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Is Tata Sons Asking For A Trial Before A Trial?  

Mistry petition for waiver does not hold water: Tata Counsel



File photo of Cyrus Mistry with Ratan Tata. (Source: PTI)
File photo of Cyrus Mistry with Ratan Tata. (Source: PTI)

Oppression is an exception to corporate democracy, senior counsel Aryama Sundaram had argued earlier, when making a case for why Cyrus Mistry companies should be allowed to file a case of oppression and mismanagement against Tata Sons despite not being strictly eligible to do so under company law. On Friday, Tata Sons’ counsel Abhishek Manu Singhvi responded that the alleged oppression does not exist and hence no waiver is deserved.

The Mistry firms sought the waiver after the NCLT, on March 6, ruled that the companies did not have the requisite 10 percent of the total shares in Tata Sons to pursue the charges, as required under Section 244 of the Companies Act, 2013 (Act). The Act gives the NCLT discretion to waive this 10 percent threshold condition.

This ‘waiver’ matter is being heard at the National Company Law Tribunal’s (NCLT) Mumbai bench, and on Friday it was the turn of Tata Sons to argue its case against granting a waiver to Mistry’s firms.

Singhvi argued on Friday:

  • The application by the two Mistry companies, for a waiver of the terms of Section 244 of the Companies Act, was not tenable. (The Section states that in order to bring a suit of oppression and mismanagement a party must hold at least 10 percent of issued share capital)
  • The 10 percent threshold was incorporated into the Act because of clear legislative intent to filter out false, frivolous and vexatious litigation. It was a reasonable bar to impose as there would always be a small section who would be unhappy with certain decisions, and constant legal battles would cause instability.
  • Earlier, the Mistry side had contended that if equity and preference shareholding were to be considered, even Tata Trusts, which holds more than 60 percent of equity shares, would not qualify under Section 244. Singhvi argued that the section provided for an alternative where if a tenth of total shareholders approach the court together, the bar would be met.
  • In this instance, the total number of shareholders was 56; the Mistry side already has the support of four shareholders and needs the support of six more shareholders to file case. Hence the bar contemplated by the section is neither exclusionary nor onerous.
  • Mistry’s counsel Aryama Sundaram had argued that amendments to Tata Sons’ Articles of Association were repugnant to the scheme of the Companies Act as the Articles granted two directors, nominated by Tata Trusts, a veto. Singhvi countered that the veto had never been exercised, adding that a waiver could not be granted on vague apprehensions that it might be exercised in the future.
  • Seven of the 10 allegations of oppression and mismanagement were not against Tata Sons but against group companies. The Mistry group is trying to target companies that haven’t been represented or heard.
  • A waiver must be granted only under exceptional and compelling circumstances such as a supervening national or public interest, and though the Mistry petition says that a waiver is not in personal interest and in the interest of the company, there was no mention of what that interestis.
  • Sundaram had earlier argued that equity shareholders represent a different class as they have voting rights and hence are more involved in the management of the company. Singhvi warned against such interpretations, arguing that the purpose and text of the legislation was amply clear.

Mistry’s counsel Aryama Sundaram will make counter arguments on April 4, 2017.

On March 7, Sundaram had argued:

  • A waiver application comes into play since the maintainability of the oppression petition has been denied under 244(1).
  • Arguments made regarding purposive interpretation become even more relevant for the NCLT to consider while deciding the waiver application.
  • The oppression and mismanagement petition has been filed for the following reasons:
    - The two Mistry companies have a grievance against the Tata Sons Articles of Association which include provisions against the interest of a class of members to which the petitioners belong.
    - The Articles grant the directors of the Tata Sons board, nominated by Tata Trust, a veto - power to vote down any board decision. This is a tool of oppression against minority shareholders. And also be a tool of mismanagement by these two directors as no decision can be taken without their consent.
    - Thus the Articles are against the letter and spirit of the Companies Act, 2013.
    - Tata Sons is the parent company of the Tata Group and funds the various group companies which have tens of lakhs of shareholders. Such a provision in the Articles is also against public interest
  • Only voting shareholders can amend the Articles and decide how the company should be managed and ensure that a company's affairs are conducted keeping in mind the letter and spirit of the Companies Act. A substantial shareholder is saying that there are Articles that can affect the independence of the board. Hence, such a shareholder should be heard.
  • While deciding whether a waiver should be granted, the NCLT has to decide if such a shareholder should be heard. The Tribunal at this stage should decide if issues being raised are important enough to be looked into at a later stage.
  • The second step is to look at voting power - whether the Mistry companies have 0.01 percent votes or more, the point is they are not fly-by-night shareholders, and have been shareholders for more than 50 years.
  • Sundaram referred to a Delhi High Court judgment on Section 399 of the Companies Act, 1956 that gave the central government powers to grant a waiver. The high court had held that such a power will not entail going into the main proceeding but a subordinate proceeding with a view to see whether it's a frivolous application by a disgruntled member.
  • The Tata Sons Articles are repugnant to the entire scheme of the Companies Act, 2013. The Act mandates that one-third of the board must consist of independent directors. This condition has been made repugnant by the Articles that give a veto to directors appointed by Tata Trusts.
  • Schedule IV of the Companies Act, 2013 lays down the role and functions of independent directors. The Act has been made more rigorous to protect the interest of the minority. And here the minority with a substantial shareholding is being told it can't even the raise its voice.
  • Bharat Vasani, group general counsel of Tata Sons, had in a written communication said that “at the outset, I apologize for extending my brief. I am not clear on the scope of prior discussion with Trustees. The AoA does not contemplate discussion with Trustees”. Sundaram referred to more such communication by Vasani that expresses his apprehension regarding the role of the Tata Trusts’ trustees in the functioning of Tata Sons.
  • Sundaram referred to instances where the agenda of board meetings of Tata Group companies has been revised at the behest of Tata Trusts. He argued, to make the point on public interest, that this indicates the pervading influence of Tata Trusts on listed group companies.
  • Janak Dwarkadas, also arguing for the two Mistry companies, said that to grant interlocutory relief, the NCLT has to examine the evidence. But to hear a member, the Tribunal need not hold a mini-trial to see if the evidence measures up. If the NCLT decides to shut the door at this stage, the respondent doesn't even have to argue his case. But if the petitioner (Mistry) has made a case good enough to initiate an inquiry under Section 241, the Tribunal should exercise its discretion. Tata Sons, by asking that evidence of  the company petition (the oppression and mismanagement petition) should be examined at this stage, is asking for a trial before a trial.