Tata Consultancy Service Limited V. Cyrus Investments Pvt. Ltd and Others: Supreme Court Judgement Summary

By Utkarsh, Student at National University of Study and Research in Law (NUSRL)

Background Facts

On 10.08.2006 Cyrus Mistry was appointed as a Non­-Executive Director on the Board of Tata Sons. By a Resolution of the Board of Directors of Tata Sons dated 16.03.2012, Cyrus Mistry was appointed as Executive Deputy Chairman for a period of five years from 01.04.2012 to 31.03.2017, subject however to the approval of the shareholders at a General Meeting. By a Resolution dated 18.12.2012, the Board of Directors of Tata Sons re-designated Cyrus Mistry as its Executive Chairman with effect from 29.12.2012, even while designating Ratan Tata as Chairman Emeritus. By a Resolution passed on 24.10.2016, the Board of Directors of Tata Sons replaced Cyrus Mistry (CPM) with Ratan Tata (RNT) as the interim Non-Executive Chairman. It is relevant to note that Cyrus Mistry was replaced only from the post of Executive Chairman and it was left to his choice to continue or not, as Non-executive Director of Tata Sons. As a follow up, certain things happened and by separate resolutions passed at the meetings of the shareholders of Tata Industries Limited, Tata Consultancy Services Limited and Tata Limited, CPM was removed from directorship of those companies. CPM then resigned from the Directorship of a few other operating companies such as the Indian Hotels Company Limited, Tata Steel Limited, Tata Motors Limited, Tata Chemicals Limited and Tata Power Company Limited, after coming to know of the impending resolutions to remove him from Directorship. Thereafter, 2 companies by name, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, belonging to the SP Group, in which CPM holds a controlling interest, filed a company petition in C.P No.82 of 2016 before the National Company Law Tribunal (“NCLT”) under Sections 241 and 242 read with 244 of the Companies Act, 2013, on the grounds of unfair prejudice, oppression and mismanagement. Along with the application for waiver of the requirement of Section 244(1)(a), the complainant companies also moved an application for stay of an Extra­ordinary General Meeting (“EGM” for short) of Tata Sons, in which a proposal for removing CPM as a Director of Tata Sons had been moved.

Findings of NCLT

The NCLT held that the Removal of Mr. Cyrus Mistry as Executive Chairman on 24.10.2016 is because the Board of Directors and Majority of Shareholders, i.e., Tata Trusts lost confidence in Mr. Cyrus as Chairman, not because by contemplating that Mr. Cyrus would cause discomfort to Mr. Tata, Mr. Soonawala and other answering Respondents over purported legacy issues. The Board of Directors is competent to remove Executive Chairman; no selection committee recommendation is required before removing him as Executive Chairman. Removal of Mr. Cyrus Mistry from the position of Director is because he admittedly sent the company information to Income Tax Authorities; leaked the company information to Media and openly come out against the Board and the Trusts, which hardly augurs well for smooth functioning of the company, and we have not found any merit to believe that his removal as director falls within the ambit of section 241 of Companies Act 2013. We have not found any merit in purported legacy issues, such as Siva issue, TTSL issue, Nano car issue, Corus issue, Mr. Mehli issue and Air Asia issue to state that those issues fall within the ambit of section 247 and 242 neither have not found any merit to say that the company filing an application under section 14 of Companies Act 2013 asking this Tribunal to make it from Public to Private falls for consideration under the jurisdiction of section 247 & 242 of Companies Act 2013. The NCLT also held that there is no merit in saying that Mr. Tata & Mr. Soonawala giving advices and suggestions amounted to interference in administering the affairs of the company, so that to consider their conduct as prejudicial to the interest of the company under section 241 of Companies Act 2013.

Findings of NCLAT

The findings of NCLAT were that the fact that the Company (‘Tata Sons Limited’) has suffered loss because of ‘prejudicial’ decisions taken by Board of Directors; the fact that a number of ‘Tata Companies’ have incurred loss; in spite of decision making power vested with the Board of Directors with affirmative power of nominated Directors of the ‘Tata Trusts’; the action in making change from ‘Public Company’ to ‘Private Company’; the manner in which Mr. Cyrus Pallonji Mistry was suddenly and hastily removed without any reason and in absence of any discussion in the meeting shown in the Board of Directors held on 24th October, 2016 and his subsequent removal as Director(s) of different ‘Tata Companies’, coupled with global effect of such removal, as accepted by the Company in its ‘Press Statement’ form a consecutive chain of events with cumulative effect justifying us to hold that the Appellants have made out a clear case of ‘prejudicial’ and ‘oppressive’ action by contesting Respondents, including Mr. Ratan N. Tata, Mr. Nitin Nohria) and Mr. N.A.Soonawala and other, the nominee Directors.

Arguments on Behalf of Tata Sons (Appellants)

The learned senior counsels for Tata sons contended that the entire focus of NCLAT was only on the justification for the removal of CPM from the post of Executive Chairman of Tata Sons, despite the fact that the positive case of the complainant companies, as well as CPM, was that they were not seeking the reinstatement of CPM. The removal of CPM was on account of the loss of confidence in CPM and the complete breakdown of trust between the other members of the Board and CPM.

NCLAT failed to appreciate in the right perspective, the effects of the Amendment Act 53 of 2000 on a ‘deemed to be a public company’ under Section 43A and the provisions of the 2013 Act, while dealing with the question of whether Tata Sons would be a private company or a public Company. NCLAT, without any justification, made uncharitable remarks against the Registrar of Companies for issuing an amended certificate of incorporation after the judgment of NCLT, though RoC was not a party. NCLAT did not find any actual misuse of the Articles of Association, which envisaged a crucial role for the nominee Directors of the two Trusts. CPM himself had proposed a Governance framework that recognized pre­-consultation with the Trusts. Therefore, the findings of NCLAT as though the pre­-consultation as well as the affirmative voting right conferred upon the Directors nominated by the Trust, undermined the role of the Board of Directors of Tata Sons, are completely perverse.

Arguments on Behalf of SP Group (Respondents)

The learned counsels on behalf of respondent were that the removal of CPM was contrary to the provisions of Article 118, which required the setting up of a Selection Committee both for appointment as well as removal. In fact Article 121B contemplates a 15 days’ notice, but the same was also not complied with. Therefore, the removal of CPM, carried out without there being any agenda for the same and without there being any deliberation or discussion, was wholly illegal. NCLAT has recorded detailed findings on facts and there is no perversity in those findings. Therefore there is actually no scope for interference by this court The reliefs sought in the company petition, are consistent with the provisions of the Companies Act, 2013 including Section 163 (proportionate representation) and sub-Sections (1), (5), (7) and (8) of Section 242 of the Act.

Issues before the Apex Court

  • Whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of NCLT on facts were not individually and specifically overturned by the Appellate Tribunal?
  • Whether the reliefs granted and the directions issued by the Appellate Tribunal, including the reinstatement of CPM into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Sub­section (2) of Section 242?
  • Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the company from exercising such a right without setting aside the Article?
  • Whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicialis justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee Directors virtually nullifying the effect of these Articles ?
  • Whether the re­conversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT.

Observations by the Apex Court

1ST Issue

The first question of law arising for consideration is whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground. The Hon’ble court observed that analysis of the provisions of Section 241(1)(a) read with clauses (a) and (b) of Sub­section (1) of Section 242 shows that relief under these provisions can be granted only if the Tribunal is of the opinion

  1. That the company’s affairs have been or are being conducted in a manner
  2. Prejudicial to any member or members or (b) Prejudicial to the public interest or (c) Prejudicial to the interests of the company or (d) Oppressive to any member or members
  3. That though the facts would justify the making of a winding-up order on the basis of a just and equitable clause, such a winding up would unfairly prejudice such members or members.
  4. It will be seen that the complainant companies forming part of the S.P. Group pitched their claim in their original petition on the ground that the affairs of Tata Sons are being carried as though it was the proprietary concern of RNT and that though the oppressive conduct of the respondents was such that it would be just and equitable to wind up Tata Sons under Section 241, but such winding up would unfairly prejudice the interests of the complainants.
  5. NCLAT, being an Appellate Tribunal, conferred with the power under subsection (4) of Section 421 to confirm, modify or set aside the order of NCLT, can be taken to be a final court of fact. An appeal from the Order of the NCLAT to this Court under Section 423 is only on a question of law. Considering the nature of the jurisdiction conferred upon NCLAT, it is clear that the findings of the NCLT, not specifically modified or set aside by NCLAT should be taken to have reached finality, unless the parties aggrieved by such non-interference by NCLAT have approached this Court, raising this as an issue.
  6. The findings recorded by NCLAT for the grant of reliefs, revolved primarily around the removal of CPM, the affirmative voting rights, interference by nominee Directors and the conversion of Tata Sons into a private company. In other words, these are the 4 areas in which NCLAT can be taken to have undertaken scrutiny and reversed the findings of NCLT. Therefore, for answering the first question of law, the court focus mainly on these issues.

Removal of Cyrus Mistry

The Apex Court observed that Cyrus Mistry was removed from the post of Executive Chairman of Tata Sons, but not from the Directorship, by the resolution of the Board dated 24.10.2016. The court said that by the Resolution of the Board of Tata Sons dated 24.10.2016, Cyrus Mistry was merely removed from the post of Executive Chairman, but he continued to be a member of the Board as a Non-Executive Director even after 24.10.2016. Therefore, the fact that the removal of CPM was only from the Executive Chairmanship and not the Directorship of the company as on the date of filing of the petition and the fact that in law, even the removal from Directorship can never be held to be oppressive or prejudicial conduct, was sufficient to throw the petition under section 241 out, especially since NCLAT chose not to interfere with the findings of fact on certain business decisions.

The Hon’ble Apex Court observed that subsequent conduct on the part of Cyrus Mistry in leaking his mail dated 25­10­2016 to the Press and sending replies to the Income Tax Authorities enclosing 4 box files, even while continuing as a Director, justified his removal even from the Directorship of Tata Sons and other group companies. A person who tries to set his own house on fire for not getting what he perceives as legitimately due to him, does not deserve to continue as part of any decision making body (not just the Board of a company). It is perhaps this realization that made the complainant companies give up their original prayer for restraining the company from removing CPM and singing a different tune seeking proportionate representation on the Board.

The Hon’ble Court said that in a petition under Section 241, the Tribunal cannot ask the question of whether the removal of a Director was legally valid and or justified or not. The question to be asked is whether such a removal tantamount to a conduct oppressive or prejudicial to some members Even in cases where the Tribunal finds that the removal of a Director was not in accordance with law or was not justified on facts, the Tribunal cannot grant relief under Section 242 unless the removal was oppressive or prejudicial. There may be cases where the removal of a Director might have been carried out perfectly in accordance with law and yet may be part of a larger design to oppress or prejudice the interests of some members. It is only in such cases that the Tribunal can grant relief under Section 242. The Tribunal is not a labour Court or an administrative Tribunal to focus entirely on the manner of removal of a person from Directorship. Therefore, the accolades received by CPM from the Nomination and Remuneration Committee or the Board of Directors on 29.6.2016, cannot advance his case.

Observations in 2nd Issue

The Hon’ble Apex Court said the original motive of the complainant companies, was to restrain Tata Sons from removing CPM as Director. Subsequently, there was a climb down and the complainant companies sought what they termed as “reinstatement” of a representative of the complainant companies. In this background it was repeatedly argued both before the NCLAT and before this Court that the objective of the litigation was not to have CPM reinstated, but only to set things right in the State of Denmark (of which CPM himself was the Premier for 4years). But interestingly, NCLAT understood what the complainant companies and CPM actually wanted, though they attempted to camouflage their intentions with legal niceties. Therefore, despite there being no prayer for reinstatement of CPM either as a Director or as an Executive Chairman of Tata Sons, NCLAT directed the restoration of CPM as Executive Chairman of Tata Sons and as Director of Tata Companies for the rest of the tenure.

The appointment of CPM as Executive Deputy Chairman of Tata Sons, was to be for a period of 5 years from 01.04.2012 to 31.03.2017, subject to the approval of the shareholders. In the Meeting of the shareholders held on 01.08.2012, the appointment of CPM as Executive Deputy Chairman was approved and the General Body left it to the Board to re­designate CPM as Chairman. Accordingly, the Board redesignated CPM as Executive Chairman, with effect from 29.12.2012, by a resolution passed on 18.12.2012. The judgment of the NCLAT was passed on 18.12.2019, by which time, a period of nearly 7 years had passed from the date of CPM’s appointment as Executive Chairman. Therefore, we fail to understand : (i) as to how NCLAT could have granted a relief not apparently sought for (though wished for); and (ii) what NCLAT meant by reinstatement “for the rest of the tenure”. That the question of reinstatement will not arise after the tenure of office had run its course, is a settled position.

NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law. By doing so, the NCLAT has forced upon the appellant an Executive Chairman, who now is unable to support his own reinstatement

The architecture of Sections 241 and 242 does not permit the Tribunal to read into the Sections, a power to make an order (for reinstatement) which is barred by law vide Section 14 of the Specific Relief Act, 1963 with or without the amendment in 2018. Tribunal cannot make an order enforcing a contract which is dependent on personal qualifications such as those mentioned in Section 149(6) of the Companies Act, 2013. The position in law that a contract of personal services cannot be enforced by the Court is a long standing principle of law and cannot be displaced by the existence of any implied power, though none is shown in the present case. This is described as the Principle of Legality.

Observations in 3rd Issue

The Hon’ble Apex Court Observed that complainant companies did not make a grievance out of Article 75 on the ground that it had been misused in the past and that such misuse tantamount to conduct oppressive or prejudicial to the interests of some of the members. The sine qua non for invoking Section 241 is that the affairs of the Company should have been conducted or are being conducted in a manner oppressive or prejudicial to some of the members. No single instance even of invocation of Article 75, leave alone misuse, is averred in the main company petition or the application for amendment. Therefore NCLAT could not have and should not have made Article 75 completely ineffective by passing an order of restraint. The Apex Court said As a matter of fact, NCLAT has agreed, on first principles, that it has no jurisdiction to declare any of the Articles of Association illegal. After having set a benchmark correctly, NCLAT neutralised Article 75 merely on the basis of likelihood of misuse. Section 241(1)(a) provides for a remedy, only in respect of past and present conduct or past and present continuous conduct. NCLAT has stretched Section 241(1)(a) to cover the likelihood of a future bad conduct, which is impermissible in law.

Observations in 4th Issue

The Hon’ble Apex Court observed that what was actually sought by the complainant companies was the deletion of the Article that necessitated the affirmative voting right of the majority of the Directors nominated by the two Trusts. There was no prayer for restraining RNT and the nominee Directors of the Trusts from taking any decision in advance.

Affirmative Voting Rights

The Hon’ble Court said that the frequent change of position that S.P. Group has taken and the relief that they now seek, raises a doubt whether it is actually a fight on principles. If affirmative voting rights are bad in principle, we do not know how they may become good, if conferred on S.P. Group also.

Insofar as Tata Sons is concerned, the Articles of Association of the Company continue to contain the prescribed restrictions which make it a private company within the definition of the expression under Section 2(68). Therefore, the provisions discussed above do not apply to Tata Sons.

The provisions of sections 135, 149, 151, 166 and 177 around which the argument relating to corporate governance is fantasised, cannot advance the case of the SP group. Section 135 deals with corporate social responsibility, which in any case is more pronounced in this company due to the fact that charitable trusts hold the majority of the shares. Section 149 deals with the requirement to have Directors, section 151 provides for the appointment of a Director elected by small shareholders, section 166 enumerates the duties of directors, and section 177 and 178 speak of some committees. Some of these provisions such as sections 151, 177 and 178 apply only to listed public companies. Yet, Tata Sons have complied with sections 177 and 178 by constituting necessary committees.

The Hon’ble Court said that it is good to wish that the creation gets liberated from the creator, so long as the creator does not have any control or ability to manipulate. In the corporate world, democracy cannot be seen as an ugly expression, after using the very same democratic process for the appointment of directors. Therefore, the challenge to the affirmative voting rights and the allegations revolving around pre-consultation and pre clearance by the Trusts of all items in the agenda and RNT’s indirect or direct influence or grip over the Board are all liable to be rejected

Observations in 5th Issue

The Apex Court observed that Section 43A contained only one stipulation namely that a private company in which not less than 25% of the paid-up share capital was held by one or more bodies corporate, shall become a public company. But by Act 41 of 1974, two additional stipulations were included. They are (i) that a private company whose average turnover during the relevant period is not less than an amount prescribed, shall become a public company, irrespective of its paid-up share capital; and (ii) that a private company which holds not less than 25% of the paid-up share capital of a public company, shall become a public company. By Act 31 of 1988, the benchmark of the average annual turnover that would determine the applicability of Section 43A was prescribed as not less than Rs. 1 crore. In addition, Act 31 of 1988 also made a private company that accepts deposits from the public, other than its members or directors, be a public company.

Two important prescriptions, which continued without any change, from the date of insertion of Section 43A, namely 28.12.1960, till the coming into force of Act 53 of 2000 namely 13.12.2000, were Sub­sections (2) and (4) of Section 43A. Subsection (2) imposed an obligation upon a private company which became a public company by virtue of section 43A, to inform the registrar.

Judgment: The Hon’ble Apex Court held that all the questions of law are liable to be answered in favour of the appellants­ Tata Group and the appeals filed by the Tata Group are allowed and the appeal filed by S.P. Group is liable to be dismissed.

On the question of alternative relief which was prayed by the S.P group by filing an application during the pendency of proceedings. The Hon’ble Apex Court said in an appeal under Section 423 of the Companies Act, 2013, this Court is concerned with questions of law arising out of the order of NCLAT. Therefore, we will not decide on this prayer.

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