Tatas v Cyrus Mistry : 15 Grounds Of Challenge Against NCLAT Order

Tata Sons has appealed to the Supreme Court against the December 18 order of the National Company Law Appellate Tribunal which reinstated Cyrus Mistry as the Executive Chairman of the company.

In the appeal, Tata Sons says that the 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 appeal filed through Karanjawala and Co states :

"the Hon'ble NCLAT has, in one stroke of the pen, pulled down the governance and corporate structure of the Appellant, so painstakingly put together by its founders, in the spirit of trusteeship and responsibility, in the course of the last one century. The Impugned Judgment virtually draws up a new charter of Articles in respect of the Appellant and an entirely new system of functioning of the Board of the Appellant, which if allowed to stand would not only give impetus to more chaos, controversy and disruption in the decision making at the Board of the Appellant but shall also upset the settled principles of corporate jurisprudence".

Tata Sons's controlling shareholding (nearly 66% of ordinary share capital) is owned by Tata Trust.

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.

Some of the key points in the statutory appeal filed by Tata Sons under Section 423 of the Companies Act 2013 are :

1. Cyrus Mistry's term as Chairman had expired in March 2017. NCLAT lacks jurisdiction to direct Mistry's reinstatement beyond his original term, especially when such a relief was not sought for.
2. Cyrus Mistry was removed by a majority decision of Board of Directors due to "loss of confidence". NCLAT direction to restore Mistry amounts to undermining principles of "corporate democracy".
3. The removal was in accordance with the process under Articles of Association. The NCLAT has not given reasons to state how the removal process was illegal and wrong.
4. NCLAT lacks jurisdiction to declare Tata Sons a "public company" when it is a "private company" under Section 2(68) of the Companies Act 2013. Tata Sons possessed all characteristics of a private company for over 100 years since its incorporation.
5. Restoring Mistry for his remaining term, even after expiry of his term, is a "recipe for disaster" as it will lead to more confusion and conflicts within the company.
6. Lack of confidence in Executive Chairman is a sufficient ground to remove him. Such removal will not amount to "oppression".
7. NCLAT cannot sit in appeal over the "commercial wisdom" exercised by the Board of Directors regarding the suitability and fitness of a person to act as Chairman.
8. NCLAT also ordered the reinstatement of Mistry as Director of other Tata companies - Tata Industries Ltd, Tata Consultancy Services Ltd and Tata Teleservices Ltd - on the ground that it was a logical consequence of his reinstatement as Tata Sons Executive Chairman. However, these three companies, which are distinct legal entities, were not parties to the litigation.
9. The direction of NCLAT to Tata Sons to consult Shapoorji Pallonji Group for appointments of Executive Chairman and Directors in future is contrary to the Articles of Association. Rights not provided to minority share holders under the AoA have been conferred on them by the NCLAT.
10. The direction restraining Ratan Tata, nominee Director of Tata Trusts, from taking any advance decision requiring majority of BoD at AGM, is beyond NCLAT's powers.
11. NCLAT fails to explain how the actions of Board constituted "prejudice" and "oppression" as per the legal tests under Sections 241 and 242 of the Companies Act 2013.
12. Mere 'prejudice' to a member will not give power to Tribunal pass under Section 242 of the Companies Act, as the section uses the word "oppression" in conjunction with "prejudice".
13. Orders under Section 242 can be passed only if there are facts which show that the winding up of the company is otherwise necessary. The NCLAT judgment does not discuss such facts. The order gives the impression that winding up of Tata group is otherwise necessary.
14. The NCLAT proceeded on the wrongful premise that there was 'understanding' between Tata Group and Shapoorji Pallonji Group that one of the persons from SPG will be made Executive Chairman. There is no record of such 'understanding'.
15. NCLAT wrongly infers that merely because Tata Trusts nominees possess affirmative voting rights, all decisions of the Board of Directors are taken at the instance of Tata Trusts or under the threat of exercise of affirmative voting rights.