NCLAT ruling on Tatas: A lesson on corporate governance retold!

Raghav Pandey and Abhikalp Pratap Singh

The National Company Law Tribunal’s December 18 judgment in relation to Cyrus Investments versus Tata Sons case has not only settled the dispute between two high-profile business families for the time being, but also highlighted the role of certain key legal provisions of the Companies Act, 2013, in corporate governance.

In the layman’s thinking, in the governance of a corporation, whosoever has a majority shareholding or the controlling stake can unilaterally make key decisions. This generalised understanding is not completely false. But the law also gives minority shareholders certain rights, which can’t be violated just by the wish of the majority shareholder.

Cut to the present case, where the corporation in question is the Tata Group. The majority shareholder is Tata Sons while a minority stake is held by two companies owned by the Mistry family.

Cyrus Mistry was suddenly removed from the post of Executive Chairman of the Group through an October 2016 resolution. Mistry then had alleged oppression and mismanagement under Section 241 of the Act and the powers of the tribunal were invoked under Section 242.

Under the law, the minority shareholder has to establish that there are certain oppressive and prejudicial acts committed by the majority shareholder, and this has been the central question in this case.

But before deciding this question, the tribunal had to settle the issue of maintainability, which stems from Section 244 of the Act. It requires that the petitioner should hold either 10 percent or more shares of the issue capital. The dispute also pertained to what is meant by the issue share capital.

The Mistry family took the line that it held 18.7 percent of the equity capital and hence, the petition is maintainable. Tata Sons’ argument was that the share capital under the 2013 Act includes equity and preference capital, which means the Mistry family has less than 3 percent of the issue capital.

Interestingly, the tribunal did not even go into this question. Section 244 empowers the tribunal to grant a waiver on this front if it deems fit.

The tribunal looked into whether the actions of the Tatas amounted to oppression and were prejudicial. The judgment went deep into the press release by the Tatas and examined the language. Finally, it held the action of the Tatas to be oppressive and illegal.

The conversion the Tata Group into a private company also came under the scanner. The two-judge Bench ruled that the conversion had not been statutorily backed by Section 14 of the Companies Act. It called into question why the Tatas did not move the Registrar of Companies (RoC) for more than 13 years on the matter.

All in all, the tribunal considered it as a fit case to pass the order under Section 242 of the Act. That explains why it decided to reinstate Mistry as the Chairman of the group. However, this part of the judgment has been suspended to allow an appeal to be filed in the Supreme Court (SC). It also ordered the RoC to do the needful to settle the conversion issue.

Post judgment, once can safely assume that the issues at hand are largely procedural. The tribunal did not question the power to remove the Executive Chairman, but the manner in which it was exercised, where all the procedural safeguards under the law were found to be compromised. The Tatas have an option to go for an appeal in the SC. That said, they must also address the procedural anomalies highlighted in the judgment.

Mistry can be still be removed by the Tatas by passing a no confidence motion, which the board and the shareholders can vote on. Being the majority shareholder, this should not be a problem for them. Had this been done earlier, this entire litigation would have been rendered pointless.

On the point of conversion from public to private, the decision is contentious because it was not challenged by any director or shareholder then. Hence, it is only reasonable that the Tatas challenge this in the top court.

Raghav Pandey is an Assistant Professor of Law at Maharashtra National Law University, Mumbai. Abhikalp Pratap Singh is a Supreme Court lawyer.