The NCLAT presumes that the decision was prejudicial, however, it does not provide a reasoned order on this aspect, explaining the presence of any such prejudice. Further, the NCLAT has not applied any existing jurisprudence explaining how and under what circumstances the decisions are prejudicial.
By Deepak Verma
On December 18, 2019, the National Company Law Appellate Tribunal (NCLAT) overturned not only the order of the NCLT in the matter but, through a broad exercise of powers under Section 242 of the Companies Act, 2013, declared the order passed by the RoC, MCA for conversion of Tata Sons from a public limited company to a private limited company as illegal.
A careful perusal of the order leads to the conclusion that, while delivering the judgment, the NCLAT failed to strike a ‘just and proper’ balance between the rights of the minority and the majority shareholders, which is the sine qua non of efficient corporate decision making. It has also missed an opportunity to address law relating to oppression vis-a-vis unfair prejudice, a concept under the Companies Act, 2013.
The removal of Cyrus Mistry, merely four years after his appointment in December 2012, was followed by one of the biggest showdowns in the corporate world in recent times. Minority shareholders of Tata Sons Limited, i.e., Cyrus Investments Private Limited and Sterling Investments Corporation Private Limited (jointly holding 18%), filed a Company Petition before the NCLT claiming the removal to be illegal, and alleged oppression and mismanagement in the conduct of affairs of Tata Sons by the Tata Trusts. The NCLT, Mumbai bench vide its order dated July 12, 2018, dismissed the Company Petition, denied all reliefs, and rejected all allegations. The grounds for such a dismissal appeared to be well within the set fundamentals of Indian corporate laws, whether it is the supremacy of Articles of Association or respecting corporate democracy.
In what was expected by this stage, an appeal was filed before NCLAT challenging the order passed by the NCLT. The NCLAT, however, passed an order in favour of Mistry. In its 172-page judgment, while reversing the order passed by NCLT, it made certain observations which are worthy of academic scrutiny. The ruling is bound to have far reaching consequences for corporate law and corporate governance.
Acts undertaken which were “prejudicial” and” oppressive”: In one of the most contentious issues, the NCLAT observed that Article 121 of the AoA of Tata Sons was “prejudicial” and” oppressive” to the interest of minority shareholders. It provides that the majority decision of the board of directors should necessarily include an affirmative vote of the nominated directors of Tata Trusts. The NCLAT observed that Article 121 dilutes the rights of the minority shareholders to have a say, even if the decision taken is not in the best interest of the company and is harmful to the minority shareholders.
Such an interpretation undermines the sanctity of the fundamental principles of corporate law—the rule of the AoA for governance of a company. This position has been tested and upheld in a slew of judgments. The present order by the NCLAT seeks to casually overturns it, thus opening doors to ambiguity and uncertainty.
In addition to the above, the NCLAT, has quite interestingly, classified a press statement issued by Tata Sons Limited post the removal of Mistry as an “oppressive act”. NCLAT concluded that the press statement was detrimental in nature. Change of an Executive Chairman of a holding company of over 100 entities, many of which by NCLAT’s own observation are listed companies, surely requires clarity in its decision making. In what should have been viewed as a forthcoming act of transparency to avoid speculation has instead been classified as an act of oppression, merely because it sought to explain the rationale. This move may, in my view, discourage corporate houses from making any public statements unless compelled by law, which in turn may lead to speculation.
Use of Article 75 of AoA of Tata Sons: NCLAT has stated that Article 75 of the AoA is “prejudicial” and” oppressive” as it grants Tata Sons the right to transfer the ‘ordinary shares’ of any shareholder, including those of the minority shareholders, by passing a special resolution in the presence of nominated directors of Tata Trusts.
Notably, Article 75 was part of the Articles for several years and it appears that no objection was raised, until the initiation of the proceedings before the NCLT. Therefore, the NCLAT has erred in concluding that the rights under Article 75 are prejudicial and oppressive, since the articles of the company are agreed between the shareholders. Further, this also goes against the fundamental principles of contract law wherein a contract entered into with the consent of the shareholders (in the form of AoA) is upheld and given effect to by the courts instead of terming it unfair.
Conversion from Public to Private: The NCLAT, further held that the Company did not follow the prescribed procedure under Section 14 of the Companies Act 2013 and relied on a purportedly outdated 2013 notification. Additionally, the members of ‘Tata Trust’ who have an affirmative voting right over the majority decision of the board of directors, acted in a manner prejudicial to the minority members and the company itself.
However, there seems to be a lacuna in the reasoning here. The NCLAT presumes that the decision was prejudicial, however, it does not provide a reasoned order on this aspect, explaining the presence of any such prejudice. Further, the NCLAT has not applied any existing jurisprudence explaining how and under what circumstances the decisions are prejudicial.
The conversion decision is not prejudicial since the outcome of conversion process would have been the same, i.e., Tata Sons would become a private company, irrespective of the procedure adopted. Further, the substantive rights and interest of the minority members and the company are dependent on the outcome and not the procedure adopted to reach such an outcome. Therefore, assuming that indeed the correct procedure was not followed, considering that the NCLAT failed to explain as to how the procedure adopted did not evidently affect substantive rights of the minority member and the company, there is a risk that any procedural non-compliance maybe directly be classified as an act of oppression.
This decision of the Company must also be seen in light of the approval by the RoC for the conversion. The required documents were submitted to the RoC, which is the governing authority, and all the records were made accessible to the public. Further, the decision of the RoC was not challenged by any director or shareholder. Therefore, it is a fair consideration that had such a conversion been prejudicial to the minority members or the company itself, it would not have been permitted by the RoC, or challenged at the time of conversion by any of the directors. It is also clear that the Company was converted from a public company to a private company only after the approval of the RoC, and after giving due notice. Any procedural lacuna cannot be classified as an act of oppression especially when such a process bears the affirmation of the regulatory body. This contra observation of the NCLAT sets a dangerous precedent and a risk of virtually questioning every order passed by a the regulatory or the quasi-judicial authority. The decision of the NCLAT vis-a-vis the conversion of the company being declared ‘illegal’ is likely to not stand good in law.
Reinstatement of Mistry as an Executive Chairman: Interestingly, the NCLAT ordered Mistry’s reinstatement as an Executive Chairman even though the appellants had never sought this relief either before the tribunal or the appellate tribunal. The NCLAT appears to have clearly gone beyond the scope. In addition to the above, NCLAT declared in effect that the appointment of Chandrasekaran as the executive chairman illegal. Assuming that the NCLAT is correct in determining that the removal of Mistry was illegal, does not imply that the appointment of Chandrasekaran was illegal and void, unless it is established before the court that the procedure to be followed under the Companies Act for appointment of Chandrasekaran were not adhered. The NCLAT has failed to observe anywhere in its order that the appointment of Chandrasekaran was not in accordance with the procedure set out under the Companies Act and considering that due process was clearly followed, this order is not only without any basis but also fails to address as to what happens to all the acts carried out by Chandrasekaran.
It is hoped that the Hon’ble Supreme Court would put to bed the host of issues arising from the present order while also reinstating the fundamentals of corporate law. However, given the nature of the proceedings and the twists and surprises which keep springing in this saga, one can only wait and watch.
Former Judge, Supreme Court of India. Views are personal.