Tata Vs Mistry: Supreme Court’s Deference To Decision-Making In Tata SonsBloombergQuintOpinion
By way of a 282-page judgment, the Supreme Court brought the curtains down on the first act in one of India’s fiercest corporate battles. In doing so, it ruled resoundingly on all issues in favour of the Tata Group and rejected the pleas of the minority shareholders represented by the Mistry Group. The Court overruled the decision of the National Company Law Appellate Tribunal and concurred with the earlier findings of the National Company Law Tribunal's Mumbai bench.
Lack Of Oppression Or Prejudice
While the parties canvassed myriad issues before the various judicial fora, the question before the Supreme Court boiled down ultimately to whether the removal of Mr. Cyrus Mistry as executive chairman of Tata Sons, and thereafter as a director of the company as well as of various companies within the Tata Group, amounted to oppression or prejudice within the meaning of the Companies Act, 2013.
Following from that was the issue of whether the NCLAT could have granted relief by reinstating Mr. Mistry as a director of various companies and as executive chairman of Tata Sons. The Court found that Mr. Mistry’s removal did not amount to oppression or prejudice and that his reinstatement on the boards of various Tata Group companies was out of the question.
At one level, this may seem a rather harsh outcome on the minority shareholders, i.e., the Mistry Group, and may even insinuate the Supreme Court’s lack of regard for minority interests. But, from a strictly legal perspective, the outcome of the litigation is altogether understandable.
The reason is that the Companies Act, 2013 imposes an extremely high bar on plaintiff shareholders to satisfy a claim of oppression or prejudice. A successful claimant shareholder needs to jump through two hoops.
The first is to show that the conduct of the company or controlling shareholders, in this case Mr. Mistry’s removal from various positions, was oppressive or prejudicial.
The second is that the facts are such that they would justify the making of a winding up order on just and equitable grounds, but that to actually wind up the company would be unfairly prejudicial to the shareholders.
As to the first criterion, the Court found that there was nothing prejudicial about Mr. Mistry’s removal from his positions on Tata Sons. A lot of emphasis was placed on Mr. Mistry’s own conduct, including his leaked letter that raised several allegations of wrongdoing in various Tata Group companies, and his release of files pertaining to the Tata Education Trust to the income tax authorities.
The Court observed in figurative terms: “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.”
The oppression and prejudice remedies bear complexities and uncertainties because their determination extends beyond pure legality and into other factors such as whether the conduct of the parties was harsh or burdensome. In that sense, a perfectly legal act by a director or controlling shareholder may be found oppressive, while an illegal act could be one that is neither harsh nor prejudicial to the minority. Eventually, based on the evidence, it remains for the adjudicatory authorities to accept one party’s word over the other.
The second criterion, which requires claimant shareholders to demonstrate the existence of facts justifying the winding up of a company on just and equitable grounds, creates an almost impassable barrier. Such a situation generally exists when it can be shown that the business which was organised as a company was effectively run like a partnership, referred to in law as a quasi-partnership. This requires shareholders to have come together in the company by extending and maintaining mutual trust and confidence in each other, along with an understanding that all of them will play an active role in its management.
The Mistry Group’s argument that Tata Sons is a quasi-partnership did not cut ice with the Supreme Court, in particular because the Mistry Group was inducted into Tata Sons only several decades after the company was incorporated. Even then, there was no understanding of mutual trust or confidence of the nature required for an oppression or prejudice claim.
The Unviability Of Relief
The questions of whether and what relief courts must grant in an oppression or prejudice action is determined against the touchstone specified in section 242 of the Companies Act of whether they bring “to an end the matters complained of”.
The Supreme Court noted that reliefs such as reinstatement of a person to the position of director or executive chairman of a company would not fall within the scope of reliefs that are capable of being granted. Arguably, such a relief would only perpetuate the disagreements and acrimony within the company than extinguish them. Hence, it refused to grant any of the reliefs sought by the Mistry Group. The Court’s stance was eased by the fact that the reliefs granted by the NCLAT were either not sought for by the Mistry Group or were beyond the tribunals powers in the case before it.
Although the main plank of the case related to the oppression and prejudice claims, the Supreme Court also ruled in favour of the Tata Group on other issues such as
(i) its rights under Article 75 of Tata Sons’ constitution which gave the controlling shareholders the power to acquire the shares of the minority,
(ii) the existence of affirmative voting rights with directors nominated by the Tata Group, and
(iii) the validity of the reconversion of Tata Sons from a public company into a private one.
A Critical Outlook And The Way Forward
Despite the categorical nature of the Supreme Court’s ruling, several loose ends remain.
First, the Court was selective in its approach in focusing on some issues such as Mr. Mistry’s removal, and discarding others. One of the principal prongs of the Mistry Group’s attacks related to several corporate governance issues emanating with Tata Sons and other subsidiary companies, referred to during the litigation as the “legacy issues”. These include (i) transactions with Siva and Sterling Group of companies; (ii) Air Asia; (iii) transactions with Mehli Mistry; (iv) losses that Tatas suffered from the Nano project; and (v) the acquisition of Corus.
The Supreme Court sidestepped these issues on the ground that these are factual in nature, and that the decision of the NCLT (in favour of the Tata Group) was not specifically overturned by the NCLAT. It is true that factual issues are involved, but whether they amount to oppression or prejudice would be a question of fact coupled with law. The Supreme Court chose to ride on the strength of the NCLT’s findings rather than to independently assess whether the facts met the test of oppression or prejudice under law.
Second, the Supreme Court was resolute in putting an end to the dispute at hand rather than to expound on larger principles of law.
A more broad-based approach would have been especially useful given that this case represents the first major oppression and prejudice dispute under the revamped regime under sections 241 and 242 of the Companies Act, 2013, which bears substantial differences from the previous regime under the Companies Act, 1956.
As the highest court of the land, it missed the opportunity to settle several important questions of law, including the meaning of ‘prejudice’, which was inserted in the new legislation.
Third, in its landmark ruling in Needle Industries (1981), the Supreme Court clarified that even where a plea for oppression failed, “the court is not powerless to do substantial justice between the parties” and it can make appropriate orders. However, in this case, the Supreme Court chose to adopt a hands-off approach, and left it to the parties to resolve the issues among themselves. While such an approach is fathomable, it merely sends parties back to the drawing board, one a victor and the other vanquished, and that too after a lapse of nearly five years.
Finally, this case has a message for legislators as well. Comparatively speaking, the Indian regime for oppression and prejudice is unduly onerous on claimant shareholders.
For example, the requirement that oppression remedy is available only when there are facts warranting just and equitable winding up exists only in India and not in other comparable jurisdictions such as the United Kingdom and Singapore.
As played out in the present episode, the judiciary’s hands are tied, and it remains for Parliament to consider whether there is merit in widening the scope of the oppression, prejudice and mismanagement remedy.
Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.