TATA CONSULTANCY SERVICES LIMITED V. CYRUS INVESTMENTS PVT. LTD. – CORPORATE BATTLE OF THE DECADE

BACKGROUND

Mistry, who was the sixth chairman of Tata Sons, was ousted from the position in October 2016. He had taken over as the chairman in 2012 after Ratan Tata announced his retirement. Tata Group patriarch Ratan Tata had personally asked Cyrus Mistry to resign as chairman of Tata Sons as the board had lost faith in him, but his refusal led to the removal via majority vote.

Cyrus Mistry is Tata Sons former chairman. Cyrus Investments Private limited and Sterling Investment Corporation Private Limited refer as a Complainant Companies belong to the Shapoorji Palloni Group in which Mistry holds a controlling interest. The Complainant Companies held about 2% of the issued share capital of Tata Sons.

On 24^th  October 2016, had personally asked Cyrus Mistry to resign as chairman of Tata Sons as the board had lost faith in him, but he refused. After that, the Board meeting held on the same day and decided to remove Mistry from Chairman post. Seven out of the nine directors of Tata Sons voted for his replacement after Farida Khambata abstained and Mistry was declared ineligible to vote as he was an interested director.

Stating that the decision was not taken suddenly or in haste, it said the removal "was the result of a chain of events that led to a growing trust and confidence deficit that had to be addressed without delay"

Mistry challenged his removal, accusing the board of mismanagement and of oppressing minority shareholders. however, India’s National Company Law Tribunal (NCLT) rejected his petition. After this Mistry challenged his removal in National Company Law Appellate Tribunal (NCLAT). In 2018, NCLAT order restored Mistry as the group's executive chairman. Tata Sons have challenged that NCLAT order in Supreme Court. Further Supreme Court stayed last month’s NCLAT order reinstating Cyrus Mistry as the executive chairman of Tata Sons and restoring his directorships in the holding company as well as three group companies, with a preliminary observation that the first impression of the order was “not good” and that the tribunal ‘could’ not have given consequential relief that had not been sought in the first place.

The NCLAT order, dated December 18, 2019, had also set aside Tata Son’s decision to convert itself into a private company. On March 26, 2021, a three-judge bench of the Supreme Court of India, led by Chief Justice of India (SA Bobde) determined there was no case of oppression and mismanagement against Cyrus Mistry at Tata Sons.

KEY TAKEAWAYS

The Board of Tata Sons (majority held by the Tata Sons) consists of 4 directors, 3 nominees of Tata Trusts and 1 finance director and Cyrus Mistry himself as Chairman. The Chairman would have had a casting vote in the event of the Board being equally divided decision. So, if the 3 directors and the finance director and the finance director of Tata Sons decide to remove him from the Board, the Chairman would require the support of only 1 independent director to move forward with a decision, if the other independent  director abstained from voting. So it becomes strategic to remove him from the Chairman before removing him as a director.

Tata Sons was an unlisted public company, the Chairman did not have the statutory right to represent his case or put up a defense strategy.

Cyrus Mistry filed a petition for oppression and mismanagement on the grounds of “prejudicial and oppressive” behaviour by the company but NCLT Mumbai Bench dismissed all the charges made against Tata Sons & also ruled that the Board of Tata Sons was competent enough to remove Cyrus Mistry from the post of Chairman of Tata Sons Limited.

Being aggrieved by the decision of NCLT, Cyrus Mistry appealed to the NCLT. The NCLAT overturned the previous decision and held that Cyrus Mistry removal as Chairman of Tata Sons was illegal and ordered to reinstate him as the Chairman. Following this Tata Sons filed an appeal in the Supreme Court.

In January 2020, Supreme Court granted relief to Tata Group and stayed the NCLAT ordered and upheld the decision of the Tata Sons Board in October 2016 to remove its then Chairman, Cyrus Mistry, from office and later the company’s board and in 2021 the Supreme Court ordered in favour of Tata Sons.  

ANALYSIS OF SUPREME COURT JUDGMENT

The Supreme Court judgment has 3 parts and the judicial grounds shall also be analyzed simultaneously:

1. Was the case was fit to be qualified as a situation of ‘ Oppression and Mismanagement’ under Section 241 of the Companies Act, 2013?
2. Was the procedure followed for removal of Cyrus Mistry as Chairman and Director from the Company are under the ambit of Companies Act, 2013 ?
3. Is Article 75  from AOA of Tata Sons Oppressive?

Under first issue, Supreme Court observed that “unless the removal of a person as a chairman of a company is oppressive or mismanaged or done in a prejudicial manner damaging the interests of the company, its members or the public at large, the NCLT cannot interfere with the removal of a person as a Chairman of a Company in a petition under Section 241 of the Companies Act, 2013.”

Section 241 specifically provides relief to the members of a corporation has the right to file an application with the Tribunal if the compay’s affairs have been or are being mishandled and conducted in an oppressive manner, harming the company, its members, or the public at large.

In second issue, Supreme Court determined that a person’s removal as Chairman of the Company is not a subject matter under section 241 unless it is demonstrated to be “oppressive or prejudicial”. The court ruled that Section 241 and 242 of the Companies Act, 2013 does not expressly grant reinstatement authority to NCLAT. As a result, the Supreme Court overturned the NCLAT decision to restore Cyrus Mistry as executive chairman of Tata Sons on December 18, 2019.

Section 242 states that if, on any application made by any member of a company or the central government under section 241, the Tribunal believes that the affairs of the company have been or being mismanaged and are conducted in an oppressive manner damaging the interests of the company, its members or the public at large, or the winding-up of the company would unfairly prejudice such member or members, the Tribunal may, intending to bring to an end the matters complained of, make an order to regulate the conduct of affairs of the company regarding the purchase of shares, restriction on the transfer of share, termination, setting aside or modification of any agreement, setting aside of any transfer or any order as the tribunal thinks fit.

And in Third issue, Supreme Court held that NCLAT neutralized Article 75 merely on the basis of likelihood of misuse. Section 241 provides for a remedy, only in respect of past and present conduct or continues conduct. NCLAT has stretched Section 241 to cover the likelihood of a future bad conduct, which is impermissible in law.

WHAT NEXT?

The verdict is likely to ease the process of separation of the two family groups, which had been together for more than 70 years. The Shapoorji Palloni group has in the Supreme Court already said that it was ready to exit from Tata Sons, provided it get an “early resolution” and a “fair, equitable solution”

Article Compiled by:-

Mayank Garg

+91 9582627751

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