The long battle between the Tata Sons and Cyrus Mistry finally concluded with Tata winning the court race like any other race they bid for. The Supreme Court vide its judgement dated 26.03.2021 had set aside the NCLAT's final order dated 18.12.2019. The Hon'ble Supreme Court allowed all the Civil Appeals of Tata Sons and the counter appeals filed by Mistry Group (hereinafter referred as SP Group) were dismissed.

Before moving ahead with discussing the ratio and issues dealt by Hon'ble Apex court in one of the biggest litigation battles between Tata Sons and Mistry Group/ Shapoorji Pallonji Group, quick recapitulate of the facts and chronology of the major events are highlighted below

  1. 24.10.2016- It all started with the removal of Mr. Cyrus Mistry as Executive Chairman and Director of Tata Sons Limited in its Board Meeting. Pursuant to this, vide separate resolutions passed at meetings of shareholders of Tata Industries Limited, Tata Consultancy Services Limited, and Tata Teleservices Limited, Cyrus Mistry was removed from Directorship of said companies.
  2. 09.07.2018 - Hon'ble Adjudicating Authority, Mumbai Bench dismissed Cyrus Mistry's application under Section 241 and 242 of the Companies Act, 2013 rejecting all the allegations and ruled TATA sons had the right to remove him as its chairman.
  3. 06.08.2018- Registrar of Companies (ROC) issued the amended certificate of Incorporation to facilitate the Tata Sons from a public entity (i.e., Public Limited Company) to a private limited company.
  4. 18.12.2019 – Hon'ble National Company Law Appellate Tribunal (NCLAT) vide its final order allowed the appeals challenging the NCLT order dated 09.07.2018, granting relief that removal of Cyrus Mistry as chairman from the board of Tata Sons was illegal. Thus, re-instated Mr. Cyrus Mistry to his original position as Executive Chairman of TATA Sons Limited and consequently as Director of the 'Tata Companies' for rest of the tenure. Hon'ble NCLAT also restricted the company, its board of directors and shareholders from exercising their rights/power under Article 75 of Articles of Association. Further set aside and declared the decision of the RoC regarding changing the Company ('Tata Sons Limited') from 'Public Company' to 'Private Company' as illegal and directed that the Company ('Tata Sons Limited') shall be recorded as 'Public Company', The 'RoC' to make correction in its record showing the Company ('Tata Sons Limited') as 'Public Company'.
  5. 06.01.2020 – Hon'ble NCLAT dismissed 2 Interim Applications filed by ROC, seeking deletion of certain remarks made by appellate authority against them.
  6. January 2020- Against the final order of the Hon'ble NCLAT dated 18.12.2019 for restoring Mr. Cyrus Mistry on the board of the company as executive chairman, TATA Sons, Mr. Rattan Tata, the trustees of two Tata Trusts and three operating companies of Tata group filed total of 12 appeals before the Hon'ble Supreme Court of India pleading that the verdict of NCLAT undermined corporate democracy. Tata Sons also moved 2 separate civil appeals against the Appellate Tribunal order dated 06.01.2020 on the applications of ROC.
  7. 10.01.2020 – Hon'ble Apex Court vide its interim order stayed the NCLAT's order dated 06.01.2020 and NCLAT's final order dated 18.12.2019 to reinstate Mr. Cyrus Mistry as Executive Chairman of Tata Sons and director on the board of group companies, observing that NCLAT granted relief which were not even sought by the ousted chairman.
  8. February 2020 – Mr. Cyrus Mistry filed Cross appeals before the Hon'ble Apex court seeking more reliefs than what had been granted by NCLAT vide its order dated 18.12.2019 and removal of several irregularities.
  9. July 2020 – During the period when both sides were filing case papers with the Hon'ble Supreme Court, there arose another commercial battle between TATA Group and Mistry Group. The financially strapped Shapoorji Pallonji Group (SP Group) sought to pledge it's shareholding in Tata Sons to raise funds.
  10. 22.09.2020 - The Tata Group opposed to SP Group action of raising funds by pledging shares. Tata Group filed an application restraining SP group from raising money and pledging shares. Hon'ble Supreme Court order status quo.
  11. September 2020- The SP group, which had been in an acrimonious legal dispute with the Tata Group since October 2016, has served legal notices seeking damages from Tata Sons and its board members for "illegitimately hindering" the Mistry family's bid to raise funds by pledging shares of the Tata Group's key holding company Tata Sons.
  12. 08.12.2020- Hon'ble Supreme Court decided to hear the cross appeals filed by Tata Sons and Cyrus Investments against the appellate tribunal's order dated 18.12.2019 which had restored Cyrus Mistry as the executive chairman.

JURISDICTION OF APEX COURT TO DEAL WITH QUESTION OF LAW

As the Jurisdiction of Hon'ble Supreme Court under Section 423 of the Companies Act, 2013, is primarily to answer the questions of law arising out of the proceedings before the Adjudicating Authority and Appellate Tribunal. Thus, the Complex issues pertaining to law which were raised before the Hon'ble Apex court were noticeably ironed out. We have tried to captivate the crux and ratio of the Hon'ble Supreme Court's findings herein below in brief.

  1. Whether Tata Sons' affair were conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the Company on just and equitable ground under Section 241 and 242 of the Companies Act, 2013 (hereinafter referred to as 'Companies Act')? The above question of law set the tone and overturned the whole judgement in the favor of Tata Sons. The Hon'ble Supreme Court modestly conferred that 'if the Company's affairs have been or being conducted in a manner oppressive or prejudicial to the interests of the Mistry's Shapoorji Pallonji (SP Group), it is pondered how a representative of SP Group holding a little over 18% of the share capital in the company could have moved up to a topmost position within a short period of only six years of his induction.' Referring to the provisions of Section 241 and 242 of the Companies Act, 2013, the Hon'ble Supreme Court emphasized that scheme of the law provides for making an application to the National Company Law Tribunal (NCLT) when the company's affairs are being conducted in a manner prejudicial to the interest of any member, public interest, or interest of the Company, or when it is oppressive to any member. Mr. Cyrus Mistry alleged prejudice and oppression by the Tata Sons on approximately eight grounds out which it was distinguished that six of these grounds have been considered as settled since neither the appellate tribunal (NCLAT) reversed the findings of the NCLT as regard to them nor the SP Group assailed them in their prayers to appeal before the Hon'ble Supreme Court. Therefore, the apex court held the contention that allegations relating to these must be rejected. The allegations included transactions with Siva and Sterling group of Companies; the losses suffered by Tata Motors in the Nano car project, the acquisition of Corus group Inc. of UK, Air Asia transactions in which a deal was reportedly struck with global terrorist, sale of flat to Mehli Mistry and the grant of huge personal favors to the companies owned and controlled by Mehli Mistry and dealings with NTT DoCoMo, which had eventually led to an arbitration award for huge money. The Hon'ble Supreme Court then shifted its focus on Mistry's removal and existence of Just and equitable grounds for winding up of Tata Sons, clearly mentioning that these were the only two issues that the appellate tribunal had specifically dealt with. Relying on the certain case law the apex court held that removal of a person from the post of executive chairman cannot be termed as oppressive or prejudicial. The Hon'ble Supreme Court also put forth the reasoning that "It is an irony that the very same person who represents shareholders owing to 18.37% of the total paid up share capital and yet identified as the successor to the empire, has chosen to accuse the very same Board, of conduct oppressive and unfairly prejudicial to the interests of the minorities", the apex court further added that the subsequent conduct of Cyrus Mistry in leaking his email and sharing the documents with Income tax Authorities enhanced the power of the management of Tata Sons with regard to their claim relating to lack of confidence and trust. It was highlighted by the apex court that the winding up could be ordered when there is "functional deadlock" leading to an inability of the Company to function at Board or Shareholder level, or where a company is a corporate quasi partnership and an irretrievable breakdown in trust and confidence between the participating members has taken place. In the present case there was no relationship in the nature of quasi partnership between the Tata Group and SP Group. Further, the functional deadlock was not even pleaded nor proved as ruled by the apex court, thus rejecting the Mistry's contentions regarding winding up plea. The Hon'ble Supreme Court clearly slammed out saying that "it was the very same complaining minority whose representative was not merely given a berth on the Board but was also projected as the successor to the office of Chairman."
  2. Whether the Appellate Tribunal order, including reinstatement of Cyrus Mistry on the Tata Sons and group company boards, is in consonance with provisions of Section 242? In the present contention, the Hon'ble Supreme Court stated that apart from underscoring that the Scheme of Section 242 does not envisage reinstatement of a Chairman or a Director, the apex court wondered how NCLAT reinstated Mistry as the executive Chairman of Tata Sons, despite there being no prayer for reinstatement either as a director or as an executive chairman. It was also found fault in the judgment restoring his chairmanship for the 'rest of the tenure' whereas there was no tenure left at all. The appointment of Cyrus Mistry as an Executive Chairman of Tata Sons was with effect from December 29, 2012 and was for a period of five years. The NCLAT judgment was passed on December 18, 2019 which was almost seven years from the date of appointment of Mistry. Thus, the apex court stated that they fail to understand as to how the NCLAT could have granted a relief not apparently sought for; and 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, as held by court. Further, the Hon'ble Supreme Court also criticized the NCLAT for reinstating Mistry not only on the Board of Tata Sons but also on the Board of some other Tata group companies, without they being parties, without there being any complaint against those Companies under Section 241 and without there being any prayer against them. The apex court further added that by virtue of the impugned order, Mistry was reinstated even on the Board of few companies from which he had resigned. In the context of the law, the apex court cited that Section 241 and 242 of the Companies Act said that these provisions do not specifically confer the power of reinstatement, nor is there any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred.
  3. Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the Company from exercising such a right without setting aside the Article? Article 75 of the Articles of Association of Tata Sons relates to the company's power of transfer of shares. It states that the Company may, at any time by Special Resolution, resolve that any holder of ordinary shares transfer his ordinary shares and that such member would be deemed to have served the Company with a sale notice in respect of his ordinary shares. The Hon'ble Supreme Court held that NCLAT could not have muted Article 75 which has the effect of sending it into out for the count, especially when Mistry and SP Group had not challenged its validity. It was also noted that NCLAT agreed that it has no jurisdiction to declare any of the Articles of Association illegal but it neutralized Article 75 merely on the basis of likelihood of misuse, even though Section 241 provides for a remedy only in respect of 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. Section 241 is not intended to discipline a Management in respect of a possible future conduct, as ruled by the apex court. Thus, the Hon'ble Supreme Court held that where a person who willingly became a shareholder and thereby subscribed to Articles of Association and who was willing and consenting party to the amendments carried out to those Articles, cannot later on turn around and challenge those Articles. The same would be tantamount to requesting the Court to rewrite a contract to which he became party with eyes wide open, ruling out the NCLAT's finding.
  4. Whether the affirmative voting rights available to the directors nominated by Sir Ratan Tata Trusts and Sir Dorabjee Trust were oppressive and prejudicial? The judgment clearly states that the affirmative voting rights, according to SP Group, disabled the nominee directors from acting independently in the best interests of the Company and its stakeholders and that once appointed, the loyalty of the nominee directors should be to the company and not solely to the Trusts which nominated them. Under Article 104B, the two Trusts, acting jointly, have a right to nominate one-third of the prevailing number of directors on the Board, so long as the Trusts hold at least 40% of the paid up share capital. Further, the Article 121 provides that matters, which require to be decided by a majority of the directors, shall require the affirmative vote of the majority of directors appointed under Article 104B. The Hon'ble Supreme Court held that affirmative voting rights for the nominees of institutions, which hold majority of shares in companies, have always been accepted as a global norm. Thus, it is pertinent to note that around 66% of the equity share capital of Tata Sons is held by philanthropic trust including Sir Dorabji Tata Trust and Sir Ratan Tata Trust that support health, education and livelihood generation, the apex court ruled that "there is nothing despising about the validity of the affirmative voting rights. The apex court further put forth the argument that if the idea was to run Tata Sons as a family business, Mr. Ratan Tata need not have stepped down from the Chairmanship. The Hon'ble Supreme Court also reprimanded Mistry for calling Mr. Ratan Tata a 'shadow director' in Tata Sons, saying that when the Board, of which Mistry was a Chairman, had nominated Mr. Ratan Tata as Chairman Emeritus and also recorded their desire of his support and guidance, it was not right on the part of Mistry and SP Group to call Mr. Ratan Tata as shadow director. Hon'ble Supreme Court also put down the Mistry's claim for a proportionate representation on the Board, saying it is neither statutorily or contractually sustainable nor factually justified since the SP Group boarded the journey only in 1980 when Mistry's father was made director. Further, it also mentioned that there was nothing to show a preexisting relationship between the Tata Group and the SP Group before the incorporation of the Company or any agreement in the nature of a partnership.
  5. Whether the reconversion of Tata Sons (from Public to Private Company) acquired the necessary approvals? The Hon'ble Supreme Court mentioned that while allowing the appeals of SP Group, NCLAT had declared the action of the Registrar of Companies in issuing the amended Certificate of Incorporation as illegal with a further direction to the Registrar of Companies to make necessary corrections in the records showing the Tata Sons as a public company. NCLAT held that Tata Sons ought to have followed the process of a Special Resolution and amendment of its Articles under Section 14 and 14(1) of the Companies Act. The apex court found the NCLAT's reasoning to be flawed, it clearly stated that the NCLAT failed to see was that Tata Sons did not become public company by choice but became one by operation of law. The court said that Section 14(1), primarily deals with the issue of alteration of Articles of Association of the Company, whereas Tata Sons only wanted amendment of the Certificate of Incorporation which is not something that is covered by Section 14 of the Companies Act. The Hon'ble Supreme Court mentioned that NCLAT mixed up the attempt of Tata Sons to have the Certificate of Incorporation amended with an attempt to have the Articles of Association amended. The apex court ruled that 'the certificate is a mere recognition of the status of the Company, and it does not by itself create one. Once a new definition of the expression 'private company' came into force under section 2(68) of the Companies Act, the only test to be applied is to find out if the company fits into the scheme under the new act or not, which provides for having restrictions on the right to transfer shares, limitation on the number of members and prohibiting any invitation to the public to subscribe to shares/debentures.

CONCLUSION:

It was these five questions and the Hon'ble Supreme Court detailed examination of the themes that swayed the verdict in favor of Mr. Ratan Tata, ending a major bitter chapter in India's Corporate History.

Key takeaways from the Hon'ble apex court's verdicts have been the concern relating to the rights of minority and small shareholders and their importance in the board of a company. The Hon'ble Supreme Court in its ruling has held that minority shareholders or their representatives are not inevitably entitled to have a seat on the private company's board like a small shareholder's representative.

Further in its ruling, the apex court also noted that the provisions contained in the Companies Act, 2013 only protects the rights of small shareholders of listed companies by asking such companies to have on their board at least one director elected by such small shareholders.

Since in the present case in hand, the Mistry family and the SP Group were not "small" shareholders, but "minority shareholders", there was no statutory provision which gave them the "right to claim proportionate representation," on the board of Tata Sons.

It is our understanding that though this landmark verdict would not directly influence the rights of minority shareholders, but going ahead, such minority shareholders would have to safeguard that they have an agreement with the majority shareholders or the promoters of the company to confirm they have adequate representation on the board of such private company.

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