Tata Sons v Cyrus Mistry : NCLAT Has No Power To Appoint Chairman, Submits Salve

Mehal Jain

8 Dec 2020 3:30 PM GMT

  • Tata Sons v Cyrus Mistry : NCLAT Has No Power To Appoint Chairman, Submits Salve

    The court-room exchange of the first day of arguments in Tata Sons v Cyrus Mistry case in Supreme Court.

    The Supreme Court on Tuesday heard the appeals filed by Tata Sons Pvt Ltd against the NCLAT direction to reinstate Cyrus Mistry as Company Chairman.The bench headed by Chief Justice S. A. Bobde heard Senior Advocate Harish Salve for Tata Sons."This (Chairmanship) is not a post as understood in service law. In Company Law, this is designation. Tata Sons Ltd is a company of considerable vintage....

    The Supreme Court on Tuesday heard the appeals filed by Tata Sons Pvt Ltd against the NCLAT direction to reinstate Cyrus Mistry as Company Chairman.

    The bench headed by Chief Justice S. A. Bobde heard Senior Advocate Harish Salve for Tata Sons.
    "This (Chairmanship) is not a post as understood in service law. In Company Law, this is designation. Tata Sons Ltd is a company of considerable vintage. It was created in 1917", began Mr. Salve.
    "Was it a public limited company?", asked the CJ.
    "Never. It has always been a private company. The curious thing which has happened in the case is that there is a provision in Tata Son's Articles which restricts the transfer of shares. It also has a remarkable feature that the Board could direct a shareholder to sell shares. The NCLAT overlooked the fact that the primary contract between the shareholders and the company is the Articles of Association", advanced Mr. Salve.
    "The Article giving power to direct selling of shareholder is Article 137?", asked the CJ. "Yes. It is an unusual Article. At interim stage, we undertook not to invoke it against Mistry", said the Senior Counsel.
    "After the new Act came in 2013, we asked the Registrar to add the name 'Private' to Tata Sons. The Registrar did it. By statutory definition, we are private. The NCLAT came down heavily on the Registrar for allowing the adding of 'private'", he continued.
    "The NCLAT used a curious interpretation. The Ministry of Corporate Affairs has also filed an appeal against the observations made by the NCALT", he added.
    "Tille 1965, Shapoorji Pallonji group was not in existence in Tata Sons. The shares to Tata Sons to the extent of 68% are with the Tata Trust. We all grew up with Mr. JRD Tata as the main person. After JRD retired, Ratan Tata. The trustees of Tata Trust which held 68% were always in the control of Tata Sons. It nominated eminent persons to the board. Tata Sons hold controlling stake in many listed companies of Tatas, like Tata Steel, Tata Chemicals etc", submitted Mr. Salve.
    "It is a matter of pride that Jaguar cars are manufactured by Tata owned company. Jaguar has a hybrid version now. Having got one, I can tell it has the highest insurance because they are the most stolen cars in UK", he remarked.
    "Pallonji Mistry, Cyrus Mistry's father was included in Tata Sons as non-executive Director in 1980. Cyrus Mistry joined Tata Sons in 2006. Mistry's appointment as Executive Chairman would have ended in March 2017. It was not a life long appointment. He was removed in October 2016. After March 2017, he had no right to seek re-appointment. Corporate democracies must have its places. Your lordships held in Escorts case held that these are mini democracies. He was removed only as Executive Chairman. He would have continued as Director", argued Mr. Salve.
    "The company has made a remarkable corporate transformation. A homegrown youngster ((Natarajan Chandrasekaran, Chairman, Tata Group) who had joined Tata at the beginning of his career has now become chairman. The appointment was set aside by the tribunal. Your Lordships were kind enough to stay it. However, I was neither a party to it nor had I ever challenged it", contended Mr. Salve.
    "What is special about the Chandrasekhar appointment?", asked the CJ.
    "He is one of the finest in-house persons. He was promoted as Executive Chairman because he is connected to anybody but only on account of his sterling performance in the company!", replied Mr. Salve.
    "Are there any suo motu powers to this effect for the CLB or the NCLT to appoint a director?", asked the CJI.
    "Maybe in case of mismanagement. The CLB may appoint or remove a director provided his conduct merits such a drastic action. Section 244 shows that the step may only be taken if there is a reason and the reason must stem from one of the two sources! In case of oppression, the test is completely different", explained Mr. Salve.
    "Is there a power to select the director?", wondered the CJ.
    "Say, there is an allegation of siphoning off money or any questionable transaction, if the majority director is acting contrary to the interest of the company or the public interest or to the shareholders to whom he has a fiduciary duty, you may remove him. But the test is different. Here, the appointment is on account of the oppression of the minority. Can you remove the director, if even he is a very fine person, saying that the slot should go to the nominee of the minority shareholders?", advanced Mr. Salve.
    "Appointment include selection. But the NCLT cannot choose. Ultimately, it is for the shareholders to appoint the director. Where the NCLT make the appointment, it must be Protem. Once the company is back on its feet, the democracy has to be brought back. It is the shareholders who have the power to elect the person they have faith in", he continued.
    "Cyrus Mistry had written an email which was supposedly for the eyes of the board and the trustees but the media got it and carried it first. It was against Ratan Tata and the board", argued Mr Salve.
    "This happens in the corporate world also?", commented the CJ.
    "Yes. They invented it and then it drifted to others...The trustees lost faith. Then Ratan Tata and Nitin Nohria told Mistry to step down from the post of the Executive Chairman, saying that you have six months left, resolve the matter quietly. But he did not agree and then he was finally removed. Then he filed the secret letter, which was leaked all over the world. The Tata Sons board gave a press release saying that since it has caused 'global concern' among the stakeholders of Tata, we must reply. The Tribunal said that since you yourself admitted there has been a 'global concern', so this is again operation. Then he was removed from the Tata Sons board. Resolutions were passed by other companies also to remove him. He saw the writing on the wall and resigned from other companies as director", elaborated Mr. Salve.
    "During the times of JRD and Ratan Tata, the representative of Tata Trust was also the chairman of Tata Sons. There was a cohesion between the Tata Trust and Tata Sons. The Articles were amended in 2013 unanimously, with Pallonji Mistry voting in their favour to incorporate conditions favourable to the trustees which enabled them to appoint a nominee director", he continued.
    "The tribunal said that it can't sit in judicial review over the Articles. It upheld the Articles but said that you won't operate them", submitted Mr. Salve.
    "Initially, there was a dominant structure in favour of the trust nominees. That is why the Articles were amended in 2000. This was much before Cyrus Mistry was made executive chairman or was even on the board. There were wide powers of veto, but they were never exercised. Before any resolution was brought to the board of Tata, there was a routine to consult the trustees so that is that there is no difficulty once a resolution has reached the board. Now, they are using expressions like 'stooges, acting as puppets'! They were nominated by the trust! So what is the harm if, towards a good working relationship, they were running things by the trust? Their directors have the right to veto! Otherwise, there would have been a very bureaucratic relationship with things going back and forth! While going for major decisions like raising capital for Tata Motors, which have wide ramifications, you need to consult Tata Sons. They run it by them so that everybody is on the same page. The tribunal said that these Articles allow you to interfere, so there is oppression of the minority!", he argued.
    "They first needed to establish the understanding that the minority has been given a say! They are missing the woods for the trees. Cyrus Mistry was appointed as the executive chairman by the selection committee, he was not a minority member. The relief means that the majority is out and the minority rules. The whole thing is a complete house of cards, highly misconceived, with the tribunal putting back, with full commanding powers, the person who did not want to come back as the executive chairman! So the 18% shareholder will now get the full run of Tata Sons and the Tata group without any say of the majority? That is the operative relief and it is absurd!", pressed Mr. Salve.
    "The power under sections 241 and 242 is available as the alternative power, only in case the court concludes that it is otherwise just and equitable that the company be wound up. The English courts developed it as an equitable relief and we incorporated it as a statutory relief. Say, in case of a deadlock, where two directors are not speaking to each other. In such cases, it may be just and equitable to wind up the company but if it would cause unnecessary prejudice to the shareholders or to the company, the tribunal would instead grant relief of oppression", he elaborated.
    "So what you are saying is that if the tribunal concludes that it is just and equitable to wind up the company, in the interest of shareholders, it may instead say that it will exercise the power under 241 and 242?", clarified the CJ.
    "Yes, but in this case, the test applied to arrive at the conclusion that it is just and equitable to wind up has became circular. The tribunal said that because of the acts of oppression, it is just and equitable to wind up. In this case, they are dispensing with the second test", pointed out Mr. Salve.
    "So your argument is that the statutory scheme of the Companies Act is such that the tribunal must conclude that though it is just and equitable to wind up the company, it is not in the public interest and the shareholders' interest to do so?", confirmed the CJ.
    "Earlier, only oppression was subject to this rider. Now even mismanagement is", responded Mr. Salve. He indicated section 241 of the new Companies Act which speaks of a situation where any member of the company complains that the affairs of the company are being conducted in a manner prejudicial to public interest or to him or to any other member of the company or to the interest of the company. Mr. Salve explained that this provision mixes use of both oppression and mismanagement.
    "Copious reference has been made to Tata Telecom, but it is only the affairs of Tata Sons that can be seen", he continued, indicating the phrases "members of a company" and "affairs of the company" in the aforesaid provision. "To say that Ratan Tata, being executive chairman of Tata Sons, had also got voted into Tata Telecom and taken a decision which was not good or that Tata Motors should have never invested in Nano or that Tata Steel never should have got Corus Steel, is nor correct! None of these are 'the company'! Tata Sons is 'the company'...The litany of allegations has been raised against downstream companies!", he contended.
    "Suppose the complaint is that Ratan Tata is causing the affairs of Tata Sons to be run in such a way that investment is being jeopardised and projects are being lost?", asked the CJ.
    "Of course, in that case it can be- If the nominees of Tata Sons and the independent and financial directors of the other company have taken decisions which are prejudicial to these companies. Suppose there are 5000 crores in the bank and you put them in a project carelessly or you put them where you have a conflict of interest and that 5000 crores is lost. Then, of course. But there is not a single allegation of that kind which has been proved", asserted Mr. Salve.
    "I said that my company will design a car of Rs. 1 lakh so that any average Indian can afford it. But some of the best of the projects fail! Corus Steel ran into difficulty. There was a question as to whether more money should be invested in it or should we get out. But Tata Sons is famous for 'when the going gets tough, the tough gets going'! There may be different viewpoints, but they were there was no mismanagement", argued with Mr Salve.
    "So you are saying that if a company develops a strategy for success, and the strategy fails, it is not mismanagement?", clarified the CJ.
    "No. It can only be called a bad decision. And hindsight is always is 20/20. And most importantly, the question is how could you make it a mismanagement by Tata Sons?! Of course, there is a website called 'CyrusMistryForGovernance'. There are articles and talks of Ratan Tata putting money in wrong places. While all this may be alright for social media chats, Your Lordships have to see if a member of Tata Sons is conflicting with the affairs of the company", argued Mr. Salve.
    Next he took the bench through section 242 of the Companies Act:
    242. (1)If, on any application made under section 241, the Tribunal is of the opinion—

    (a) 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 a manner prejudicial to the interests of the company; and
    (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up,

    the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

    He stressed on the words 'and' and 'otherwise'. "If I don't wind up, I can also fix the company. The genesis is in the old company law. The old section 397 has now become the present 241. The court started using equity jurisdiction to fashion relief where it was a case of just and equitable winding up", advanced Mr. Salve.
    "From day one, you are a 68% shareholder. And you have not heaped up to become a 68% shareholder. You would were one even when it was a private limited company. 50 years later, you are a 18% shareholder, even after one of your persons has been taken on the board. If we calculate ,18% is worth 70-80,000 crores. The company has been run amazingly by Ratan Tata. Between 1991 and 2012, the Tata Group market cap went up by 500 times. This is the trajectory of growth", submitted Mr. Salve.
    The CJI pointed out that in March 2016, 18% was valued at 50,000 crores. "Yes. And this is despite the so-called losses of the downstream industries", commented Mr. Salve. "When the trajectory of growth is of 500 times, you will also have some winner projects which may sometimes turn out to be losers", he added. "This is like successful senior counsel. The best lose more cases than they win", remarked the CJ.
    "The Articles which are specifically enforceable can't be overridden unless some part of them is illegal", argued Mr Salve. He indicated clauses (h) and (k) of section 242(2) on the orders which the Tribunal may pass in a case under section 241(1)- (h) removal of the managing director, manager or any of the directors of the company; (k) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;
    "The tribunal cannot choose directors. There is a narrow power under (k)", he pointed out.
    "So this is like appointing a Commissioner Director. Like the court appoints commissioners for a specific purpose", noted the CJ.
    "Yes, you may say that you will appoint a director to conduct litigation, who will report to you. Like in Satyam, there were prosecutions to be conducted, forensic audits to be carried out. A director was appointed to do that. Similarly, in the case of IL&FS, a director was appointed to effect recoveries of money, restructuring etc. This is a nuanced appointment. The director comes with a mandate. You can't say that you chaps don't know how to appoint so I will", advanced Mr. Salve.
    "And as to removal of the MD, the tribunal cannot and, in this case, need not direct the company to remove but it may itself remove the director. If a company has removed the director, it cannot set aside the removal", noted the CJ.
    Mr. Salve indicated clause (g) which provides for the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;
    He submitted that the "setting aside" is only to that extent- "Tomorrow, if they say that a group of people is cornering the shares and cartelising and appointing the wrong people, it may intervene".
    "So there is no power to choose and select. You are right. There is no implied power either", noted the CJ.
    Then there was a discussion on clause (j) which provides that the Tribunal may make an order as to the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h).
    Indicating clause (j), the CJI remarked that the Tribunal can direct only the manner of appointment, not the choice or selection. "You can't say that 'Mr. X' is to be appointed as MD", observed the CJ.
    "So it is the power to correct mismanagement. You can't resort to it unless the mismanagement is of such magnitude that it results in a situation where it is deemed just and equitable to wind up the company", summarise the CJI.
    Tata is doing well, except three companies. TCS is doing fabulously. There is no deadlock...In corporate democracy, Cyrus Mistry won't be getting even 1% on the board. The 68% trustee directors would back the board. If Tata Sons is still distributing dividends, where is the question of winding up?", argued Mr Salve.
    "You should have argued like this in front of the tribunal, so patiently", commented the CJ. "I did. The problem is that I won on the point of law...", responded Mr. Salve. "No, you didn't", remarked the CJI.
    The CJ then questioned about the exemption under section 244(1)(a) of the Companies Act on the Right to apply under section 241. Mr. Salve advanced that the finding on that has "unfortunately" attained finality. "Very serious allegations were raised of Ratan Tata aiding and abetting terrorism. Somebody connected to AirAsia sent money to someone. Then, there was an article. He said I can't live with a slur on my reputation", he explained. "This argument was pushed with full force and responsibility in the NCLAT", interjected Dr. A. M. Singhvi. "And it was also abandoned in the NCLAT", pointed out Mr. Salve. "For want of evidence?", asked the CJ.
    Moving on, Mr. Salve quoted the observations of the NCLAT in the impugned decision-

    "In this background, the Appellants have raised no confidence on the majority shareholders particularly the 'Tata Trusts' which have nominated Directors having affirmative right over the majority decision of the Board and have raised doubt on the Respondents that they may now act in a manner 'prejudicial' and 'oppressive' against the minority shareholders by exercising powers conferred under Article 75 and without any notice or reason, may take over their shares", the NCLAT had recorded.

    "Article 75 has been there since years! The tribunal says that exercising that power would be unfair and injuncted it!", argued Mr. Salve.

    The NCLAT had taken note of "the fact that the Company ('Tata Sons Limited') has suffered loss because of 'prejudicial' decisions taken by Board of Directors". "There is not even one such instance, I will show", asserted Mr. Salve.

    "Is there any finding as to whether the so-called losses because of the prejudicial decisions of Tata Sons affected just the minority or the whole company? Everybody lost, including the majority?", asked the CJI.

    "I am losing Rs. 68 for every hundred rupees. The whole company is losing", replied Mr. Salve.

    "They said your nominated directors were there on the company. Despite that, there have been losses, so you are responsible. This is a fantastic proposition of law!", commented Mr. Salve.

    "They are pointing out the conversion of the company from a private company to a public company! How did minority lose by that?! They are referring to the manner in which Cyrus Mistry was hastily removed and his subsequent removal as director of different Tata companies. They said that 'coupled with global effect of such removal, as accepted by the Company in its Press Statement, form a consecutive chain of events with cumulative effect justifying us to hold that the Appellants have made out a clear case of prejudicial and oppressive action by contesting Respondents, including Mr. Ratan N. Tata, Mr. Nitin Nohria and Mr. N.A.Soonawala and other, the nominee Directors'", continued Mr. Salve.

    "If the director did something awful, one is expected to look at the resolutions passed. Other than the removal of Cyrus Mistry, there is no resolution which has been complained of. Still it has been said that there was oppression of the minority by the nominees of the company because they were 'stooges'", argued Mr Salve.

    "For years, the power of veto has been in place. Not once has it been exercised in 20 years. That is how this company runs!", he stressed.

    "So the conclusion that the company should be wound up can only come from the proven fact of oppression etc, and then, because it is not just and equitable to do so, they can make orders under oppression?", asked the CJ. In response, Mr. Salve indicated the term 'otherwise' in section 242(1)(b).

    "So the facts which give rise to the conclusion of winding-up must be the same facts of oppression?", questioned the CJI. Mr. Salve replied, "They could be".

    "If there is a petition before the tribunal for just and equitable winding up on any grounds, and the Tribunal says that it is not just and equitable to wind up because it can remedy the problem, it may order that instead of winding up, do this. If the petitioner before the tribunal complains of oppression or mismanagement and the tribunal concludes that it is just and equitable to wind up, why can it not say that the oppression or the mismanagement is so gross that normally we would wind up, but because it will sink such a good company or one which is important for the nation, it will direct something else?", asked the CJ.

    "Let's take the case of a partnership which is working wonderfully. A 15% partner is thrown out of management. Can it be wound up? No. But if he says that he has been thrown out and the conduct of the majority lacks probity, that accounts are not being shown etc, then you can. The same is in company law", replied Mr. Salve.

    "Suppose the behaviour is oppressive and the mismanagement is persistent, would that not be a ground for just and equitable winding up?", asked the CJ.
    "If I can say that you are running the company in such a manner that you are trying to take money out, then there is a case. But if a director is making bad decisions, then, ultimately, it was the shareholders who chose the manager. If he is bad, then everybody loses. But then it is not a just and equitable ground to wind up...Like Docomon was the leading Japanese company in telecom. If the spectrum distribution went awry and because of that the project failed, can you call it mismanagement?", argued Mr. Salve.
    "Articles give the right of appointing directors to the majority. They are exercising their powers. There is a power of veto. If veto is used against you and you are out-voted, where is the question of oppression?", asked Mr. Salve.
    "So the finding of just and equitable winding up should be dehors the oppression and mismanagement?", the CJ wanted to know.
    "If you are dissatisfied with a partner, you retire him and ask him to go away. If there is a downturn in fortunes, one could say that you didn't manage the company properly. That is why probity is important. The conduct must be burdensome and harsh and wrongful and mere no-confidence is not sufficient. Oppression apart, you have to first say that it is just and equitable to wind up the company as you are being treated badly", replied Mr. Salve, citing several authorities on the aspect of lack of probity in the management of affairs
    "So in a complaint of oppression and mismanagement, the courts have to see that it is of such a degree and there is such lack of probity and unfairness, that it would be just and equitable to wind up. But it is not expedient to do so because it can be fixed. Then the judge can give directions under 241 and 242?", noted the CJ.
    "Can the court return a finding of oppression and mismanagement on the ground that the Article is illegal or unfair but there is no act which has been established as relating to this oppression or mismanagement?", asked the CJ.
    "If you say that the Articles were slammed down your throat by a brute majority, that itself is oppression. Here, there was no such thing. Every Article was unanimous...for there to be a case of oppression and mismanagement, there has to be an act of management which is contrary to and inconsistent with the Articles", expounded Mr. Salve.
    "So this is like we tell the petitioners to not simply say that the law is arbitrary or illegal. We ask the petitioner to show what the respondent has done and what the cause of action is", noted the CJ.
    The hearing shall resume on Wednesday.

    On January 10, the Supreme Court had stayed the December 18 order of the National Company Law Appellate Tribunal which reinstated Cyrus Mistry as the Executive Chairman of the company.

    Tata side had given assurance in court that they do not propose to take any steps invoking powers under Article 75 of the Articles of Association against the minority shareholders of Shapoorji Pallonji group.

    In the appeal, Tata Sons says that the NCLAT judgment sets a 'dangerous legal precedent' and is a 'blow to corporate democracy'.

    It is contended in appeal that judgment has virtually re-written the Articles of Association of the company to confer new rights on the minority shareholders, which were not otherwise existing.

    The present legal battle has its genesis in the company petitions filed by Shapoorji Pallonji Group under Sections 241 and 242 of the Companies Act 2013 alleging oppression and mismanagement in Tata Sons. These petitions were filed in the wake of Mistry's removal. The NCLT Mumbai bench dismissed the petitions, against which appeals were filed in NCLAT. Cyrus Mistry also filed a separate appeal seeking to expunge certain remarks made against him by the NCLT.

    On December 18, the Appellate Tribunal ordered the reinstatement of Mistry as the Chairman. Tatas contend that this relief was not even sought by Mistry and the other appellants.

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