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Law Of Oppression And Mismanagement Vis-A-Vis Tata-Mistry Dispute (Part I)

That though the will of the majority is in all cases to prevail, that will to rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.

-Thomas Jefferson

On 26th March 2021, the Supreme Court of India (“SC”)1 settled the dust around the legal battle fought between country’s two leading conglomerates Tata Sons (Private) Limited (“Tata Sons”) and Shapoorji Pallonji Group (“SP Group”). The whole battle commenced on 24th October 2016 when a resolution was passed by the board of directors of Tata Sons replacing the then executive chairman of Tata Sons, Mr. Cyrus Mistry with Mr. Ratan Tata as the interim non-executive chairman. Later, in a pattern like a domino effect, Mr. Mistry was also stripped off from directorship of Tata Industries Limited (“TIL”), Tata Consultancy Services (“TCS”) and Tata Teleservices Limited (“TTL”). Thereafter, Mr. Mistry himself resigned from the directorship of a few other companies which fall under TATA group of companies namely Indian Hotels Company Limited, Tata Steel Limited, Tata Motors Limited, Tata Chemical Limited etc.

By way of retaliation, two companies namely Cyrus Investments Private Limited and Sterling Investment Corporation Limited (“Petitioners”), belonging to SP Group, in which Mr. Mistry holds a controlling interest, filed a company petition before National Company Law Tribunal, Mumbai (“NCLT”). The said company petition was filed under Section 241 and 242 of the Companies Act, 2013 (“CA Act”) alleging prejudicial and oppression acts of Tata Sons.

The present article discusses the significant legal issues qua oppression and mismanagement that arose during the whole journey of the said company petition from the NCLT to SC and the way the judicial authorities solved these conundrums.
  • Eligibility To File A Company Petition Under Section 241 And 242 Of The CA Act, 2013
Section 244 of the CA Act2 stipulates the eligibility criteria for filing a petition under Section 241 and 242 of the CA Act. As per the said provision, a company petition alleging oppression and mismanagement in a company having share capital is not maintainable unless it is supported -
  • by not less than one hundred shareholders or not less than one tenth of the total number of its member whichever is less; or
  • any shareholder or shareholders holding not less than one-tenth of the issued share capital of the company. The provision, however, reserves the right of the Tribunal to waive off such locus requirement on an application made to it.

The first hurdle that was faced by SP Group in contesting its company petition was failure to satisfy the eligibility criteria laid out under Section 244 of CA Act as the Petitioners overall had only 2% of the 'total issued share capital' of Tata Sons. Notably, Petitioners, however, held 18.37% equity share capital of Tata Sons. Hence, the Petitioners sought resort to the exception under Section 244 of CA Act by filing a petition for waiver.

The NCLT dismissed the petition for waiver and thereby also dismissed the main company petition as not maintainable. Aggrieved by the same, SP Group challenged the NCLT’s order. The Appellate Tribunal (“NCLAT”) by its judgement dated 21st September 20173 by taking into consideration the ‘exceptional circumstances’ including the fact that out of INR 6,00,000 Crores of total investment in Tata Sons, one of the Petitioners i.e. Cyrus Investment Private Limited had invested approximately INR 1,00,000 Crores held that it was fit case for waiver and remitted the main company petition to NCLT for decision on merit.

While deciding the petition for the waiver, the NCLAT listed down the factors which must be seen in a chronological manner while adjudicating an application under Section 244 of the CA Act. The said factors are as follows:
  • The petitioner must be the member of the company in question;
  • The petition under Section 241 of the CA Act must pertain to oppression and mismanagement;
  • The allegations raised in the petition should not be earlier raised by any other member, and/ or has stood decided by the adjudicating authority. ;
  • There must be an exceptional circumstance made out to grant waiver, so as to enable members to file application under Section 241.

Thereafter, NCLT heard the main company petition on merits in detail and dismissed the same by an order dated 9th July 2018. SP Group challenged the NCLT’s order before the NCLAT which ruled in favour of SP Group by declaring, inter alia, thatthe proceedings of Board of Directors of Tata Sons dated 24th October 2016 as illegal and as a result, Mr. Cyrus Mistry was restored to his original position as executive chairman. By way of various appeals, Tata Sons approached the SC seeking answer to pertinent questions of law that arose for consideration. The response of the SC to each question has been discussed below. The first question of law formulated by the Supreme Court was :
  • Without giving any contrary view or dealing with various NCLT findings, is NCLAT correct in holding that affairs of Tata Sons have been or are being conducted in prejducial and oppressive manners ?
While dealing with present question of law, the Apex Court observed that NCLT has given a categorical finding in each and every one of the allegations forming the basis of SP Group’s Petition. The Apex Court further observed that except the issues pertaining to removal of Mr. Mistry and conversion of Tata Sons from a public company to a private company, none of the NCLT’s findings was specifically and individually overturned by NCLAT.

By placing reliance on Sections 421 (4)4 and 4235 of CA Act, SC maintained that in an appeal from an order of NCLAT, SC has the limited power to deal with questions of law only. In view thereof, the Court held that the findings of NCLT, not specifically modified or set aside by NCLAT should be taken to have reached finality and it should be concerned exclusively with those findings which have been overruled by NCLAT.
  • Removal of Mr. Mistry as executive chairman- a ground of oppression and mismanagement?
At the outset, SC noted that Mr. Mistry was removed only from the post of executive chairman and not from the post of director when the petition was filed. In view of SC, the NCLT is not a labour court or an administrative tribunal to focus entirely on the manner of removal of a person as directorship. Nonetheless, it highlighted that in a petition under Section 241 of CA Act 2013, the Tribunal should not adjudicate on whether a removal of a director was legitimate or justified or not. Instead, it should see whether such removal would tantamount to a conduct which is oppressive or prejudicial to some members. In the end, the Court set a ratio that in any event the removal of person from the post of executive chairmanship cannot be termed as oppressive or prejudicial.
  • Applicability of just and equitable clause
Through a catena of judgements, the law is crystallised that in order to succeed in the oppression and mismanagement claims, the claimant must show the facts which otherwise justify the winding up of a company on just and equitable ground. In the present case, NCLAT held that facts canvassed by the SP Group justify the winding up of Tata Sons under the just and equitable clause.

On dealing with said findings of NCLAT, the Court discussed a series of judgements. Most importantly, it placed a reliance on a judgement of the House of Lords in Lau v Chu6 to maintain that there might be two instances which necessitate the invoking of the just and equitable standard. In the first instances, the company is a quasi-partnership and the Court should be satisfied that one partner cannot certainly carry on with the other. In the second instance, a company where there is complete functional dead lock and members cannot work altogether. The Court also referred the precedent set out by itself in Rajahmundry Electric Supply Corpn. Ltd. v Nageshwara Rao7 and SP Jain v Kalinga Tubes8 and reiterated that a mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient for grant of reliefs.

  1. Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. 2021 SCC Online SC 272.
  2. "244. Right to apply under section 241
    1. The following members of a company shall have the right to apply under section 241, namely:
      1. in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
      2. in the case of a company not having a share capital, not less than one-fifth of the total number of its members:
        Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.
        Explanation. - For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
      3. Where any members of a company are entitled to make an application under subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them."
        • 2017 SCC OnLine NCLAT 261
        • 421(4)- On the receipt of an appeal under sub-section (1), the Appellate Tribunal shall, after giving the parties to the appeal a reasonable opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.
        • Appeal to Supreme Court- Any person aggrieved by any order of the Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of receipt of the order of the Appellate Tribunal to him on any question of law arising out of such order.
        • [2020] 1 WLR 4656
        • (1995) 2 SCR 1066
        • AIR 1965 SC 1535