TATA CONSULTANCY SERVICES LTD. V CYRUS INVESTMENTS PVT. LTD. AND ORS.

COURT: Supreme Court of India

APPEAL NO.: Civil Appeal No. 440441 of 2020

DATE OF JUDGEMENT: March 26, 2021

BENCH: Hon’ble Chief Justice, A.S. Bopanna, V. Ramasubramanian

PARTIES TO THE CASE: Appellant(s): TATA CONSULTANCY SERVICES LIMITED; Respondent(s): CYRUS INVESTMENTS PVT. LTD. AND ORS.

FACTS OF THE CASE

  • On December 29, 2012, Cyrus Mistry was redesignated as the Executive Chairman of Tata Sons.
  • On October 24, 2016, Ratan Tata replaced Cyrus Mistry for the position of Executive Chairman. This was done by passing a board resolution to that effect.
  • Following his removal as the executive chairman, Cyrus Mistry was also removed from the position of director of the Tata Group of Companies. This was done by passing a resolution by the requisite majority at the shareholder meeting.
  • Thereafter, a petition was filed before the National Company Law Tribunal (Hereinafter referred to as “the NCLT”) under sections 241, 242 read with section 244 of the Companies Act, 2013 (Hereinafter referred to as “The 2013 Act”) by the Shapoorji Pallonji Group (Hereinafter referred to as the “SP Group”), one of the leading conglomerate companies of India in which Cyrus Mistry has controlling interest.
  • On March 6, 2017, the petition filed by the SP Group was rejected by the NCLT as it failed to fulfill the eligibility criteria to file an application for oppression and mismanagement as provided under section 244 of the 2013 Act.
  • Following the rejection of the petition, the SP Group filed a waiver application as NCLT has the power to enable the members to apply under section 241 even if the eligibility criteria to file an application for oppression and mismanagement under section 244 are not satisfied.
  • On April 17, 2017, the waiver application was rejected by the NCLT.
  • Following the rejection of the waiver application, an appeal was made to the National Company Law Appellate Tribunal (Hereinafter referred to as “the NCLAT”) against the orders of the NCLT.
  • NCLAT decided in favor of the SP Group.
  • Thereafter, an appeal was filed by Tata Consultancy Services against the order of the NCLAT.

ISSUES RAISED

  • Whether the affairs of the company are being conducted in a manner prejudicial and oppressive to certain members of the company.
  • Whether the NCLAT has the power to reinstate Cyrus Mistry back to the positions he held in Tata Sons and other Tata companies.
  • ●       Whether the existence of Article 75 in the Articles of Association of the Tata Group, oppressive?
  • Whether approval under section 14 of the 2013 Act was required to effect the conversion of Tata Sons into a private company from a public company.

CONTENTIONS ON BEHALF OF TATA SONS AND TATA GROUP OF COMPANIES

  • ●       SP Group never demanded the reinstatement of Cyrus Mistry in their pleadings. Moreover, NCLAT does not have the power of reinstatement.
  • Cyrus Mistry was removed from the position of Executive Chairman and subsequently from the position of director of the Tata Group of companies due to a lack of confidence and trust issues. The mere removal of Mr. Mistry does not amount to an act of oppression.
  • Article 75 in the Articles of Association of the Tata Group was not illegal and there was no proof available to support its illegality.
  • NCLAT compromised the majority rule by directing the Tata Group to consult SP Group for all future appointments for the position of the Executive Chairman.
  • Commercial decisions by the Tata Group which did not yield the desired results cannot be taken to be acts of mismanagement. The same does not justify winding up on just and equitable ground. 

CONTENTIONS ON BEHALF OF SP GROUP AND CYRUS MISTRY

  • A 15 days’ notice was required to be served on Mr. Mistry prior to his removal but the same was not done. His removal from the position of director is a manifestation of lack of probity.
  • Articles of Association, in general, were used by Tata Sons to control the Board and to jeopardize their independent decision-making. Particularly, Article 75 was for the purpose of squeezing out the minority shareholders from the company.
  • Tata Sons, having accepted deposits from the public, was previously categorized as a public company. Thus, the sudden transformation of the company from public to private through a handwritten order from the Registrar of Companies (ROC) was highly unexpected.
  • The invocation of the “just and equitable” ground cannot be solely based on financial probity. It also encompasses the violation of legal and proprietary rights as a valid reason.
  • The NCLAT discovered a series of oppressive acts and the misuse of articles.

RATIONALE

First Issue

The Supreme Court emphasized that the mere removal of an individual from a position, such as the chairman or director, does not fall within the scope of Section 241 of the 2013 Act, as long as it does not adversely affect the interests of minority shareholders. If the actions taken are not detrimental or oppressive to the company, its members, or the public at large, the Tribunal lacks the authority to intervene in the removal of an individual through its powers under Section 242 of the Act, based on an application filed under Section 241 of the Act.

The court further added that Cyrus Mistry had deliberately caused trouble by leaking highly confidential information about the company to the media, solely for the purpose of generating sensation. Taking this into account, the Apex Court deemed Mr. Mistry’s removal from the positions of chairman and director of the Tata Group of Companies as justified.

In line with this issue, the court further noted that minority shareholders are not inherently entitled to a seat on the Board. In the case of private companies with minority shareholders, it is at the discretion of the company to include such a provision if they choose to do so. However, there is currently no legal obligation for them to do so.

Second Issue

The lawsuit was not filed with the intention of reinstating Cyrus as either the Executive Chairman or Director. However, the NCALT ordered his restoration. The NCLAT overlooked a crucial detail that Cyrus was initially appointed as the executive deputy chairman for a five-year term from April 1, 2012, to March 31, 2017, and later redesignated as the Executive Chairman through a resolution dated December 18, 2012. It is noteworthy that the NCLAT issued its judgment on December 18, 2019, almost seven years after Cyrus’s appointment. The Supreme Court failed to comprehend why the NCLAT granted relief that was not even sought, and the meaning behind reinstating Cyrus for the remaining period when five years had already passed since his appointment. Additionally, Cyrus was reinstated on the boards of Tata Group Companies, even though they were not involved in the proceedings. Consequently, it seems that the NCLAT granted the reinstatement relief without any basis in the pleadings. The NCLAT deemed Cyrus Mistry’s dismissal illegal but not nullity. Section 242 does not provide the Tribunal with the implied power to direct reinstatement. Therefore, the Court concluded that the reinstatement of Cyrus by the NCLAT was over the board.

Third Issue

As per Article 75 in the Articles of Association of the Tata Group, the company is granted the power to purchase shares from minority or small shareholders at a fair market value. The Court stated that Article 75 essentially serves as an exit option for shareholders, a provision that was challenged by the Mistry Group in front of the NCLT and NCLAT.

The Apex Court stated “We cannot adjudicate on fair compensation. We will leave it to the parties to take the Article 75 route or any other legally available route in this regard”

Fourth Issue

The Supreme Court deduced that under Section 465(3), Section 2(68) takes precedence over Section 3(1)(iii), thus affirming the legitimacy of the company’s decision to include “Private” in its name. Moreover, the Court concluded that Tata Sons had full authority to exercise control over its status.

DEFECTS OF LAW

Limited guidance on corporate governance matters and insufficient legal remedies:

During the pronouncement of its verdict, the Supreme Court noted that the provisions outlined in the 2013 Companies Act primarily focus on safeguarding the rights of small shareholders within listed companies. This requirement mandates that such companies must have at least one Director on their Boards who is elected by these small shareholders. However, it is crucial to acknowledge that the Mistry family and the SP Group, as Minority Shareholders, did not fall within the definition of small shareholders. As a result, there was no statutory provision that entitled them to “claim proportionate representation” on the Board of Tata Sons.

The aforementioned observation underscores the absence of a statutory provision that grants Minority Shareholders, including the Mistry family and the SP Group, the right to “claim proportionate representation” on the Board of Tata Sons. Although the 2013 Companies Act safeguards the rights of small shareholders by mandating board representation, it does not specifically address the concerns and rights of Minority Shareholders.

This omission in the law results in a gap in statutory provisions and potentially limited avenues for Minority Shareholders to assert their interests and seek representation on the Board of a company like Tata Sons. This case highlights the need for clear legal provisions that address the concerns and rights of Minority Shareholders in corporate governance matters. It emphasizes the importance of ensuring adequate representation and protection for all shareholders, regardless of their stake in the company.

INFERENCE

This landmark decision will leave a lasting impact and serve as a reference point in future cases involving oppression and mismanagement. It is evident that Mr. Cyrus Mistry’s downfall was primarily a result of his own actions. While his legal argument may have been weak, he presented a compelling and emotional case. However, it is widely recognized that judicial systems prioritize evidence and facts over emotions. The lack of substantial evidence became a significant hurdle for Mr. Mistry, ultimately leading to his straightforward dismissal.

It is important to acknowledge that portraying Mr. Mistry as a villain was an easy task, given the overwhelming public support for the Tata Company. The company is renowned for its philanthropic image rather than being perceived solely as an industrialist entity. Although it is not possible to draw definitive conclusions about the influence of public opinion on judicial procedures, it cannot be denied that even if Mr. Mistry had chosen to blow the whistle against the company publicly, he would have faced considerable challenges in tarnishing the long-standing reputation of the company. The profound respect and admiration the company enjoys among the masses would have made it extremely difficult to undermine its reputation in any significant manner.

NAME: SHRUTI

COLLEGE: XAVIER LAW SCHOOL