2021 (3) TMI 1181 - SC - Companies Law

Oppression and Mismanagement - Validity of proceedings of the sixth meeting of the Board of Directors of TATA Sons Limited held on 24.10.2016 in so far as it relates to the removal of Shri Cyrus Pallonji Mistry (CPM) - seeking restoration of position of CPM as the Executive Chairman of Tata Sons Limited and consequently as a Director of the Tata Companies for the rest of the tenure - seeking to declare as illegal the appointment of someone else in the place of CPM as Executive Chairman - seeking restraint on Shri Ratan N. Tata (RNT) and the nominees of Tata Trust from taking any decision in advance - seeking restraint on the Company, its Board of Directors and Shareholders from exercising the power under Article 75 of the Articles of Association against the minority members except in exceptional circumstances and in the interest of the Company - seeking to declare as illegal, the decision of the Registrar of Companies for changing the status of Tata Sons Limited from being a public company into a private company - sections 241 and 242, Companies Act, 2013. 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? - HELD THAT - For invoking the just and equitable standard, the underlying principle is that the Court should be satisfied either that the partners cannot carry on together or that one of them cannot certainly carry on with the other, The advantage that the English courts have is that irretrievable breakdown of relationship is recognised as a ground for separation both in a matrimonial relationship and in commercial relationship, while it is not so in India - In the case in hand there was never and there could never have been a relationship in the nature of quasi partnership between the Tata Group and S.P. Group. S.P. Group boarded the train half way through the journey of Tata Sons. Functional dead lock is not even pleaded nor proved. Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts. The majority shareholders are not individuals or corporate entities having deep pockets into which the dividends find their way if the Company does well and declares dividends. The dividends that the Trusts get are to find their way eventually to the fulfilment of charitable purposes. Therefore, NCLAT should have raised the most fundamental question whether it would be equitable to wind up the Company and thereby starve to death those charitable Trusts, especially on the basis of un charitable allegations of oppressive and prejudicial conduct. Therefore, the finding of NCLAT that the facts otherwise justify the winding up of the Company under the just and equitable clause, is completely flawed. 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 Sub section (2) of Section 242? - HELD THAT - Fundamentally, the object for the achievement of which, the Tribunal is entitled to pass an Order under Section 242(1) of the 2013 Act, remains just the same, as in the 1956 Act. The words the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit , found in the last limb of Sub section (2) of Section 397 of the 1956 Act, is also repeated in the last limb of Sub section (1) of Section 242 of the 2013 Act. These words also found a place in the last limb of Sub section (4) of Section 153C of the 1913 Act - Even Section 210 of the English Companies Act of 1948 used the very same words namely the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit . Though the English Law made a paradigm shift from oppressive conduct to unfairly prejudicial conduct under the Companies Act, 1985, the object to be kept in mind by the Court while passing an order under Section 461 of the English Companies Act, 1985 continued to be almost similar. Section 461(1) enabled the Court to make such order as it thinks fit for giving relief in respect of the matters complained of . Section 996 of the English Companies Act, 2006 retained the very same wordings. The purpose of an order both under the English Law and under the Indian Law, irrespective of whether the regime is one of oppressive conduct or unfairly prejudicial conduct or a mere prejudicial conduct , is to bring to an end the matters complained of by providing a solution. The object cannot be to provide a remedy worse than the disease. The object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders. It is relevant to point out that once upon a time, the provisions for relief against oppression and mismanagement were construed as weapons in the armoury of the shareholders, which when brandished in terrorem, were more potent than when actually used to strike with. While such a position is certainly not desirable, they cannot today be taken to the other extreme where the tail can wag the dog. The Tribunal should always keep in mind the purpose for which remedies are made available under these provisions, before granting relief or issuing directions. It is on the touchstone of the objective behind these provisions that the correctness of the four reliefs granted by the Tribunal should be tested. If so done, it will be clear that NCLAT could not have granted the reliefs of (i) reinstatement of CPM (ii) restriction on the right to invoke Article 75 (iii) restraining RNT and the Nominee Directors from taking decisions in advance and (iv) setting aside the conversion of Tata Sons into a private company. 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? - HELD THAT - It is no doubt true that the Tribunal has the power under Section 242 to set aside any amendment to the Articles that takes away recognised proprietary rights of shareholders. But this is on the premise that the bringing up of amendment itself was a conduct that was oppressive or prejudicial. It was contended that Article 75 was repugnant to Sections 235 and 236 of the Companies Act, 2013. We do not know how these provisions would apply. Section 235 deals with a scheme or contract involving transfer of shares in a Company called the transferor company, to another called the transferee company. Similarly, Section 236 deals with a case where an acquirer acquired or a person acting in concert with such acquirer becomes the registered holder of 90% of the equity share capital of the Company, by virtue of amalgamation, share exchange, conversion of securities etc. These provisions have no relevance to the case on hand - Even the contention revolving around Section 58(2) is wholly unsustainable, as Section 58(2) deals with securities or other interests of any member of a Public Company. Therefore, the order of NCLAT tinkering with the power available under Article 75 of the Articles of Association is wholly unsustainable. It is needless to point out that if the relief granted by NCLAT itself is contrary to law. 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? - HELD THAT - Whether the re conversion 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? - HELD THAT - The right to claim proportionate representation is not available for the S.P. group even contractually, in terms of the Articles of Association. Neither S.P. Group nor CPM can request the Tribunal to rewrite the contract, by seeking an amendment of the Articles of Association. The Articles of Association, as they exist today, are binding upon S.P. Group and CPM by virtue of Section 10(1) of the Act - Realising the fact that they have no right, statutorily or contractually or otherwise to demand proportionate representation on the Board, S.P. Group has come up with a very novel idea, namely the claim of existence of a quasi partnership between the Tata group and SP group. It is contended by S.P. Group that there existed a personal relationship between those in management of the S.P. Group and those in management of Tata Sons for over several decades and that the relationship was one of trust and mutual confidence. According to S.P. Group, they acted as the guardian of the Tata Group when the Tata Trust had no voting rights. Therefore, it is claimed that there is a right and a legitimate expectation to have a representation on the Board of Tata Sons. But we do not think that there ever existed a relationship in the nature of quasi partnership. As we have pointed out elsewhere, the company was incorporated in the year 1917 and S.P. Group became a shareholder in 1965, namely after 50 years. A berth on the Board of Tata Sons was granted only in the year 1980 to CPM s father. Therefore, there is nothing on record in the form of pleadings or proof, to show that there was either (i) a pre existing relationship before the incorporation of the company or (ii) a living in relationship picked up half way through, by entering into an agreement in the nature of a partnership - In fact, CPM s father was inducted into the Board in 1980, after 15 years of acquisition of shares and such induction was not in recognition of any statutory or contractual right. After his father s exit in 2004, CPM was inducted in 2006, neither in recognition of a contractual right nor in recognition of a hereditary or statutory right. Placing reliance upon section 163 of the Companies Act, 2013, it was contended that proportionate representation is statutorily recognised. But this argument is completely misconceived. Section 163 of the 2013 Act corresponds to section 265 of the 1956 Act. It enables a company to provide in their Articles of Association, for the appointment of not less than two-thirds of the total number of Directors in accordance with the principle of proportionate representation by means of a single transferable vote. First of all, proportionate representation by means of a single transferable vote, is not the same as representation on the Board for a group of minority shareholders, in proportion to the percentage of shareholding they have. It is a system where the voters exercise their franchise by ranking several candidates of their choice, with first preference, second preference etc. Moreover, it is only an enabling provision and it is upto the company to make a provision for the same in their Articles, if they so choose. There is no statutory compulsion to incorporate such a provision. The fourth question of law is also to be answered in favour of the Tata group and the claim in the cross appeal relating to affirmative voting rights and proportionate representation are liable to be rejected. Whether the re conversion 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 43 A(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? - HELD THAT - Once the company had become a deemed public company with effect from 1 2 1975, the privileges of a private company stood withdrawn and the company was entitled in law to allow renunciation of shares under rights issue. In any case, the validity of what was done in 1995 was not in question. That they accepted deposits from public till September 2002, is the reason why they were not reconverted as a private company at that time. Once a new definition of the expression private company came into force with effect from 12 09 2013 under section 2(68) of the 2013 Act, the only test to be applied is to find out if the company fits into the scheme under the new Act or not. We need not go to the circulars issued by the department or the RBI when statutory provisions show the path with clarity. The description of the company in the forms filed under Rule 10, reflected the true position that prevailed then and they would not act as estoppel when the company was entitled to take advantage of the law. That the ability of the company to raise funds has now gone and that the company will have to repay the investments made by insurance companies, are all matters which the shareholders and the Directors are to take care. The question before the court is whether the reconversion is in accordance with law or not. The question is not whether it is good for the company or not. The real reason why SP group and CPM are aggrieved by the conversion is, that most of their arguments are traceable to provisions which apply only to public and listed public companies. If re conversion goes, they may perhaps stand on a better footing. But that would tantamount to putting the cart before the horse. One may be entitled to a collateral benefit arising out of a substantial argument. But one cannot seek to succeed on a collateral issue so as to make the substantial argument sustainable - the question is answered in favour of Tata Sons and as a consequence, all the observations made against the appellants and the Registrar of companies of the impugned judgment are set aside. Appeal allowed.

Summary

Issues Involved:
1. Legality of the removal of CPM as Executive Chairman of Tata Sons.
2. Validity of the affirmative voting rights of the Directors nominated by the Tata Trusts.
3. Conversion of Tata Sons from a public company to a private company.
4. Proportional representation of the SP Group on the Board of Directors of Tata Sons.
5. Validity of Article 75 of the Articles of Association of Tata Sons.

Detailed Analysis:

1. Legality of the Removal of CPM as Executive Chairman:
The removal of CPM from the post of Executive Chairman of Tata Sons was the primary trigger for the litigation. CPM was removed from the Executive Chairmanship by a resolution of the Board dated 24.10.2016. Following his removal, CPM wrote a confidential mail on 25.10.2016, which was leaked to the media. NCLT recorded that CPM could not satisfactorily explain the leakage, and thus the leakage was attributed to him. Subsequently, CPM was removed from the Directorship of various Tata companies, leading him to resign from other companies. The complainant companies filed a petition under Sections 241 and 242 of the Companies Act, 2013, alleging oppression and mismanagement.

NCLT found no merit in the allegations of oppression and mismanagement, holding that the removal of CPM was due to a loss of confidence and trust. NCLAT, however, focused on the removal of CPM and granted relief by directing his reinstatement as Executive Chairman and Director of Tata Sons and other Tata companies. The Supreme Court held that the removal of CPM, even if wrongful, did not constitute oppression or mismanagement and that the relief of reinstatement was not justified, especially after the expiry of his term.

2. Validity of the Affirmative Voting Rights of the Directors Nominated by the Tata Trusts:
The affirmative voting rights of the Directors nominated by the Tata Trusts were challenged by the SP Group. Article 121 of the Articles of Association required the affirmative vote of the majority of the Directors nominated by the Trusts for any decision. The SP Group argued that this undermined the independence of the Board and violated corporate governance principles.

NCLT found no merit in the challenge to the affirmative voting rights, noting that the Trusts could have appointed the majority of the Directors but chose only to have 1/3rd representation with affirmative voting rights. NCLAT, however, restrained RNT and the nominee Directors from taking any decision in advance. The Supreme Court held that the affirmative voting rights were valid and that the challenge was unfounded, as the Directors nominated by the Trusts had fiduciary duties towards both the Trusts and the company.

3. Conversion of Tata Sons from a Public Company to a Private Company:
Tata Sons was originally incorporated as a private company but became a deemed public company under Section 43A of the Companies Act, 1956. With the advent of the Companies Act, 2013, Tata Sons sought to reconvert to a private company. The Registrar of Companies issued an amended Certificate of Incorporation on 06.08.2018, recognizing Tata Sons as a private company.

NCLAT declared the conversion as illegal, stating that Tata Sons should have followed the procedure under Section 14 of the Companies Act, 2013. The Supreme Court held that Tata Sons satisfied the criteria of a private company under Section 2(68) of the 2013 Act and that the procedure followed for reconversion was valid. The observations made by NCLAT against Tata Sons and the Registrar of Companies were set aside.

4. Proportional Representation of the SP Group on the Board of Directors of Tata Sons:
The SP Group sought proportional representation on the Board of Tata Sons, claiming a quasi-partnership and mutual trust between the Tata Group and SP Group. They argued that the relationship warranted proportional representation on the Board.

NCLT found no merit in the claim for proportional representation, noting that the Articles of Association did not provide for such representation and that there was no statutory or contractual right to it. The Supreme Court held that the claim for proportional representation was neither statutorily nor contractually sustainable and that the SP Group's argument of a quasi-partnership was unfounded.

5. Validity of Article 75 of the Articles of Association of Tata Sons:
Article 75 of the Articles of Association allowed Tata Sons to demand any member to transfer their shares. The SP Group challenged the validity of Article 75, arguing that it was a tool for oppression.

NCLT found no instance of misuse of Article 75 and held that it provided an exit option for unwilling partners. NCLAT, however, restrained Tata Sons from exercising the power under Article 75 except in exceptional circumstances. The Supreme Court held that the challenge to Article 75 was unfounded, as it was a contractual provision agreed upon by the shareholders. The restraint imposed by NCLAT was set aside.

Conclusion:
The Supreme Court allowed the appeals filed by the Tata Group, set aside the order of NCLAT, and dismissed the company petition filed by the SP Group. The court held that the removal of CPM did not constitute oppression or mismanagement, the affirmative voting rights were valid, the conversion of Tata Sons to a private company was lawful, the claim for proportional representation was unsustainable, and Article 75 was valid. The application for separation of ownership interests filed by the SP Group was dismissed.