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Supreme Court sets aside the NCLAT order in the case of TCS vs. Cyrus Investment

Updated: Mar 27

News Article Covered By Komal Kaushal

The Apex Court on 26th March, 2020 winded up the 5 year long legal battle by answering all the legal questions in favour of Tata Sons. A three judge bench of the Supreme Court constituting Chief Justice of India, SA Bobde, Justice AS Bopanna, and Justice V Ramasubramanian set aside the 2019 order of the National Company Law Appellate Tribunal(NCLAT), mandating to reinstate Cyrus Mistry as the Chairperson of the Tata Sons Limited.


The Court was of the opinion that all legal questions were required to be answered in favour of the appellants, Tata Sons and the appeal filed by Tata Sons should be allowed, whereas the appeal filed by Shapoorji Pallonji group stands dismissed.


The SP group pleaded for an alternative remedy requiring Tata Sons to cause the separation of ownership interest of SP Group in Tata Sons by extinguishing the shares held by SP Group in lieu of fair compensation. In view of this the Court said that it cannot adjudicate on fair compensation and the parties shall take the route of Article 75 or any other available legal route.


BACKGROUND OF LITIGATION


Two companies; Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, forming part of the SP Group acquired preference and equity shares of the paid up share capital of Tata Sons. With years passing by the shareholding of SP Group in Tata sons grew to 18.37% of the total paid-up share capital. The majority shares were held by two Tata Trusts forming 65.89%.


The Board of Directors of Tata Sons by a resolution in 2012 appointed Cyrus Mistry as the Executive Deputy Chairman for a tenure of five years. The shareholders in the general meeting gave their approval following this resolution. In 2016 the board of directors removed Cyrus Mistry as the Executive Deputy Chairman, it is to be noted that Cyrus Mistry was only removed from the post and he was left with the choice of continuing or not as the Non- Executive Director. Cyrus Mistry was removed from directorship from a few companies( Tata Industries Limited, Tata Consultancy Services Limited, and Tata Teleservices Limited). Following these events Cyrus resigned from the position of Director in the remaining companies.


Thereafter, two of the Shapooji Pallonji firms namely; Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, in which Cyrus holds controlling interests, filed a company petition under sections 241 and 242 read with section 244 of the Companies Act, 2013 over Mistry’s removal and on the grounds of “oppression” of minority shareholders, unfair “prejudice” and “mismanagement”. The NCLT dismissed the petition in 2018 against which appeal was filed by the SP firms before the National Company Law Appellate Tribunal. The NCLAT overturned the NCLT order, following which an appeal was filed by Tata Sons before the Supreme Court. The SP firms filed cross appeals contending that the NCLAT failed to grant crucial reliefs to Cyrus Mistry.


CONTENTIONS LAID DOWN BY TATA SONS


Learned Senior Counsel Shri Harish Salve for Tata Sons contended,

  1. That NCLAT lost track of the question in hand. It’s entire focus was on reinstatement of Cyrus Mistry as the Executive Chairman of Tata Sons, whereas the complainant and CPM in their case didn’t plead for reinstatement;

  2. That with the entire focus on reinstatement NCLAT lost track of the law that removal cannot be termed as oppression or mismanagement;

  3. That NCLAT went completely overboard and out of the way in reinstating CPM as the Executive Chairman of Tata Sons. In furtherance to this NCLAT also reinstated CPM as the director of the operating companies. The operating companies didn’t form the subject matter of the case in hand, the case in hand only involved the management of affairs of Tata Sons;

  4. That NCLAT failed to interpret the “just and equitable clause” which can be enforced in only two situations:

a. Wherever there was a functional deadlock

b. Wherever there was a corporate quasi partnership in which there was a breakdown of trust and confidence.

SP Group and Tata Group never had a pre-existing partnership. SP Group became shareholders after 48 years of incorporation of Tata Sons and they didn’t even hold a directorial position until 1980. Hence, SP Group never had a right of management nor a right which could result from a pre-existing relationship of trust and confidence, before the incorporation of the company;

5. Tata Sons was not a two group company with one of them being a majority and the other, a minority;

6. That a member of Tata Sons cannot make an allegation of mismanagement based on the functioning of other downstream companies. Henceforth, a member of Tata Sons cannot complain about other Tata companies. In accordance to section 241 a complaint is to be registered against the “company” which in this given case is Tata Sons, not downstream companies;

7. That NCLAT doesn’t hold absolute powers to appoint Directors under Section 242(2)(k).


CONTENTIONS LAID DOWN BY SP GROUP AND CPM


Learned Senior Counsel CA Sundaram and Shyam Divan represented SP Group, whereas Senior Advocate Janak Dwarkadas represented CPM. Both the parties contended that,

  1. The relationship between Tata Sons and SP Group is of mutual trust. Both the companies had a long standing relationship which went back to 70 years. Due to statutory restrictions Tata Trusts couldn’t vote on its own shares between the timeline of 1964-2000, since the statutory framework restricted the role of private trust. A public trustee appointed by the Central Government could only vote on its shares. During this period because of the relationship between SP and Tata, SP became a reliable partner which could vote and for the same reason Tata sold their shares to SP Group;

  2. Tata sons is only an investment company. The company invests in group companies and the board takes a decision on the direction in which these companies will operate. Tata Sons income is directly proportional to the income of downstream companies, and since Tata Sons is the majority shareholder in these companies, functioning of group of companies is important;

  3. Solely on profit making it cannot decided whether or not oppression or mismanagement is present. The whole conduct of conversion of company to a private limited company showed that minority is side lined;

  4. Tata Sons should be board run, they cannot use the Articles of Association to claim that they have absolute rights over the management affairs of the company. Tata Trust- the largest shareholder of Tata Sons and a public charitable trust cannot legally run such companies;

  5. Article 121A of the Articles of Association mandating pre-consultation with Tata Trusts nominees, was a medium used by Tata Trusts to undermine the board. As stated by NCLAT that Tata Trusts cannot use Article 121A to demand pre-consultation, it is contended that Tata Sons should be a board managed company;

  6. Director’s role is fiduciary.

  7. The removal of CPM was contrary to the provisions of Article 118, which required the setting up of a Selection Committee both for appointment as well as removal.

QUESTIONS OF LAW FORMULATED BY THE SUPREME COURT

  1. Whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of NCLT on facts were not individually and specifically overturned by the Appellate Tribunal?

  2. Whether the reliefs granted and the directions issued by the Appellate Tribunal, including the reinstatement of CPM into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Sub­section (2) of Section 242?

  3. Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the company from exercising such a right without setting aside the Article?

  4. Whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee Directors virtually nullifying the effect of these Articles?

  5. Whether the re­conversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT?

  6. All these questions were answered in favour of Tata Sons.


CONCLUSION


The three judge bench concludes its judgment with dismissing the appeal filed by the SP Group and allowing the appeal filed by the Tata Group. All questions of law framed in this present case are liable to be answered in favour of the appellants, and upheld its decision to sack CPM as the Executive Director.


The judgment marks the end of one of the ugliest boardroom rooms in India. The verdict is likely to ease the separation of the two giant family groups, which had a long lasting 70 years relationship. With 18.37% stake, SP group is the biggest minority shareholder in Tata Sons apart from the majority stakeholder Tata Trusts holding 65.89% stake. SP group has already expressed its intention to exit from Tata Sons in front of the supreme court, provided the group gets an early resolution and a fair solution. However, the two giant family groups already differ on the valuation of the 18.37% stake of the SP group. Tata Sons has valued the Mistry family’s share in between Rs 70000-80000 crores whereas, the Mistry family claims its shares to be around Rs 1.75 lakh crores. It would be interesting to see what lies ahead for both of these companies.


Judgement
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