Mar 07, 2017), accessible at: https://indiacorplaw.in/2017/03/nclt-rules-on-maintainability-in-tata.html

[10] Indian Accounting Standard (Ind AS) 32, MCA, accessible at: http://www.mca.gov.in/Ministry/pdf/Ind_AS32.pdf

[11] You can’t file oppression plea against Tata Sons: Tribunal to Mistry, Business Standard (Mar 06, 2017), accessible at: http://www.business-standard.com/article/companies/you-can-t-file-oppression-plea-against-tata-sons-tribunal-to-cyrus-mistry-117030600302_1.html

[12] J Upadhyay, Cyrus Mistry’s main NCLT petition against Tata Sons dismissed, Live Mint (Apr 18, 2017), accessible at: http://www.livemint.com/Companies/6FpejrVtvJSI0rjb5SC0vO/NCLT-dismisses-Cyrus-Mistry-petitions-against-Tata-Sons.html

[13] Page 48, ‘Cyrus Investments Pvt Ltd & Anr v Tata Sons Ltd & Ors’ CA No. 26 of 2017 in C.P. No. 82/241,242,244/NCLT/MAH/2016, accessible at: http://www.nclt.gov.in/Publication/Mumbai_Bench/2017/397_398/Tata%20Sons%20Ltd.%20&%20Ors.%20Dated%2017.04.2017%20CP%2082-2016%20FINAL_22.04.2016.pdf

[14] Cyrus Mistry appeals against NCLT rejecting waiver plea in Tata Case, News 18 (Apr 21, 2017), accessible at: http://www.news18.com/news/business/cyrus-mistry-appeals-against-nclt-rejecting-waiver-plea-in-tata-case-1380311.html

[15] Umakanth Varottil, NCLAT Ruling on Maintainability in the Tata Sons Case, India Corp Law (Sep 23, 2017), accessible at: https://indiacorplaw.in/2017/09/nclat-ruling-maintainability-tata-sons-case.html

[16] Rajesh Kurup, Cyrus Mistry scores a small win in corporate war with Tatas, The Hindu Business Line (Sep 21, 2017), accessible at: http://www.thehindubusinessline.com/companies/nclat-allows-waiver-plea-of-cyrus-mistry-firms/article9867067.ece

[17] Pages 81-83, ‘Cyrus Investments Pvt Ltd & Anr v Tata Sons Ltd & Ors’ (AT) No.133 and 139 of 2017, accessible at: http://nclat.nic.in/final_orders/Principal_Bench/2017/company/21092017AT1331392017.pdf

[18] Only Tata, Sekhsaria can appeal as minority shareholders in Tata Sons: NCLAT, The Economic Times (Sep 22, 2017), accessible at: https://economictimes.indiatimes.com/news/company/corporate-trends/only-tata-sekhsaria-can-appeal-as-minority-shareholders-in-tata-sons-nclat/articleshow/60796656.cms

[19] Akshat Sulalit, Companies Act 2013: Rise of Minority Shareholders, India Law Journal, accessible at: http://www.indialawjournal.org/archives/volume6/issue-2/article5.html

[20] Krishna Kant, Mistry family’s stake in Tata Sons could be worth Rs 90,000 cr, Business Standard (Oct 29, 2016), accessible at: http://www.business-standard.com/article/companies/mistry-family-s-stake-in-tata-sons-could-be-worth-rs-90-000-cr-116102801642_1.html