In the Tata-Mistry battle, how and why the court swung in favour of Ratan Tata

The five issues framed by the top court and their answers present an interesting chapter on interpretation of law, hinging on the change in dynamics between Cyrus Mistry and Ratan Tata

With its final judgment last week, the Supreme Court not only set aside set aside a tribunal’s 2019 order reinstating Cyrus Mistry as the executive chairman of the corporate giant, Tata Sons, but also ruled all the questions of law in favour of Ratan Tata and the ­Tata Group.

Ratan Tata (right) and Cyrus Mistry. (REUTERS File)

The five issues framed by the top court and their answers present an interesting chapter on interpretation of law, hinging on the change in dynamics of relationship between Cyrus Mistry and Ratan Tata, with the court describing Mistry as a man who set his own house on fire. A detailed reading of the judgment helps give a sense of why one of corporate India’s most bitter battles in recent years ended the way it did, in favour of Tata.

Here are the five questions and their answers by the top court:

One — Whether Tata Sons’ affairs 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 Sections 241 and 242 of The Companies Act?

This turned out to be the most important question that swung the entire case in favour of Ratan Tata. A substantial part of the 282-page judgment was devoted to scrutinise and eventually negate the accusations relating to oppression and prejudice.

The court answered this question in negative and cited a simple example: “If the company’s affairs have been or are being conducted in a manner oppressive or prejudicial to the interests of the SP Group, we wonder how a representative of Mistry’s Shapoorji Pallonji (SP) Group holding a little over 18% of the share capital could have moved up to the topmost position within a period of six years of his induction.”

Referring to Sections 241 and 242 of the Act, the court underlined that scheme of the law provides for making an application to the National Company Law Tribunal 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.

It enumerated eight grounds on the basis of which Mistry alleged prejudice and oppression but noted that six of these grounds have be considered as settled since neither the appellate tribunal reversed the findings of the NCLT as regard to them nor had the SP Group assailed them in their appeal before the SC.

Therefore, the court said, allegations relating to these must be rejected. These 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 Hamid Reza Malakotipour who was classified as a “global terrorist” by the United Nations; sale of a flat to Mehli Mistry and the grant of huge personal favours to the companies owned and controlled by Mehli Mistry, and dealings with NTT DoCoMo, which eventually led to an arbitration award for a huge sum of money.

The court then went on to focus on Mistry’s removal and existence of just and equitable grounds for winding up of Tata Sons, underlining that these were the only two issues that the appellate tribunal had specifically dealt with. Relying on case law and the statutory provisions, the court held that removal of a person from the post of executive chairman cannot be termed as oppressive or prejudicial.

“It is an irony that the very same person who represents shareholders owning just 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,” maintained the court, adding that the subsequent conduct of Cyrus Mistry in leaking his email and sending some documents to the Income Tax department enhanced the firepower of the management of Tata Sons “with regard to their claim relating to lack of confidence and trust”.

About the existence of “just and equitable grounds”, which would justify winding up of Tata Sons, the top court noted that a winding up petition would hold water only if there is a breakdown in mutual trust and confidence impeding the management of a company.

The lack of confidence, said the court, “must spring not from dissatisfaction at being out­voted on the business affairs or on what is called the domestic policy of the company”.

It highlighted that winding up could be ordered when there is a “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 case in hand there was never and there could never have been a relationship in the nature of quasi partnership between the Tata Group and SP Group. SP Group boarded the train half­way (in 1965) through the journey of Tata Sons. Functional deadlock is not even pleaded nor proved,” ruled the court, rejecting Mistry’s contentions regarding winding up plea.

It further noted that the NCLAT lost sight of the most important aspect that Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts — Sir Ratan Tata Trust and Sir Dorabji Tata Trust.

“Therefore, NCLAT should have raised the most fundamental question whether it would be equitable to wind up the Company and thereby starve to death those charitable Trusts, especially on the basis of un­charitable allegations of oppressive and prejudicial conduct,” said the court, terming NCLAT’s findings as completely flawed.

Here, the court once again reminded Mistry 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.”

Two — Whether the relief granted, and the directions issued by the appellate tribunal, including the reinstatement of Mistry into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Sub­section (2) of Section 242?

Apart from underscoring that the scheme of Section 242 does not envisage reinstatement of a chairman or a director, the 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 further found fault with the judgment restoring his chairmanship for the “rest of the tenure” when there was no tenure left at all.

It pointed out that the appointment of Mistry as executive chairman of Tata Sons with effect from December 29, 2012, was for a tenure of five years. The judgment of the NCLAT was passed on December 18, 2019, by which time, a period of nearly seven years had passed from the date of Mistry’s appointment.

“Therefore, we fail to understand as to how the NCLAT could have granted a relief not apparently sought for (though wished 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,” held the court.

It also criticised 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 court added that by virtue of the impugned order, Mistry was reinstated even on the Board of a few companies from which he had resigned.

“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 relief of reinstatement granted by the Tribunal, was too big a pill even for the complainant companies (and perhaps Mistry) to swallow,” said the court, highlighting that even Mistry had pleaded that he was not looking to be reinstated.

In law, the apex court, citing Sections 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.

“It is interesting to note that at the time of his appointment in December 2012, what Mistry saw and acknowledged, was a ‘great learning experience he had under the direct guidance of Ratan Tata’, but at the time of departure in October 2016, what he saw was only a conduct for over 10 years, that was oppressive and prejudicial to the interests of the company and of the minority. The NCLAT failed to take note of this, while granting reliefs neither sought for nor feasible in law,” ruled the court.

Three — 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 court held that the NCLAT could not have muted Article 75, which has the effect of sending it into comatose, especially when Mistry and SP Group had not challenged its validity.

The complainant companies, the court noted, did not make a grievance out of Article 75 on the ground that it had been misused in the past or that such misuse tantamount to conduct oppressive or prejudicial to the interests of some of the members.

“No single instance even of invocation of Article 75, leave alone misuse, is averred in the main company petition or in the application for amendment. Therefore, NCLAT could not have and should not have made Article 75 completely ineffective by passing an order of restraint,” said the court.

It also noted NCLAT agreed that it has no jurisdiction to declare any of the Articles of Association illegal but it neutralised 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 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. Section 241 is not intended to discipline a Management in respect of a possible future conduct,” ruled the court.

About the history of the Article of Association, the court also highlighted that it was amended in its present form in September 2000 in the presence of and with the consent of Mistry.

“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,” said the court, reversing NCLAT’s finding.

Four — Whether the affirmative voting rights available to the directors nominated by Sir Ratan Tata Trusts and Sir Dorabjee Trust were oppressive and prejudicial?

The affirmative voting rights, according to the 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, 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 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.

“So long as these special rights are incorporated in the Articles of Association and so long as they are not in contravention of any of the provisions of the Act, the same cannot be attacked on these grounds,” it said.

Noting that around 66% of the equity share capital of Tata Sons is held by philanthropic Trusts including Sir Dorabji Tata Trust and Sir Rata Tata Trust that support education, health and livelihood generation, the court ruled that “there is nothing abhorring about the validity of the affirmative voting rights”.

The court held that Tata Group was guided by the principle of “Corporate Governance” even without a statutory compulsion since it was not a listed public company, and this was evidenced by the fact that Mistry was the first one outside the Tata family to be crowned as the executive chairman and the Board of Tata Sons had many persons who could be ranked outsiders.

“If the idea was to run Tata Sons purely as a family business, Ratan Tata need not have stepped down from the chairmanship. Today, nobody wants to step down from any office, except if afflicted by brain stroke or sun stroke,” said the court.

It also reproached Mistry for calling Ratan Tata a “shadow director” in Tata Sons, saying that when the Board, of which Mistry was a chairman, had nominated Ratan Tata as chairman emeritus and recorded their desire of his support and guidance, it was not open to Mistry and the SP Group to call Ratan Tata a shadow Director.

The apex court also shot down 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 a director. Further, it said, 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.

And finally — Whether the re­conversion of Tata Sons from a public company into a private company was bad in law?

While allowing the appeals of the 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.

The court commenced its adjudication by underlining that even SP Group does not dispute that Tata Sons satisfies the parameters of Section 2(68) of the 2013 Act that defines a private company — but contentions revolve around the procedure followed for reconversion. 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 court found NCLAT’s reasoning to be flawed. “What 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,” it noted. The court said that Section 14(1), primarily, deals with the issue of alteration of Articles of Association of the company but “Tata Sons wanted a mere amendment of the Certificate of Incorporation, which is not something that is covered by Section 14 of the 2013 Act.”

It said that the 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, while pointing out that Tata Sons satisfied the criteria prescribed in Section 2(68) of the Act by having restriction on the right to transfer shares, limitation on the number of members and prohibiting any invitation to the public to subscribe to shares/debentures.

“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 2013 Act, the only test to be applied is to find out if the company fits into the scheme under the new Act or not,” ruled the court.

It was these five questions and the court’s detailed examination of the themes that swung the verdict in favour of Ratan Tata, bringing to an end a major acrimonious chapter in India’s corporate history.