Autonomy Versus Protection: A Delicate Balance For NCLT In The Tata-Mistry Battle
Shareholders of a company who are “oppressed” by actions of other members, can complain to the National Company Law Tribunal (NCLT). This right though, is available only to a member or group who either
(i) own 10 percent of the shares or
(ii) are 10 percent of the total number of shareholders of the company
Under the Companies Act, 1956, the central government was granted the power, if circumstances exist which make it just and equitable so to do, to authorise any member who did not satisfy the requirements of shareholding or number, to apply under Section 397 and 398. Under the Companies Act, 2013, a member who does not satisfy the requirements of shareholding or numbers under Section 244 could apply to the NCLT to “waive” such requirements and be allowed to complain to the NCLT about oppression by other shareholders or mismanagement of the company.
This lack of qualification by the Mistry group and the application for a “waiver” is the crux of the issue before the Mumbai bench of the NCLT in the Tata-Mistry dispute.
What are the circumstances under which the NCLT can waive such requirements given that the Mistry group, shareholders of Tata Sons complaining of oppression by the Tata trusts do not own either 10 percent of the shares or constitute 10 percent of the total number of shareholders of Tata Sons?
What process does NCLT apply while deciding to grant waiver?
There is not much guidance or jurisprudence on this issue. The Delhi High Court in Universal Music India Limited vs UOI (2007) had held that the scope of enquiry by the central government is essentially limited and in the nature of an administrative order. There was therefore no need for the company to be even put on notice prior to the grant of permission. This position stands altered on a plain and simple reading of the existing provisions of the Companies Act, 2013 since the NCLT exercises a “judicial power” given the nature of the tribunal.
What are the circumstances under which the NCLT can grant waiver? Given that this is an area with no relevant precedent, the NCLT will have to necessarily examine the nature of the allegations that have been made in the petition under Section 241.
It will probably have to adopt a prima facie view on whether the allegations regarding oppression and mismanagement along with the documentary evidence placed on record would justify the grant of a waiver.
This approach may seem counter intuitive given that there are several judicial decisions holding that the prescribed requirement of standing is a substantive provision of the Companies Act, 1956 (i.e., not merely procedural which can be flexible), and lack of standing has been held to be fatal to the complaint – the Company Law Board (CLB) did not have to consider the merits of the complaint if it found that the members complaining of oppression or mismanagement did not have the requisite qualification.
The NCLT may draw inspiration from the provisions of Section 92 of the Code of Civil Procedure, 1908 where two or more persons “interested in the affairs of the trust” are required to seek leave from the court to sue the trustees. For about a century now, rich jurisprudence has been developed by the courts in this area and the NCLT may find it useful to draw parallels while dealing with an application for waiver. The object behind both the provisions (Section 92 CPC and Section 241 Companies Act, 2013) is similar – that a company and a public charity ought to be autonomously managed by the directors and members or trustees and ring-fenced from disgruntled persons or meddlesome interlopers who have an insignificant interest in its affairs. The court therefore acts as a gatekeeper balancing this autonomy with special procedures and remedies for any abuse of that autonomy. So long as it is shown that the directors of a company as is in the case of trustees of public charities have exercised due diligence, skill and care, good faith, independence and professionalism in their decision-making their autonomy is protected. The court normally interferes only where it is shown the absence of the above. The nature of the allegations, the impact that it would have on the business of the company and the public interest, the absence of good faith or lack of independence in the decision making process involved are considerations that the NCLT may consider relevant.
If the evidence submitted by members to the NCLT demonstrates oppression or mismanagement on a prima facie basis, it may justify the waiver to be granted so that merely because the member who complains may not possess the requisite qualification, the company which is the real victim of the oppression and mismanagement, is denied justice.
Karthik Seshadri practices corporate law and is a senior partner in Chennai-based law firm, Iyer & Thomas.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.