Author: Anam Irfan Patel, ILS Law College
The corporate dispute between Tata Sons and Cyrus Mistry has become a landmark case in Indian legal and corporate history. The conflict, which began in 2016, not only involved high-stakes legal battles but also raised significant questions about corporate governance, shareholder rights, and the role of the judiciary in overseeing corporate affairs. This article delves into the complexities of the case, exploring its background, legal issues, key court rulings, and broader implications for corporate governance.
Parties-
Tata Trusts, which includes prominent entities such as the Sir Dorabji Tata Trust (established in 1932), the Sir Ratan Tata Trust (founded in 1919), and various other affiliated trusts like the Tata Education and Development Trust (2008), Sarvajanik Seva Trust (1975), Lady Tata Memorial Trust (1932), and the JN Endowment for the Higher Education of Indians Trust (1892), collectively hold 66% of Tata Sons’ equity share capital. These trusts are dedicated to philanthropic efforts, focusing on areas such as education, economic support, health, well-being, and the promotion of art and culture. Subsidiaries of Tata Sons operate independently, each guided by its own Board of Directors.
Mr. Cyrus Pallonji Mistry, son of former Non-Executive Director Shri Pallonji S. Mistry, was appointed Chairman of Tata Sons, succeeding Mr. Ratan Tata. However, Mr. Mistry’s tenure was cut short when he was removed from the position on October 24, 2016, due to a loss of confidence from the Board of Directors.
Facts of the case
Tata Trusts, Tata Group companies, and Tata family members collectively held over 81% of Tata Sons Limited’s total shareholding, while the SP Group owned more than 18% of the company’s equity share capital.
Cyrus Mistry was first appointed as Executive Deputy Chairman of Tata Sons Limited on March 16, 2012, He had succeeded Ratan Tata, with substantial management powers, for a term of five years, from April 1, 2012, to March 31, 2017.
On October 24, 2016, Ratan Tata asked Mistry to step down as chairman, but Mistry declined. The board voted to remove him, with seven out of nine directors in favor of his replacement. The board stated that the decision was not abrupt but a necessary response to a growing trust deficit that needed to be addressed promptly.
Mistry challenged his removal, alleging board mismanagement and oppression of minority shareholders.
Right to apply for oppression & mismanagement as per the provision of Companies Act,2013
Section 244 of the Companies Act, 2013 provides specific rights to members of a company to file an application with the National Company Law Tribunal (NCLT) under Section 241 of the Act. This provision is designed for situations where members believe that the company’s business operations are being conducted in a manner that is oppressive or prejudicial to the interests of its members, the company itself, or the general public.
The ability to file such an application depends on whether the company has share capital or not:
For companies with share capital:
Members must meet one of the following criteria:
At least 100 members, or
Not less than one-tenth of the total number of members, whichever is fewer,
Alternatively, any member or group of members holding at least one-tenth of the company’s issued share capital (provided all calls and other amounts due on their shares have been paid).
For companies without share capital:
The application can be filed by at least one-fifth of the total number of members.
Proviso to Section 244 allows the NCLT to waive these requirements in whole or in part upon request. This provision ensures that even if members do not meet the specified thresholds, they can still seek redressal for issues related to oppression and mismanagement. This flexibility aims to protect minority shareholders and provide a means for addressing grievances against the management, regardless of whether they can meet the strict quantitative criteria
Contentions of the petitioner (Cyrus Investments Private Limited)
Mr. Mistry contends that certain Articles within Tata Sons’ Articles of Association, particularly Article 75, are inherently oppressive. These Articles, he argues, grant excessive control to the Tata Trusts (Sir Ratan Tata Trust and Sir Dorabji Tata Trust), enabling them to exert undue influence over the company’s affairs and decision-making processes.
Mr. Ratan Tata and Mr. N. A. Soonawala were involved excessively in every decision made by the company.
the Nano Car Project, which has been a financial drain, incurring losses exceeding ₹1,000 crores. Mr. Mistry argues that the project, continued at Mr. Tata’s insistence, should have been terminated due to its poor performance and financial impact.
The removal of Mrs. Cyrus Mistry from her role as Chairman was unlawful and breached principles of governance, fairness, transparency, and integrity.
The acquisition of Corus by Tata Steel, valued at over USD 12 billion, is also under scrutiny. Mr. Mistry alleges that the acquisition was overpriced by 33%, raising concerns about financial mismanagement
The petitioners assert that Transactions with the Siva and Sterling Group of Companies by the Tata Group were questionable & Mr. Tata’s close affiliations with the Siva and Sterling group of companies led to confidential board decisions being exposed publicly, further damaging Tata Sons’ reputation
They also accuse Mr. Venkataramanan, a former managing trustee of Tata Trusts, of influencing the diversion of funds from Air Asia, and claim that a forensic investigation revealed fraudulent transactions amounting to ₹22 crores..
Contentions of the respondent (Tata Sons)
Tata Sons highlighted the significant achievements during Ratan Tata’s tenure as Chairman, emphasizing that his leadership, which spanned 21 years, substantially increased the company’s valuation. The company noted that while Mr. Tata was no longer a board member, he was to continue as a special guest at board meetings, with his participation based on discretion.
The company also addressed criticisms related to the Articles of Association, asserting that the changes to these articles had been approved by shareholders, including Mr. Mistry himself. The amendments, they claimed, were aimed at enhancing the flexibility and efficiency of board operations, and Mr. Mistry had previously supported these changes.
Tata Sons defended the continuation of the Nano Project and other strategic decisions, arguing that Mr. Mistry’s handling of these matters lacked vision and led to internal disruptions. They criticized his management of capital distribution and strategic planning, alleging that his actions deviated from traditional practices and hindered the company’s performance Acquisitions and Investments:
Tata Sons defended the acquisition of Corus as a strategic move that positioned Tata Steel as a global leader in steel production.
Regarding the alleged fraudulent transactions involving Air Asia, Tata Sons emphasized that Mr. Mistry was actively involved in key decisions and that any fraudulent activity was attributed to the former CEO of Air Asia, not the directors of Tata Sons. They stressed that Mr. Mistry’s tenure saw significant investment in Air Asia, which was part of his strategic initiatives
The company categorically denied all allegations of oppression and mismanagement. They argued that Mr. Mistry’s removal was conducted in accordance with legal provisions under the Companies Act, 2013, and was a legitimate exercise of board authority. The company asserted that the petition was an attempt to malign Tata Sons’ reputation and that the allegations of unfair practices and governance failures were unfounded.
The National Company Law Tribunal (NCLT), Mumbai Bench, initially dismissed the petition, deeming it non-maintainable. The NCLT cited a lack of established cause of action in the allegations presented by the petitioners. It was also noted that the petitioners did not meet the requisite 10% ownership threshold to file a case of oppression and mismanagement under the Companies Act, 2013.
In its detailed judgment, the NCLT addressed several key issues:
Air Asia Allegations: The bench criticized the allegations concerning Air Asia, finding them to be made with impunity and in violation of legal principles.
Nano Project Claims: The tribunal dismissed the allegations related to the Nano Car Project, noting that Tata Motors, a crucial party in this issue, was not included in the case.
Corus Acquisition and Other Transactions: The NCLT also rejected the claims regarding the acquisition of Corus and transactions with the Shiva and Sterling Groups, stating that these allegations lacked merit.
Oppression and Mismanagement: The NCLT found no substantial evidence supporting claims of oppression of minority shareholders or operational mismanagement of Tata Sons.
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Appealing to the NCLAT, Mistry and the affected companies secured a reversal of the NCLT’s decision on December 18, 2019.The National Company Law Appellate Tribunal (NCLAT) overturned the NCLT’s dismissal of Cyrus Mistry’s petition, ruling in his favor. The NCLAT reinstated Mistry as Executive Chairman of Tata Sons for the remainder of his term and deemed the appointment of Natarajan Chandrasekaran as Executive Chairman illegal, though it suspended this decision for four weeks to allow Tata Sons an opportunity to appeal .The NCLAT’s decision underscored that there was no documented evidence of dissatisfaction with Mistry’s performance from the Tata Sons board or Tata Trusts. Instead, performance records showed that Tata Sons had been thriving under Mistry’s leadership, as confirmed by the Nomination and Remuneration Committee shortly before his removal. Furthermore, the tribunal noted that the reasons for Mistry’s removal were not recorded in the minutes of an October 24 board meeting, where directors who had recently appraised Mistry’s performance favorably participated in the decision to remove him.
In January 2020, Tata Sons appealed to the Supreme Court to overturn the NCLAT’s decision reinstating Mr. Mistry as Chairman of Tata Sons. Tata Sons argued that the NCLAT’s ruling compromised democratic principles within corporate governance and infringed upon the rights of the Board of Directors.
The Supreme Court’s judgment on the Tata Sons case addressed three key issues, with detailed judicial analysis:
1. Fit for ‘Oppression and Mismanagement’ Under Section 241:
The Court observed that the National Company Law Tribunal (NCLT) cannot intervene in the removal of a company chairman under Section 241 unless it is shown that such removal is oppressive, mismanaged, or prejudicial to the company’s interests, its members, or the public. Section 241 provides relief only if a company’s affairs are being conducted in a manner that harms the company or its stakeholders.
2. Procedure for Removal of Cyrus Mistry:
The Court ruled that the removal of a chairman is not a matter under Section 241 unless it is demonstrably oppressive or prejudicial. The Supreme Court clarified that Section 241 and 242 of the Companies Act, 2013 do not grant NCLAT the authority to reinstate a removed chairman. Therefore, the Court overturned NCLAT’s decision to restore Cyrus Mistry as Executive Chairman of Tata Sons.
3. Validity of Article 75 from AOA:
The Supreme Court held that NCLAT had invalidated Article 75 of Tata Sons’ Articles of Association (AOA) based merely on its potential for misuse, rather than actual oppressive conduct. Section 241 addresses past and present conduct, not the potential for future misuse. The Court found that NCLAT’s extension of Section 241 to hypothetical future conduct was legally impermissible.
Conclusion
The five-year-long legal battle between Cyrus Mistry and Ratan Tata has clarified the interpretation and scope of Section 241 of the Companies Act, 2013. The Supreme Court’s judgment defined the boundaries of Section 241, establishing that the Company Law Tribunal cannot intervene in the removal of a Chairman unless it is proven to be “oppressive or prejudicial.” The case revolved around Mistry’s removal as Executive Chairman of Tata Sons Ltd, which was on October 24, 2016. The Court concluded that this decision was based on the loss of confidence by the majority shareholders and the Board of Directors, rather than any personal animosity toward Mistry from Ratan Tata.This landmark ruling has not only shaped the understanding of corporate governance but also underscored the limits of judicial interference in management decisions, reinforcing the principle that such actions must meet the legal threshold of oppression or prejudice to warrant Tribunal intervention.
Frequently Asked Questions
1. What was the core issue in the Cyrus Mistry vs. Tata Sons case?
The main issue was Cyrus Mistry’s removal as Executive Chairman of Tata Sons Limited. Mistry challenged his ousting under Section 241 of the Companies Act, 2013, alleging that it was done in an oppressive and prejudicial manner.
2. What did Section 241 of the Companies Act, 2013 address?
Section 241 provides a remedy for shareholders if a company’s affairs are conducted in a manner that is oppressive or prejudicial to its members or the public. It allows for Tribunal intervention if the conduct harms the company’s interests.
3. How did the Supreme Court’s ruling affect the case?
The Supreme Court overturned the NCLAT’s decision to reinstate Mistry, clarifying that Section 241 does not grant the Tribunal the authority to reinstate a removed chairman unless the removal is demonstrably oppressive or prejudicial.
