The recent judgment pronounced by National Company Law Appellate Tribunal (NCLAT) in a protracted legal battle between ‘salt to software’ conglomerate Tata and its former executive chairman Cyrus Pallonji Mistry has presented a serious challenge to the established principles of corporate law.

Mistry family is one of the oldest allies of the Tata group and holds over 18 per cent share in Tata Sons making them second-largest individual shareholder in the holding company of Tata Group. Mr Cyrus Pallonji Mistry was not a new face for the Tata group, apart from the alliance which was forged half a century back, he held numerous position in the Tata group and served in various capacities viz. Director of Tata Elxsi Limited and Tata Power, further he joined the board of Tata Sons after his father’s retirement, prior to his appointment as Executive Chairman of Tata Group.

On October 24, 2016, Mr Mistry was ousted from the post of chairman of Tata Sons Limited, as a result of a resolution approved by 7 out of 9 directors (four were independent directors and three were Tata Trust nominated directors) who voted in favour of resolution to remove Mr Mistry from the post of Executive Chairman citing lack of performance.

Following this, Mr Mistry, filed a suit before the National Company Law Tribunal (NCLT), citing oppression of minority shareholders and lack of corporate governance in the company, where the tribunal refuted all the charges pressed by Mr Mistry against the conglomerate.

Thereafter, an appeal was filed in the NCLAT; eventually reversing the decision of the NCLT and termed the removal of Mr Mistry illegal.

The judgment, on few counts, needs serious introspection. If one were to analyse this after taking into consideration the established principle of corporate law, one can find immense room for discontent. However, this discontent is a product of the conceptual aspects of the decision and not the merit of either party’s case on appeal.

The judgment, on an analysis, seems to have ignored the Rule of Majority which focusses on the administration of affairs of a company that courts will not, in general, intervene at the instance of shareholders in matters of internal administration, and will not interfere with the management of a company by its directors, so long as they are acting within the power conferred on them under the Articles of Association.[1]

Further, in LIC v Escorts[2] the court highlighted the concept of Corporate Democracy-the will of the majority constitutes the decision of the body. It is a democratic setup where the directors and members in general meetings are two primary organs of the company like the legislature and executive of the state.

Where the sovereignty lies with the parliament and execution lies with the executive. Similarly, general members have the power to change or alter the Article of Association (AoA) and Directors have the power to run day to day operation and take decisions which are delineated in the AoA.

The court has further went on to say:
The holder of the majority of the stock of a corporation has the power to appoint, by-election, Directors of their choice and the power to regulate them by a resolution for their removal.
To briefly put light on the supremacy of Article of Association: Articles of Association are the regulations of the Company and binding on the Company and its shareholders.[3] Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the shareholders’ agreement shall not go contrary to the Articles of Association.[4]

Not even a single instance has been highlighted by the tribunal, where the company has gone beyond the provision of Articles of Association, Companies Act and the Secretarial Standard on the Meetings of the Board of Directors. The aforementioned legal principle (Rule of Majority) laid by the Supreme Court at various instances clearly restricts the interference of court in the internal administration of a company taken by directors within the realm of Articles of Association. Therefore, by interfering, the tribunal has directly taken the right of shareholders and board of directors to manage the company in accordance with the law.

Second count on which it needs to be further relooked that directorial dispute has no nexus with the shareholders’ proprietary rights, (Voting rights, dividends, etc.) therefore same cannot be agitated in a petition filed under Section 241-242[5] of Companies Act, 2013.

The Apex court in a plethora of cases has underlined the incident under which a petition can be filed under the aforementioned section of Companies Act. In the case of S.P. Jain[6] Hon’ble court has held that the conduct of the majority shareholders should be continuous in nature and not be considered in isolation but as a part of a consecutive story. There must be series of act on the part of majority shareholders, continuing up to the date of the petition, showing that the affairs of the company in a manner oppressive to some members of the company and the conduct must be harsh, burdensome and not mere lack of confidence.

It is very necessary to note that Mr Mistry was appointed as a director of Tata Sons Limited which is a majority stakeholder and not as a director or a representative of Shapoorji Pallonji Group which is a minority shareholder and the appointment was never made in recognition of any entrenched right of representation and management as shareholder of Tata Sons Ltd.

Therefore a case of oppression and prejudice to the proprietary rights of Mr Mistry cannot be made. Secondly, it does not impinge the right of former chairman as a shareholder which is a condition precedent to agitate the matter under the aforementioned section.

The Courts have always laid emphasis that a decision pronounced by a court or tribunal must be a reasoned decision which is amenable to appeal before the appellate authority. It is necessary to convey the reason otherwise it will be a cryptic order and will be very difficult to decipher.

To file an appeal before any appellate body, grounds on which decision is based must be recognized, so that same can be contented. The apex court, a few times, has come across judgment where the court has failed to give reasoning to reach a particular decision. Hence, the apex court has established that the rules giving reasons in support of an order are the third principle of natural justice.[7]

In the instant case, the NCLAT has not discussed the law relating to oppression and mismanagement as envisaged under section 241-242 in required depth whereas NCLT took great pains to trace the evolution of law pertaining to oppression and mismanagement and set out the jurisprudence which gave an understanding to both the parties where they can comprehend the reasons behind the decision given by NCLT. Second, judgment is based on an assumption that the Tata Sons is a quasi-partnership without rigour in analysis. Determination of the legal structure of Tata Sons is very necessary, the fulcrum of the judgment remains on the determination of the same.

The learned tribunal (NLCAT) has went on to say that the majority should consult minority groups before appointing a chairman or executive director as case may be. It has opened a Pandora’s Box – this will set a wrong precedent and defeat the very purpose of majority shareholders i.e., to run a company in a manner which will benefit the majority of shareholders. This consultation process will ensure unending tussle between majority and minority shareholders. In case, if consensus is not reached between the shareholders; it will open the floodgates to litigation and affect the progress and development of the company.

The basic tenet of corporate democracy can be very well summed up in few words:The strongest dimension of democracy is the highest degree of participation and not with the degree of freedom or equality. The Rule of Majority shall prevail otherwise there is no point of owning a majority shareholder in a company if the majority does not have the discretion to appoint the directors and administer the affairs of the company in a desired manner within the drawn boundaries of Article of Association. The legislature has laid down enough measures to ensure that the rights of the minority are protected but certainly, the legislature has not envisaged such a consultation process between minority and majority shareholders.

Conclusion

1. Firstly, in the instant case order exceed prayer, Mr Mistry never sought relief for reinstatement of his position and it would be overly ambitious to assume that the affairs of the company will run smoothly after Mr Mistry reassume his position where the promoters and most of the directors had voted him out.
    
2. Secondly, even if the judgment has been passed regarding his reinstatement, Mr Mistry’s tenure as the executive chairman was scheduled to end just a few months after his removal (end of March 2017). The instant judgment has been pronounced 3 years after his removal and it has set the clock three years into the past. The practicality of him reassuming his position is an absolute impossibility.
    
3. Thirdly, it has ruled the appointment of N. Chandrasekhran, the incumbent director, as illegal. It is important to note that he was not even the party to the case. He has not put his side in front of the tribunal and he has not been given an opportunity to defend, which violates the basic tenets of natural justice (audi alteram partem). Judgement has, also, been given against other entities which were not a party to the case i.e., reinstatement of Mr Mistry as a director in other group companies of Tata Group which were not at any stage impleaded as parties to the case. This has put the whole management of Tata Sons in a state of limbo. The investors appear to be rattled by the judgement as the price of the share has plummeted.
    
4. Fourthly, in a rudimentary sense, the role of the tribunal in a case where the matter of oppression and mismanagement has been raised to find a solution to break the stalemate. The same idea has been conceived in Company Law, that powers have been vested with the tribunal to pass an order which can put an end to matters in contention. Now, this order seems to ensure perpetuating stalemate rather than getting rid of them.
    
5. Finally, the consequence of the judgment is that a company with revenue excess of USD 100 billion is now headless as the appointment of incumbent Chairman has been termed as illegal. The stocks are plummeting as shareholders are caught off guard by this ostensibly inscrutable decision. Given the intensity of the matter and stakes involved, the order has been challenged before the Supreme Court. One could reasonably expect that this case, apart from corporate governance, develops the significant jurisprudence pertaining to this matter.

End-Notes:

1. Rajahmundry Electric Supply Corporation Ltd. vs. A. Nageswara Rao and Ors. AIR 1956 SC 213
2. LIC v Escort AIR 1986 SC 1370
3. V.B. Rangaraj v. V.B. Gopalakrishnan and Ors (1992) 1 SCC 160
4. Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors.
5. S -241. Application to Tribunal for relief in cases of oppression, etc
   (1) Any member of a company who complains that-
   (a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company;
   S- 242. Power of the Tribunal
   (1)If, on any application made under section 241, the Tribunal is of the opinion—
   (a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
   (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up,
6. S.P. Jain v Kalinga Tubes AIR 1965 SC 1535
7. Siemens Engg & Mfg. Co. v Union of India AIR 1976 SC 1785