In Tata Sons (Private) Limited Vs Cyrus Pallonji Mistry, Civil Appeal Nos.13-14 of 2020, the Supreme Court finally quashed the order passed the order passed by NCLAT which had given relief to Cyrus Pallonji Mistry(“CPM”).
A Supreme Court bench comprising of CJI S.A. BOBDE, J.A.S. BOPANNA & J. V. RAMASUBRAMANIAN decided the appeals in favour of Tata Sons on 26th March,2021.
By a Resolution of the Board of Directors of Tata Sons dated 16.03.2012, CPM was appointed as Executive Deputy Chairman for a period of five years from 01.04.2012 to 31.03.2017.
Further, CPM was re-designated as its Executive Chairman with effect from 29.12.2012, even while designating Shri Ratan N. Tata (“RNT” ) as Chairman Emeritus.
Subsequently, by a Resolution passed on 24.10.2016, the Board of Directors of Tata Sons replaced CPM with RNT as the interim Non Executive Chairman.
Unfair Prejudice, Oppression and Mismanagement
This led to filing of a company petition in C.P No.82 of 2016 before the National Company Law Tribunal under Sections 241 and 242 read with 244 of the Companies Act, 2013, on the grounds of unfair prejudice, oppression and mismanagement.
This was filed by 2 companies by name, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, belonging to the SP Group, in which CPM holds a controlling interest.
Order of NCLT
NCLT by an Order dated 06.03.2017, held the main company petition to be not maintainable at the instance of persons holding just around 2% of the issued share capital.
This was followed by another order dated 17.4.2017, by which NCLT dismissed the application for waiver.
Order of NCLAT
The complainant companies filed appeals before NCLAT against both the Orders dated 06.03.2017 and 17.04.2017. These appeals were allowed on 21.09.2017, granting waiver of the requirement of Section 244(1)(a) and remanding the matter back to NCLT for disposal on merits.
But, Tata Group did not challenge this order.
Denovo Proceeding in NCLT
Thereafter, NCLT heard the company petition on merits and dismissed the same by an Order dated 09.07.2018.
Second Round of Appeal in NCLAT & Order
Both these appeals were allowed by the Appellate Tribunal by a final Order dated 18.12.2019 granting the reliefs sought.
NCLAT Order Challenged in Supreme Court
The order of NCLAT was challenged by i)Tata Sons Private Limited ,ii) RNT , iii) the Trustees of the two Tata Trusts and iv) three operating companies of Tata Group have come up with 2 Civil Appeals each (totalling to 12 appeals) and the complainant companies have come up with one Civil Appeal.
Supreme Court Held
The Supreme Court set aside the NCLAT ‘s order with consequential relief and on the issues decided as under;
1.On Reinstatement of CPM
The Supreme Court was shocked to find that there was no prayer for reinstatement then too he was reinstated.
Therefore, despite there being no prayer for reinstatement of CPM either as a Director or as an Executive Chairman of Tata Sons, NCLAT directed the restoration of CPM as Executive Chairman of Tata Sons and as Director of Tata Companies for the rest of the tenure.
The judgment of the NCLAT was passed on 18.12.2019, by which time, a period of nearly 7 years had passed from the date of CPM’s appointment as Executive Chairman. Therefore, we fail to understand : (i) as to how NCLAT could have granted a relief not apparently sought for (though wished for); and (ii) what NCLAT meant by reinstatement “for the rest of the tenure”. That the question of reinstatement will not arise after the tenure of office had run its course, is a settled position.
It was further observed that such reinstatement would not have been even granted by a labour Court or Tribunal.
In this regard, we may refer to the decisions in Raj Kumar Dey vs. Tarapada Dey and Mohd. (1987) 4 SCC 398 186 Gazi vs. State of Madhya Pradesh . While so, it is incomprehensible that the NCLAT directed reinstatement, and that too, of a Director of a company, after the expiry of his term of office. Needless to say that such a remedy would not have been granted even by a labour court/service Tribunal in matters coming within their jurisdiction.
This further led to a remark as under;
NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law. By doing so, the NCLAT has forced upon the appellant an Executive Chairman, who now is unable to support his own reinstatement.
The Court categorically held that Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement, nor we would add that there is any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred.
The Tribunal has no implied power for reinstatement of a director or other officer of the company who has been removed from such office in terms of Section 241 and 242 of the Companies Act,2013.
It further held that “the architecture of Sections 241 and 242 does 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 with or without the amendment in 2018. Tribunal cannot make an order enforcing a contract which is dependent on personal qualifications such as those mentioned in Section 149(6) of the Companies Act, 2013.
When Contract for services cannot be enforced?
The Court went on to deal as to when a Contract for services cannot be enforced in law as under:
In Vaish Degree College (supra) that the general rule is that a contract of personal services is not specifically enforceable unless a person who is removed from service is
(a) a public servant who has been dismissed from service in contravention of provisions of Article 311 of the Constitution of India;
(b) dismissed under Industrial Law seeking reinstatement by Labour or Industrial Tribunal; and
(c) terminated in breach of a mandatory obligation imposed by statute by a statutory body.
The Court observed:
“17. On a consideration of the authorities mentioned above, it is, therefore, clear that a contract of personal service cannot ordinarily be specifically enforced and a court normally would not give a declaration that the contract subsists and the employee, even after having been removed from service can be deemed to be in service against the will and consent of the employer. This rule, however, is subject to three well recognised exceptions — (i) where a public servant is sought to be removed from service in contravention of the provisions of Article 311 of the Constitution of India; (ii) where a worker is sought to be reinstated on being dismissed under the Industrial Law; and (iii) where a statutory body acts in breach or violation of the mandatory provisions of the statute.”
Principle of Legality
Even, Court also dealt with cardinal principles as to that the enactments are not made in vacuum and held as under:
17.20 The position in law that a contract of personal services cannot be enforced by Court is a long standing principle of law and cannot be displaced by the existence of any implied power, though none is shown in the present case. This is described as the Principle of Legality(Principles of Statutory Interpretation 14th Edition by Justice G.P. Singh at Page 541):
“As statutes are not enacted in a vacuum, it is assumed that long standing principles of constitutional law and administrative law are not displaced by use of merely general words. This is styled as the principle of legality. In the words of SIR JOHN ROMILLY: “The general words of the Act are not to be so construed as to alter the previous policy of the law, unless no sense or meaning can be applied to those words consistently with the intention of preserving the previous policy untouched.” Since every new law involves some change the above statement of LORD ROMILLY must be applied with caution and should be normally confined to cases where ‘the abrogation of a long standing rule of law is in question’. There are many presumptions which an interpreter is entitled to raise which are not readily displaced merely by use of general words, e.g., an intention to bind the Crown or an intention to exclude the supervisory jurisdiction of superior courts will not be inferred merely by use of general words. It is an application of the same principle that unless there be clearest provision to the contrary, Parliament is presumed not to legislate contrary to rule of law which enforces ‘minimum standard of fairness both substantive and procedural’. Thus a statutory power though conferred in wide terms has certain implied limitations; provisions excluding challenge to an order have no application when the order is a nullity and a provision excluding an appeal against an order of a criminal court does not bar an appeal against an order which the court had no power to make. For the same reason, unless the statute expressly or by necessary implication provides otherwise an administrative decision does not take effect before it is communicated to the person concerned.”
The Court was so upset with the reinstatement that it went on to conclude as under;
Thus the relief of reinstatement granted by the Tribunal, was too big a pill even for the complainant companies (and perhaps CPM) to swallow.
2.Relief relating to Article 75
The Court again held that there was no prayer on such a relief and held that “Actually, the relief in respect of Article 75, technically speaking, could not have been granted by NCLAT. The reason is that in the Company Petition as it was originally filed, there was no prayer challenging Article 75.
It is true that the rigors of CPC and the Evidence Act are not be applicable to Tribunals/QuasiJudicial Authorities. These rigours do not even apply to Courts dealing with constitutional matters (refer the Explanation under Section 141 CPC).
Such a concession was incorporated in all Statutes by which quasi judicial Tribunals are created, solely with a view to 197 avoid delay in the dispensation of justice. But instead of eliminating delay, it has eliminated discipline in pleadings and procedure.
Then it further proceeded to observe that
Even if we take it that the memo dated 12012018 restricted the prayer in clause M alone and not clause M2, NCLAT could not have muted Article 75 by holding that it cannot be invoked except in exceptional circumstances. This is for the reason that after all, Article 75 just provides for an exit option to the unwilling partner. Even traditionally, the law in England and in India is to pave the way for a safe and honourable exit, when 2 persons in commercial relationship cannot coexist.
Oppression & Mismanagement
The Court on Oppression & Mismanagement is consistently undergoing changes and the object has to be therefore realised and held that
“Fundamentally, the object for the achievement of which, the Tribunal is entitled to pass an Order under Section 242(1) of the 2013 Act, remains just the same, as in the 1956 Act. The words “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit”, found in the last limb of Subsection (2) of Section 397 of the 1956 Act, is also repeated in the last limb of Subsection (1) of Section 242 of the 2013 Act. These words also found a place in the last limb of Subsection (4) of Section 153C of the 1913 Act”
In other words the purpose of an order both under the English Law and under the Indian Law, irrespective of whether the regime is one of “oppressive conduct” or “unfairly prejudicial conduct” or a mere “prejudicial conduct”, is to bring to an end the matters complained of by providing a solution. The object cannot be to provide a remedy worse than the disease. 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. It is relevant to point out that once upon a time, the provisions for relief against oppression and mismanagement were construed as weapons in the armoury of the shareholders, which when brandished in terrorem, were more potent than when actually used to strike with. While such a position is certainly not desirable, they cannot today be taken to the other extreme where the tail can wag the dog.
The Court further added that
The Tribunal should always keep in mind the purpose for which remedies are made available under these provisions, before granting relief or issuing directions. It is on the touchstone of the objective behind these provisions that the correctness of the four reliefs granted by the Tribunal should be tested.
3. On Amendment to Article of Association
The Court noted the consent during
A person who willingly became a shareholder and thereby subscribed to the Articles of Association and who was a willing and consenting party to the amendments carried out to those Articles,cannot later on turn around and challenge those Articles. The same would tantamount to requesting the Court to rewrite a contract to which he became a party with eyes wide open.
The Court also noted that there had been no single instance or grievance of misuse out of Article 75 so as to tantamount to conduct oppressive or prejudicial to the interests of some of the members. The sine qua non for invoking Section 241 is that the affairs of the Company should have been conducted or are being conducted in a manner oppressive or prejudicial to some of the members.
The Court observed that at the first place NCLAT has admitted that it has no jurisdiction to declare any article of association to be illegal. Then too, NCLAT neutralised Article 75 merely on the basis of likelihood of misuse.
The Court held that
Section 241(1)(a) provides for a remedy, only in respect of past and present conduct or past and present continuous conduct. NCLAT has stretched Section 241(1)(a) to cover the likelihood of a future bad conduct, which is impermissible in law.
Ratio – That Articles of Association of a company constitute a contract among shareholders, is the bedrock of Company Law.
When an amendment in Article of Association can be set aside?
Court dealt on this and held that
It is no doubt true that the Tribunal has the power under Section 242 to set aside any amendment to the Articles that takes away recognised proprietary rights of shareholders. But this is on the premise that the bringing up of amendment itself was a conduct that was oppressive or prejudicial.
Court concluded that muting Article 75 of Article o Association was perverse and concluded as under;
Therefore, the order of NCLAT tinkering with the power available under Article 75 of the Articles of Association is wholly unsustainable. It is needless to point out that if the relief granted by NCLAT itself is contrary to law, the prayer of the S.P. Group in their Appeal C.A. No.1802 of 2020 asking for more, is nothing but a request for aggravating the illegality
4. On Affirmative voting rights under Article 141
The Court again observed that there was no relief sought and then too such relief was granted and held to the effect that :
Therefore, what was actually sought by the complainant companies was the deletion of the Article that necessitated the affirmative voting right of the majority of the Directors nominated by the two Trusts. There was no prayer for restraining RNT and the nominee Directors of the Trusts from taking any decision in advance.
In fact, even the complainant companies are not happy about the relief so granted by NCLAT.
Rather, in this case, an ironical fact was that the Complainant themselves appealed against this relief which was suo motu granted by NCLAT, which Court also noted as under:
But for the fact that the complainant companies have also come up with an appeal, we would have simply set aside the order of restraint passed by NCLAT against RNT and nominee Directors, on the ground that there was no such prayer. Now that S.P. Group has come up with an appeal seeking an amplification or modulation of the relief so granted, we shall deal with the challenge to the affirmative voting rights.
Court while deliberating on affirmative voting rights also discussed on evolution of corporate enterprises
Evolution of Corporate Enterprises and Amendments in Companies Act,1956
The Court held that If we have a look at the history of evolution of corporate enterprises, it can be seen that there are 3 time periods through which development of corporate entities have passed.
In the first period, large corporate houses were established by individuals with their own funds and those individuals and their families controlled both ownership and management of these enterprises.
In the second time period, when professionalism became the ‘Taraka mantra’, families which promoted enterprises, retained ownership, but appointed professional managers to run the show. Thus ownership got divested from management.
In the third time period, social participation increased by leaps and bounds through public issues and listing. This increased the social accountability and social responsibility of corporate entities. Every time a historical shift/change took place, the legal regime had to undergo a change, albeit at snail’s pace.
(for the sake of better understanding the above para has been bifurcated)
Path to Companies Act,2013
The Court further discussed on 24 amendments in Companies Act,1956. Major amendments were made first in 1988 and then in 2002, respectively on the basis of the recommendations of the Sachar Committee and the Report of the Eradi Committee. On August 4, 2004, the Ministry of Company Affairs, published a Concept Paper on Company Law on its website, after which, the Government constituted an Expert Committee under the Chairmanship of Dr. J.J. Irani20.
The mandate of the Committee was to make recommendations on certain issues, one of which was “protecting the interests of stakeholders and investors, including small investors”. This committee’s report crystallised into Companies Bill, 2009, which later became Companies Bill, 2011 and then Companies Act, 2013.
Salient Features of Companies Act,2013
The felt deem to discuss upon the salient features of the 2013 Act as below:
(i) Every company is required to have at least one Director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
(ii) Every listed Public Company is required to have at least one third of the total number of Directors as independent Directors.
(iii) Some Public Companies are required to have at least two independent Directors.
(iv) Every independent Director should give a declaration at the first Board meeting that he meets the criteria of independence.
(v) Certain types of Public Companies are required to appoint at least one woman Director. (vi) Every listed company may appoint a small shareholders’ Director, to be elected by the small shareholders.
vii) The report of the Board of Directors should include a Director’s Responsibility Statement, covering certain aspects relating to accounting standards, accounting policies and maintenance of accounting records.
(viii) Directors of a company are obliged to perform certain duties, such as duty to act in good faith, duty to exercise reasonable care, skill diligence and independent Judgment etc.
(ix) A detailed Code of conduct for independent Directors is stipulated in Schedule IV. This includes guidelines for professional conduct, roles and functions and duties.
(x) The resignation or removal of independent Directors should be in accordance with the procedure prescribed.
(xi) Independent Directors are required to hold at least one meeting in a year without the attendance of nonindependent Directors and members of management and they are entitled in this meeting to review the performance of nonindependent Directors and the Board as a whole. They can even review the performance of the Chairperson of the Company and assess the quality,quantity and timeliness of flow of information between the management and the Board.
(xii) The Board of Directors of certain companies are required to have certain Committees such as (1) Audit Committee; (2) Nomination and Remuneration Committee and (3) Stakeholders Relationship Committee.
(xiii) A separate section on Corporate Governance is to be included in the Annual Reports of certain companies, with a detailed compliance Report on Corporate Governance.
(xiv) After the advent of the Companies Act, 2013, SEBI Regulations were also amended, inserting Clause 49 in the Listing Agreement, to enforce compliance with Corporate Governance standards.
Nomination by a Charitable Trust
The Court observed that
A person nominated by a charitable Trust, to be a Director in a company in which the Trust holds shares, also holds a fiduciary relationship with the Trust and fiduciary duty towards the nameless, faceless beneficiaries of those Trusts. As we have pointed out elsewhere, the history of evolution of the corporate world shows that it has moved from the (i) familial to (ii) contractual and managerial to (iii) a regime of social accountability and responsibility.
Business Interest & Charitable Trust
While dealing on the issue of interest of a company, nominator and member, the Court held as under;
The question as to (i) what is in the interest of the company, (ii) what is in the best interest of the members of the company as a whole and (iii) what is in the interest of a nominator, all lie in locations whose borders and dividing lines are always blurred. If philosophical rhetoric is kept aside for a moment, it will be clear that success and profit making are at the core of business enterprises. Therefore, the best interest of the majority shareholders need not necessarily be in conflict with the interest of the minority or best interest of the members of the company as a whole, unless there is siphoning of or diversion. Such a question does not arise when the majority shareholders happen to be charitable Trusts engaged in philanthropic activities. It is good to wish that the creation gets liberated from the creator, so long as the creator does not have any control or ability to manipulate. In the corporate world, democracy cannot be seen as an ugly expression, after using the very same democratic process for the appointment of directors.
This led the Court to reject the claim and concluded that
Therefore, the challenge to the affirmative voting rights and the allegations revolving around pre consultation and pre clearance by the Trusts of all items in the agenda and RNT’s indirect or direct influence or grip over the Board are all liable to be rejected.
Claim for proportionate representation
The Court observed a similarity in Companies Act,1956 and 2013, respectively and on small shareholders held that the definition of the expression “small shareholders” is just the same under both the enactments.
It is interesting to note that the smallness conceived by the 1956 Act is virtually minuscule. One would qualify to be a small shareholder only if he holds shares of a nominal value of Rs.20,000/ or less, in a public company having a paidup capital of Rs.5 crores or more. This proportion works out to 1/2500 or 0.04%.
The Court decided in favour of Tata, the Appellant and held significantly as under;
Whatever it be, the right to claim proportionate representation is not available even to a minority shareholder statutorily, both under the 1956 Act and under the 2013 Act. It is available only to a small shareholder, which S.P. Group is certainly not.
The further deliberated upon proportionate representation and concluded that
Placing reliance upon section 163 of the Companies Act, 2013, it was contended that proportionate representation is statutorily recognised. But this argument is completely misconceived. Section 163 of the 2013 Act corresponds to section 265 of the 1956 Act. It 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. First of all, 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 a system where the voters exercise their franchise by ranking several candidates of their choice, with first preference, second preference etc. Moreover, it is only an enabling provision and it is upto the company to make a provision for the same in their Articles, if they so choose. There is no statutory compulsion to incorporate such a provision.
On permission for reconversion of Tata Sons from a public company into a private company
The Court held that
NCLAT failed to see was that Tata sons did not become a public company by choice, but became one by operation of law. Therefore, we do not know how such a company should also be asked to follow the rigors of Section 14(1)(b) of the 2013 Act. As a matter of fact, Section 14(1) does not ipso facto deal with the issue of conversion of private company into a public company or viceversa. 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”.
As pointed out by this court in Ram Parshotam Mittal Vs. Hillcrest Realty (2009) 8 SCC 709, “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 the Articles of association and the statutory provisions.
Therefore, NCLAT was completely wrong in holding as though Tata Sons, in connivance with the Registrar of companies did something clandestinely, contrary to the procedure established by law. 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.
On Fair Valuation of Exit
The Court refrained from addressing this issue on fair value compensation for exercising an exit option.The Court held that
What is pleaded in Paragraph 72 of the application for separation of ownership interests, require an adjudication on facts,of various items. The valuation of the shares of S.P. Group depends upon the value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets etc., and also perhaps the funds raised by SP group on the security/pledge of these shares. Therefore, at this stage and in this Court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the Article 75 route or any other legally available route in this regard.
This order of Supreme Court enlightens on various important aspects of Companies Act,2013, as amended, and its evolution through many years, while dealing with the core issue of the appeals as stated above.
It is equally strange that what was not prayed before NCLAT was granted as relief and this was pointed out by Supreme Court in 3 issues what they had to decide out of a total of 5 issues.
The Oppression and mismanagement was discussed with reference to the issue with a focus on small shareholders and minority shareholders vis-a-vis business interest.
This order can be considered as one of the biggest board battle in Corporate world and which ultimately went unveiling many aspects of law and also an old anomaly in repeal provisions in Company Act,2013 as well.