A Note on Two Landmark Company Law Judgments:

Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors. And

Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd.

Author: Kkanika Sharma, a student at the Army Institute of Law

Citations:     1) 2017 SCC OnLine NCLAT 261

2) 2017 SCC Online SC 272

Abstract

This legal analysis explores the landmark Tata-Mistry case in Indian Company Law, involving Ratan Tata and Cyrus Mistry. The conflict, which stemmed from Mistry’s resignation as Executive Chairman, plunged into allegations of oppression and mismanagement of minority shareholders against Tata Sons. The NCLT ruled against Mistry, but the NCLAT overturned the decision, accentuating his leadership. In its 2019 decision, the NCLAT protected minority rights while ignoring fair expectations. In 2021, the Supreme Court overruled this, emphasising that there was no mismanagement or oppression against minorities but Mistry’s reinstatement was rejected owing to his own fiduciary breaches. The analysis delves into how these cases explored corporate governance complexities, conversion issues, and the balance of majority-minority rights in Indian Company Law.

Keywords: Company Law, Tate-Mistry, NCLT, mismanagement, corporate governance, minority shareholders.

Introduction

Two landmark cases in the history of Indian Company Law ensued from the legal battle between two leading Indian industrialists Ratan Tata and Cyrus Mistry. The background of the entire predicament was such that Tata Sons is the holding company that belongs to the country’s premier businessman, Ratan Tata, who was the previous chairman of Tata Sons and the entire Tata Group. Tata Consultancy Services (TCS) is a branch of Tata Sons that provides global IT and Consultancy Services. Cyrus Mistry was on the board of Tata Sons as his own company, the Sapoorji Pallonji Group (SP Group) held 18.37% of their shares. He was later appointed as the Executive Chairman of Tata Sons by the Board of Directors in 2012, making Tata the Chairman Emeritus. He held this position until 2016, when he was removed from his post via a boardroom coup – i.e. a resolution was passed by the Board of Directors on account of loss of faith.

Later, he was also removed from his post of Director to Tata Industries Ltd., TCS, and Tata Teleservices Ltd. via separate resolutions. Following that, he filed a company petition with the National Company Law Tribunal (NCLT) through two companies of the SP Group under Sections 241, 242, and 244 of the Companies Act claiming mismanagement, oppression, and unfair prejudice. The conversion of Tata Sons from a public to a private company was also challenged. The NCLT ruled in favor of TATA, so Mistry preferred an appeal with the National Company Law Appellate Tribunal (NCLAT) which ruled in Mistry’s favor. However, the NCLAT judgment had many flaws. 

The Supreme Court stayed the NCLAT’s order as it had granted various reliefs that were not prayed for. The Supreme Court finally took the helm of the second Tata-Mistry case and laid down the law.

These two Landmark judgments not only dealt with corporate governance and operational management in lieu of the Companies Act of 2013 and 1956 but also tackled the oppression of minority stakeholders.

1. Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors.

The SP Group filed a complaint against the Tata Group in December 2016 alleging abuse of powers by the majority shareholder (holding 68% shares) – Tata Trusts, particularly Articles 121, 121A, 86, 104B, and 118 under their Articles of Association (AOA). The dismissal of Cyrus Mistry as the Executive Chairman was challenged as illegal, i.e. U/S 241, The Company Act, 2016- the dismissal was alleged to be “prejudicial or oppressive to the public interest, interests of the company or its members”.

There were other claims to the oppression of minority shareholders and mismanagement, given substance under Article 75 of their AOA, which empowers the Board of Tata Sons to urge any shareholder to sell his shares to current shareholders or outsiders chosen by the Board by the passing of a special resolution. It was alleged that Ratan Tata treated the company as his sole proprietorship, keeping the other directors as mere puppets.

There was another question pertaining to the Tata Trust’s mishandling of Tata Sons and other related firms.

Tata Sons in response stated that Cyrus was removed due to the loss of faith and confidence of the Board of Directors and that commercial mismanagement cannot be equated to oppression or mismanagement of minority shareholders.

NCLT’s Judgment: As for the claim U/S 241, the NCLT stated that dismissing an employee does not fall within the scope of Section 241 and that this argument is without substance because a corporation exists for the benefit of its members. It also felt that Mistry’s removal from the boards of directors of numerous Tata firms was due to him disclosing private and sensitive information. (Kulshreshtha, n.d.)

Apropos Article 75, the NCLT also ruled in favor of the Tatas stating that the clause had been in existence since before the petitioners became shareholders, therefore, they had knowingly consented to it. Furthermore, a new article or a changed article was not introduced which must be the case while proving minority prejudice.

The company’s conversion from a Public Ltd. to a Private Ltd. company was claimed to fall U/S 241 and 242, however, the NCLT rejected the claims. The NCLT also rejected the claims that Tata Group and the SP Group operated Tata Sons as a quasi-partnership. The NCLT also rejected the claim of bias against Tata Trusts as they would not self-sabotage, being the majority shareholders.

Thus, the NCLT rejected Mistry’s case finding no merit in his claims on the date of July 9, 2018. This led to Mistry preferring an appeal with the NCLAT.

NCLAT’s Judgment: The NCLAT turned the case around in favor of Cyrus Mistry, perhaps going too far and according to him such awards as were not prayed for by the appellant. In its judgment, the NCLAT found that the company records demonstrated Mistry as an excellent leader so his termination was unexpected. It observed that Tata was inclined to remove Mistry prior to the board meeting, the lack of trust in Mistry was not due to his unsatisfactory performance but a result of abuse of powers of the respondents.

The NCLAT held the removal to be illegal and passed an order to reinstate Mistry within four weeks, if an appeal is not preferred, as the Director of many businesses, and as the Executive Chairman of Tata Sons.

The NCLAT also directed Tata Sons not to use Article 75 of the AOA against the SP Group. It also upheld the appellant’s claim of the Board’s oppression and bias against minority shareholders, and the challenge to the conversion of the company to a Pvt. Ltd. It held that the conversion was made in haste in the pendency of litigation without following due procedure, therefore the Tata Sons was declared to go public again. The NCLAT ordered the Registrar of Companies to remedy the error. Along with that, it directed the Tata Group to consult with the SP Group for all future appointments to the posts of Director or Executive Chairman. This judgment was passed on December 18, 2019.

While the NCLAT passed a land sliding judgment for the protection of minority rights, it failed to view that legitimate expectation might be a source of oppression. It also failed to comply with the principles vis-à-vis quasi-partnerships as laid down by the Supreme Court. The NCLAT by reinstating Mistry as the Managing Director and Executive Chairman of these companies exceeded its jurisdiction as Mistry had never asked for such reinstatement. The Supreme Court found it to be a bad judgment and stayed the orders passed by the NCLAT, till it took up the case itself.

2. Tata Consultancy Services Limited V. Cyrus Investments Pvt. Ltd.

The Supreme Court took up the Tata-Mistry case after it had issued an injunction in January 2020 against the NCLAT’s order of 2019 due to the various flaws in the judgment which needed to be perused thoroughly. The verdict was postponed till December, 2020. The appeal was made by the Tata Group.

A three-judge bench comprising of the then Chief Justice of India S.A. Bobde, Justice V. Ramasubramanian and Justice A.S. Bopanna decided the case.

The Supreme Court’s Judgment: The Apex Court overturned the NCLAT judgment and upheld the NCLT’s judgment in favor of the Tatas, dismissing the allegations made by the SP Group. It ruled that there was no mismanagement or oppression/ persecution of minority shareholders. The Court observed that it was ironic for Mistry to claim oppression against minority shareholders when he had been appointed as Ratan Tata’s successor in 2012, having had only 18.37% shares in the company.

The Court observed that Mistry was first remove from the position of Executive Chairman but was to be retained as a Director, until he leaked confidential company information to the media and the Income Tax Department which led to the Board stripping him of all his posts in the Tata Group.

It also held that the Tribunal cannot intervene in the removal of a Company’s Chairman from his post in a petition filed under Section 241 unless such removal is oppressive, mismanaged, or done in a prejudicial manner against the interest of public, the company, or its members. 

It also said that Sections 241 and 242 do not specifically give the authority to reinstate. The Supreme Court thus overturned Mistry’s reinstatement as his term of five years had ended in 2017, two years before the NCLAT’s judgment.

A question was raised against the dismissal of Mistry in which the NCLAT had also observed that Mistry had shown stellar performance as a leader and had not done anything to solicit a lack of trust from the Board. The Just and Equitable clause was invoked by the respondents (SP Group) in furtherance of this question. As an answer, the Supreme Court stated that the principle derives from the Law of Partnership, while Tata Sons is not even a quasi-partnership so the case does not fall near this standard at all. 

The Supreme Court also observed that as the SP Group had knowingly subscribed to the AOA, they cannot challenge it. It also held that since Cyrus himself had sought Tata’s guidance and he was appointed as Chairman Emeritus, it cannot be contended that he was trying to make Tata Sons his sole proprietorship by being a shadow director, a puppet-master.

The challenge to the conversion of the company to a Pvt. Ltd. was rejected as the AOA already satisfied the parameters for a private company, it was merely given a certificate amended by the Registrar. Precedent rules that the Registrar’s records don’t govern a company’s status, but its AOA and statutory provisions do.

Thus, the Supreme Court entirely ruled in favor of the Tatas in its judgment dated March 26, 2021.

Conclusion 

These two cases discussed the rights of minority shareholders, corporate governance, mismanagement, conversion of a company from public limited to private limited, removal and reinstatement of the Chairman of a company, quasi-partnerships, and many other interpretations of the provisions given under the Companies Act, 2016 and the Companies Act, 1956. The Supreme Court delved deeper into the issue than the Company Tribunals. It referred to English Law as well as Indian Corporate Law to interpret the bare meaning of every single word in every single provision.

It ended up ruling for the Tatas and against Mistry as his removal was taken to be legal and justified due to the loss of confidence and faith in him by the Board Directors ensued by his own actions of breaching his fiduciary relationship with the company. It noted that the SP Group and the Tata Group were not in a quasi-partnership relation, and the SP Group does not have the right to proportionate representation as it is only given to small shareholders not minority shareholders.

Minority shareholders do not have a statutory right as to the same but a contractual right at the time of the agreement may arise. This is if the minority shareholders are vigilant enough to ensure so. Excess of jurisdiction by the NCLAT can also be seen in how they granted reliefs that were not prayed for by the appellant.

Works Cited

• Kulshreshtha, S., n.d. Tata v/s Mistry: Summarised Judement Of Hon’Ble Supreme Court. [Online]
  Available at: https://www.legalserviceindia.com/legal/article-6279-tata-v-s-mistry-summarised-judement-of-hon-ble-supreme-court.html
  [Accessed 20 November 2023].
• Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors, 2017 SCC OnLine NCLAT 261.
• Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd., 2017 SCC Online SC 272.