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Law Of Oppression And Mismanagement Vis-a-Vis Tata-Mistry Dispute (Part II)

  1. Reinstatement of Mr. Mistry as executive chairman- an appropriate relief under Section 242 of CA Act? At the outset, the Apex Court observed that NCLAT has unjustly forced upon Mr. Mistry an executive chairmanship of Tata Sons without any foundation in pleadings before the Court. Outrightly, the Court held that neither Section 241 nor 242 confers power of reinstatement, and even if dismissal found to be wrongful and malafide, an effective dismissal would give rise to claim of damages. The anatomy of Section 241/242 of CA Act does not confer power on the Tribunal to make an order enforcing a contract which is dependent on personal qualification.
  2. Without setting aside an article under Article of Association, can the Tribunal restrain the company from exercising its right under the same article? SC faced an interesting legal conundrum wherein NCLAT had not accepted the plea of SP Group to strike off or delete Article 75 of Tata Sons’ Article of Association1 but injuncted Tata Sons to exercise its right under the said article. The SP Group challenged the said article on the ground that it is a tool in the hands of majority shareholders to oppress minority. SC observed that Article 75 is not a new invention of Tata Sons rather it was in existence at the time when SP Group acquired the shares of Tata Sons and continue to be there in one form or other. The Court declared the NCLAT findings to be wholly unsustainable as the SP Group did not raise any grievance under Article 75 on the ground it had been misused in the past and that such misuses tantamount to oppression and mismanagement. Therefore, the NCLAT cannot restrain Tata Sons from exercising its rights under Article 75 especially when the Tribunal has not set aside the same.
  3. Affirmative voting rights - a tool for oppression and causing prejudice? The SP Group had challenged Article 121 of the Article of Association of Tata Sons which provides that the matters which require to be decided by a majority of the directors shall require the affirmative vote of the majority of directors appointed under Article 104B. Under Article 104B, two trusts have been given a right to nominate 1/3rd of the prevailing number of directors on the board, so long as those trusts own and hold, in the aggregate, at least 40% of the paid-up share capital.The ground of challenge by SP Group was that the affirmative rights in the nature of Article 121 disables the nominee directors from acting independently in best interests of the company. As such, the pre-consultation/pre- clearance requirement from the trustees such as Mr. Ratan Tata disables the director from effectively discharging their fiduciary duties under Section 166, violates the standards under Section 118 (10) and renders nugatory, the scheme of Section 140 which requires 1/3rd of the members of the board to be independent directors. The Court negated the arguments of SP Group in light of Section 166 (2) of the CA Act. According to the Court, the nominated directors have fiduciary duties towards two parties, one towards the shareholders of company who have nominated them and the other towards the Company on whose board they are nominated. In light of the fact that apart from being the principal investment holding company, Tata Sons, by itself is not engaged in any direct business activity and the majority of its members are only philanthropic trust towards whom the nominated directors owe fiduciary duties along with Tata Sons. Thus, there was no disability or illegality apparent in Article 121 which bars the nominee directors from acting independently in best interests of the company and they are bound to perform their fiduciary duties towards Trust by taking the appointed directors such as Mr. Ratan Tata into confidence. Along with aforesaid reasons, the Court also maintained that affirmative voting rights cannot be attacked so long as they are incorporated in the Articles of Association and not in contravention of the any provisions of CA Act.
  4. Whether the minority shareholders can claim for proportionate representation? One of most common prayer that are found in the petition of oppression and management is the direction to provide for proportionate representation of shareholders on the board of directors of the company. SP Group sought the same prayer in its company petition.SC held that right to claim proportionate representation is not available to a minority shareholder under CA 2013. It is only available to a small shareholder under Section 151 of the CA Act2, which SP Group is certainly not. The Court also observed that the right to claim proportionate representation was not available to SP Group even contractually in terms of Tata Sons’ Articles of Association. Thus, the Court answered this question in favour of Tata Group and rejected the claim of SP Group pertaining to affirmative voting rights and proportionate representation.
  5. Conversion of tata sons from public company into a private company is not in tune with CA 2013? In its judgment, NCLAT found that Tata Sons became a public company by virtue of Section 43 (1A)3 of Companies Act, 1956 (“CA 1956”) and in accordance with sub-section 4 of Section 434, it continues to be a public company until it becomes a private company with the approval of Central Government. The CA Act 2013, however, repealed a part of the CA 1956 and defined private company under clause 68 of Section 2.5 In view of the same, Tata Sons having become a private company was required to alter its articles of association by following the procedure under Section 14 of CA Act, 2013.6 NCLAT held that action on part of Tata Sons in 2018 to change its status from public to private by approaching the registrar and in breach of Section 14 of the CA Act 2013 was prejudicial to minority shareholders. In short, the NCLAT held that Tata Sons was not a private company at the time of operation of CA Act, 2013 and therefore, in order to convert its status, Tata Sons was obliged to follow procedure under Section 14 of the CA Act, 2013.SC reversed the findings of NCLAT and held that due to operation of new definition of private companies under CA Act, 2013, Tata Sons de facto became a private company. In pursuant thereto, Tata Sons merely needed an amended certificate of incorporation to amend its article of association and Section 14 of CA Act, 2013 has no relevance to the same. Hence, Tata Sons rightly applied to the Registrar of Companies for amendment of the Certificate. While doing so, the Court analysed the historical development on this particular issue of law. The Court noted the amendment made to Section 43A of CA 1956 with effect from 13th December 2000. As per the said amendment, two sub-sections i.e. sub-section (2A) and sub-section (11) were inserted. By virtue of sub-section (11), all the provisions of Section 43 A except sub-section (2A) were made inapplicable from the effective date. Sub-section (2A) provided the procedure which is to be followed by a company which was earlier a public company but later became a private company after the aforesaid amendment. The changes were as follows:
    • The company shall inform the Registrar that the company has again become a private company; and
    • The Registrar shall thereupon substitute the word "Private Company" for the word "Public Company" upon registration and also make necessary alterations in the Certificate of Incorporation and its Memorandum of Association.
    At that juncture, those public companies which wanted to reconvert itself into a private company were required to satisfy the parameters of clause iii of sub-section 1 of Section 3 of the CA 1956.7 Since, the Articles of Association of Tata Sons were lacking the parameter laid out in sub clause (d) of Section 3(1) (iii), therefore, they did not take steps under the said provision. The change in definition of private companies with effect from 12th September 2013, however, brought Tata Sons within its definition as parameter mentioned in sub clause (d) of Section 3(1) (iii) was removed from the new definition. Thus, for the purposes of Section 14 of the CA Act, 2013, the Tata Sons was a private company and continues to be a private company. In this background, the Court held that the NCLAT was wrong in holding that action taken by Registrar of Companies to amend the certificate of incorporation of Tata Sons was improper and illegal.
  6. ROAD LIES AHEAD On the perusal of said judgement of Apex Court, it is clear that the status of Tata Sons as a private company is upheld which entails a difficulty for the SP Group as it restricts their right to transfer their shares to an outsider in the event they seek a favourable exit. One of positive outcomes from this judgement is that the seminal issues of corporate law in India has fallen back into its place as the Apex Court has aptly corrected the errors which were apparent in the findings of NCLAT. This judgement will certainly be very significant for the laws of oppression and mismanagement stipulated under the new CA 2013.As per the news reports, the SP Group, however, has filed a review petition before SC which seeks to set right the errors apparent on the face of the record as if these are left unaddressed, it will significantly impact the rights of minority shareholders across the country as well as erode the statutory protections accorded to them under the CA 2013. 8 Interestingly, it has been filed after the retirement of erstwhile Chief Justice of India who presided the bench alongside Justice Shri A. S Bopanna and Justice Shri V Ramasubhramanian which has given the final verdict. Hence, the SC has to assign a new judge in place of Justice (Retd.) Shri Bobde for hearing of a review petition. Till the time the review petition is decided or any order putting stay on the operation of judgement is passed, the law settled by the SC on 26th March 2021 is final and binding upon the companies and its members.
  1. 75. Company's Power of Transfer- The Company may at any time by Special Resolution resolve that any holder of Ordinary shares do transfer his Ordinary shares. Such member would thereupon be deemed to have served the Company with a sale-notice in respect of his Ordinary shares in accordance with Article 58 hereof, and all the ancillary and consequential provisions of these Articles shall apply with respect to the completion of the sale of the said shares. Notice in writing of such resolution shall be given to the member affected thereby. For the purpose of this Article any person entitled to transfer an Ordinary share under Article 69 hereof shall be deemed the holder of such share
  2. 151. A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed. Explanation.- For the purposes of this section "small shareholders" means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.
  3. 43 (1A) Without prejudice to the provisions of sub- section (1), where the average annual turnover of a private company, whether in existence at the commencement of the Companies (Amendment) Act, 1974 , (41 of 1974 ) or incorporated thereafter, is not, during the relevant period 1 less than such amount as may be prescribed] the pri- vate company shall, irrespective of its paid- up share capital, become, on and from the expiry of a period of three months from the last day of the relevant period during which the private company had the said average annual turnover, a public company by virtue of this sub- section: Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub- section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven.
  4. 43(4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company.
  5. 2 (68) "private company" means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,-
    • restricts the right to transfer its shares;
    • except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that -
      1. persons who are in the employment of the company; and
      2. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
    • prohibits any invitation to the public to subscribe for any securities of the company;
  6. 14. Alteration of articles.
    1. Subject to the provisions of this Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of-
      • a private company into a public company; or
      • a public company into a private company:
      Provided that where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under this Act, the company shall, as from the date of such alteration, cease to be a private company: Provided further that any alteration having the effect of conversion of a public company into a private company shall not take effect except with the approval of the Tribunal which shall make such order as it may deem fit.
    2. Every alteration of the articles under this section and a copy of the order of the Tribunal approving the alteration as per sub-section (1) shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of fifteen days in such manner as may be prescribed, who shall register the same.
    3. Any alteration of the articles registered under sub-section (2) shall, subject to the provisions of this Act, be valid as if it were originally in the articles.
  7. "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by is articles, (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty not including - (i) persons who are in the employment of the company ; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased ; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company ; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
  8. Dev Chatterjee, 'Miscarriage of justice', claims SP group's Tata-Mistry case review plea, BUSINESS STANDARD (Apr 27, 2021), https://www.business-standard.com/article/companies/miscarriage-of-justice-in-tata-mistry-case-sp-group-in-review-petition-121042700538_1.html