On Friday, the Supreme Court of India set aside the order passed by the National Company Law Appellate Tribunal (NCLAT), which reinstated businessman Cyrus Mistry as the Chairman of Tata Sons Limited. The Court order effectively upheld the decision of the Tata Group to remove Mistry from the post in 2016.
The matter appeared before a 3-Judge Bench of the apex court, comprising of Chief Justice of India (CJI) SA Bobde, Justices AS Bopanna and V Ramasubramanian. “Company petition no 82/2016 filed by two companies belonging to Shapoorji Pallonji Group shall stand dismissed. Civil Appeal 1802 filed by Cyrus Investments Limited and Sterling Investment Corporation is dismissed. There will be no order as to costs,” the Court ordered.
It further said, “We find all the questions of law are liable to be answered in favour of the appellants, Tata Group and the appeals filed by the Tata Group are liable to be allowed and Shapoorji Pallonji group is liable to be dismissed.” Ratan Tata, who served as the Chairman of Tata Sons Limited between 1991 and 2012, took to Twitter to appreciate the verdict.
Ratan Tata wrote, “I appreciate and am grateful for the judgement passed by the honourable Supreme Court today. It is not an issue of winning or losing. After relentless attacks on my integrity and the ethical conduct of the group, the judgement upholding all the appeals of Tata Sons is a validation of the values and ethics that have always been the guiding principles of the group. It reinforces the fairness and justice displayed by our judiciary.”
The Background of the Case
After Ratan Tata stepped down as the Chairman of Tata Sons, a Selection Committee was formed to appoint the new successor of the Group. Cyrus Mistry’s father Pallonji Mistry owned an 18.4% stake in the conglomerate. Mistry, a Board member and also a part of the Selection Committee was appointed the Chairman of Tata Sons.
In a historic feat, Mistry became the only second Chairman in the 153-year-history of the Group to not have the ‘Tata’ surname. However, his term was short-lived. On October 24, 2016, the majority of the Board of Directors removed him from the position of Chairman. Six months later on February 6, 2017, Cyrus Mistry was removed from the Board of Directors as well.
Following this, two Shapoorji Pallonji firms owned by Mistry’s father moved the National Company Law Tribunal (NCLT) claiming Cyrus Mistry’s removal as ‘mismanagement’ and ‘oppression of minority stakeholders. The petition was dismissed by NCLT in July 2018. They then filed an appeal before the National Company Law Appellate Tribunal (NCLAT).
In an unprecedented decision on December 18, 2019, NCLAT not only overturned the NCLT order but also reinstated Cyrus Mistry as the Chairman of Tata Sons. It also declared the appointment of the new Chairman Natarajan Chandrasekaran as ‘illegal’. NCLAT directed Ratan Tata to not take any decision in advance without the majority of the Board of Directors. Both Tata Group and Mistry moved the apex Court, seeking resolution of the long-standing conflict.
Arguments in favour of Tata Sons in the Supreme Court
On January 10, 2020, the apex court put a stay on the order of the National Company Law Appellate Tribunal (NCLAT) reinstating Cyrus Mistry as the Chairman of Tata Sons. On Friday, the Supreme Court formulated a total of 5 questions, pertaining to the case. All the questions were answered in favour of the Tata conglomerate.
Senior Advocate Harish Salve, appearing for Tata Sons, contended that the NCLAT order gave minority shareholders (Shapoorji Pallonji firms) the control of Tata companies. He pointed out that in a ‘normal corporate democracy’, stakeholders with 18% will not have even a single director in the Board of Directors, let alone the position of Executive Chairman. He added that NCLAT’s order to reinstate Cyrus Mistry superseded the wish of the majority of the Board.
Harish Salve stated that bad business decisions, even if it causes loss to the company, cannot be classified under Section 241 of the Companies Act as ‘mismanagement.’ He pointed, “Section 241 refers to the filing of a complaint against ‘the company’ which in this case is Tata Sons. So, a complaint under 241 cannot be based on a litany of allegations against downstream companies like Tata Motors, Corus, Tata Steel etc.”
He further argued that NCLAT does not have absolute power to appoint a Director of a company, even under Section 242(2)(k) of the Companies Act, which makes for such provisions. “The power under Section 242(2)(k) is nuanced and for specific purposes,” Harish Salve pointed out. The Tribunal had cited “just and equitable” reasons in its order. The senior advocate emphasised, “The test is whether there is lack of probity in the running of company and standards for applying the principle (of just and equitable grounds) are very high.”
Arguments in favour of Cyrus Mistry and Shapoorji Pallonji firms
In its cross-appeals, Shapoorji Pallonji (SP) firms claimed that NCLAT did not give ‘crucial reliefs’ to Cyrus Mistry. They claimed that they should be given representation in all committees by the Board of Directors of Tata Sons. SP firms contended that their relationship with Tata Sons dated back 70 years ago and that it was based on ‘mutual relationship’ and trust.
SP firms counter-argued Harsh Salve by claiming that Tata Sons’ Board took decisions about the group companies, which in turn affected the downstream companies. “Decisions taken by Tata Sons if not made correctly affect the downstream companies and that, in turn, will affect Tata Sons shareholders because Tata Sons’ only income is the income from the downstream companies,” they said.
Furthemore, they argued, “In earlier Act, only ‘oppression’ of members was a ground and not ‘prejudice’. Under the 2013 Act, an action can be prejudicial without being oppressive. there have been acts which have been prejudicial to us though not necessarily oppressive.” They claimed that the decision to turn Tata Sons into a private limited company was to prejudice the minority stakeholders.
Given that Tata Sons owned listed companies with over 65 lac crores stake, SP firms pointed out, “f they wanted to keep a family affair, they should have remained so instead of making it public…That is why it needs it be “board run”. They cannot use the Articles to claim that they have absolute right over affairs of the company.”
Supreme Court sets aside NCLAT order, rules in favour of Tata Sons
After hearing both sides, the apex court set aside NCLAT order and ruled in favour of Tata Sons. It also dismissed the plea for ‘alternate relief’ sought by SP Groups. “The valuation of shares of SP Group depends on the value of stake of Tata Sons in listed equities, unlisted equities, immovable assets etc. and also perhaps the funds raised by SP Group on the security pledge of the shares,” the Court said.
It further emphasised, “Therefore, at this stage and in this court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the article 75 route or any other legally available route in this regard.”