TATA SONS & ORS v. CYRUS MISTRY

 

Shubham Budhiraja[1]

This Judgment is important not because it has brought end to the famous corporate battle but also because it has given light on various subjects such as;

-          Power of Tribunal under the law

-          Service Law aspects of contract of personal services and reinstatement

-          Specific overruling and importance of consistency in pleadings and not to do multiple amendments

-          How too much use of CPC can destroy the tribunal expediency and can create a mess

-          Binding nature of AOA on its members

-          Concept of Private company under old act & confusions with new act

-          History of Companies act in England and India

-          Concept of Corporate Governance in three phases in India

-          Nominee director and their duties

-          Proportional representation on board

-          Interpretation of AOA & Court cannot re-write them

-          Meaning of term “same process” in AOA

-          Concept of Chairman of Board & its removal

-          Importance of Pleading and its consistency

-          Powers under Section 241 & what is the ultimate objective that court must kept in mind

-          Special rights/ affirmative rights

-          Meaning of Interest of Company/ Interest of Members and their inter-play

-          Section 242 cannot be used to maintain discipline as it’s not for future probability of abuse

-          Prior legal opinion has nothing wrong because anyway they most know what to pass in meeting

Summary of Judgment

Mr. Cyrus Mistry appointed as Executive chairman of Tata sons in year 2012 for period of 5 years as per Articles of Association of Company and in year Oct 2016, he was removed in a board meeting from the position of chairman. Thereafter he started leaked confidential information and all operating companies also resolved to remove him from post of directorship by following due process of law. SP Group which holds 18% of Equity in Tata sons filed Section 241 Petition which was refused on merits by NCLT but NCLAT in appeal allowed more than been asked for in plea dig and therefore total 15 appeals filed before apex court where 14 by TATA group and 1 by SP group itself for modification of relief granted by NCLAT. The apex court hold that NCLAT overruled without any specific findings and therefore findings of facts recorded by NCLT was final except that of Cyrus Reinstatement. The court also heard fresh arguments on validity of Article 75 of AOA, Concept of affirmative rights, and Proportional representation on board. Hon’ble apex court in detail discussed the comparative Corporate law and its development in England & India and also discussed the lacuna in CA 2013 so far as different dates of its effectiveness and also the 3 era of corporate governance from history to present and finally decided that NCLAT judgment deserved to be se-aside and further denied request of Cyrus companies to give fair compensation for its shares by  citing that it is for tribunal to decide and not this court 

CHAPTER: 1- HISTORY OF TATA GROUP & OVERVIEW OF THEIR AOA

HISTORY OF TATA GROUP

Tata Group was founded by Jamsetji Nusserwanji Tata (1839-1904). It was first established as a private trading firm in 1868 and was later incorporated as a private company on 8.11.1917 under Section 2(13) of the Companies Act, 1913.

Later two Trusts were created, one in the year 1919 under the name Sir Ratan Tata Trust and another in 1952 under the name Sir Dorabji Tata Trust.

It was only in 1965 that S.P. Group acquired 48 preference shares and 40 equity shares, from a member of Tata Sons named Mrs. Rodabeh Sawhney.

Shri Pallonji Mistry, the father of CPM was inducted as a Non-Executive Director on 25.06.1980, though the Articles of Association did not confer any right of Directorship upon the S.P Group. He stepped down from this position in December, 2004. Thereafter, CPM was appointed as Non-Executive Director on 10.08.2006.

Ever since the establishment of the Tata Group in 1868, there have only been six persons who became the Chairmen of the Group. While five of them namely Jamshedji Tata, Sir Dorab Tata, Nowroji Saklatwala, JRD Tata and Ratan Tata belonged to the same family, the sixth person namely CPM was inducted as Executive Chairman by Resolution dated 18.12.2012

Before the said appointment, CPM was identified by a Selection Committee which comprised of the nominees of the two Tata Trusts. This Selection Committee identified CPM as a successor to RNT as Chairman and appointed him first as Executive Deputy Chairman for a period of five years form 1.04.2012 till 31.03.2017, subject to the approval of the General Body. The General meeting of the shareholders, held on 1.8.2012 approved the appointment of CPM as Executive Deputy Chairman and also left it to the Board to re-designate him as Chairman. This is how the Board, in its meeting dated 18.12.2012 re-designated CPM as Executive Chairman.

At present, Tata sons total Equity Capital of Tata Sons:

-          65% is held by two Tata Trust

-          18% by Palonji Group and

-          remaining by Tata Operating Companies, Ratan Tata & Others

Only 2% of the total issued share capital of Tata Sons hold by Palonji Group

 

 

 

 

ARTICLES OF ASSOCIATION OF TATA SONS

ARTICLE NO.	ARTICLE SUBJECT
ARTICLE 118. APPOINTMENT OF CHAIRMAN	For the purpose of selecting a new Chairman of the Board of Directors and so long as the Tata Trusts own and hold in the aggregate at least 40% of the paid up Ordinary Share Capital of the Company for the time being, a Selection Committee shall be constituted in accordance with the provisions of this Article to recommend the appointment of a person as the Chairman of the Board of Directors and the Board may appoint the person so recommended as the Chairman of the Board of Directors, subject to Article 121 which requires the affirmative vote of all Directors appointed pursuant to Article 104B. The same process shall be followed for the removal of the incumbent Chairman.
ARTICLE 105(a) POWER OF BOARD	Article 105(a) deals with the power of the Board to appoint a Managing Director, Joint/Deputy Managing Director or Whole Time Director.
ARTICLE 105(b) POWER TO DESIGNATE CHAIRMAN	“The Board shall have the power to designate the Chairman of the Board as the Executive Chairman and pay him such remuneration as, in their opinion, they deem fit”.
ARTICLE 122(b) BOARD TO EXERCISE RESIDUAL POWERS IN BM	Article 122(b) says that the Board may exercise all such powers as are not required to be exercised by the company in General Meeting.
ARTICLE 121B ADVANCE NOTICE BY DIRECTOR	121B. Any Director of the Company will be entitled to give at least fifteen days’ notice to the Company or to the Board that any matter or resolution be placed for deliberation by the Board and if such notice is received it shall be mandatory for the Board to take up such matter or resolution for consideration and vote, at the Board meeting next held after the period of such notice, before considering any other matter or resolution

 

ARTICLE 86. QUORUM AT GENERAL MEETINGS	No quorum at a general meeting of the holders of the Ordinary Shares of the Company shall be constituted unless the members who are personally present are not less than five in number including at least one authorised representative jointly nominated by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust so long as the Tata Trusts hold in aggregate at least 40% of the paidup Ordinary share capital, for the time being, of the Company. Explanation: the words “jointly nominated” used in this Article shall mean that the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust shall together nominate the authorized representative. In the case of any difference, the decision of the majority of the Trustees in the aggregate of the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust shall prevail.”
ARTICLE 104. GENERAL PROVISIONS	B. Nomination of Directors; So long as the Tata Trusts own and hold in the aggregate at least 40% of the paid up Ordinary share capital, for the time being, of the company, the Sir Dorabji Tata Trust and Sir Ratan Tata Trust, acting jointly, shall have the right to nominate one third of the prevailing number of Directors on the Board and in like manner to remove any such person so appointed and in place of the person so removed, appoint another person as Director. The Directors so nominated by the Sir Dorabji Tata Trust and Sir Ratan Tata Trust shall be appointed as Directors of the Company. Explanation: the words ‘acting jointly’ used in this Article shall mean that the Sir Dorabji Tata Trust and Sir Ratan Tata Trust shall together nominate such Directos. In the case of any difference, the decision of the majority of the Trustees in the aggregate of the Sir Dorabji Tata Trust and Sir Ratan Tata Trust shall prevail.
ARTICLE 121. MATTERS HOW DECIDED	Matters before any meeting of the Board which are required to be decided by a majority of the directors shall require *the affirmative vote of a majority of the Directors appointed pursuant to Article 104B present at the meeting and in the case of an equality of vote’s the Chairman shall have a casting vote.”
ARTICLE 75 COMPANY’S POWER OF TRANSFER	The Company may at any time by Special Resolution resolve that any holder of Ordinary shares do transfer his Ordinary shares. Such member would thereupon be deemed to have served the Company with a sale notice in respect of his Ordinary shares in accordance with Article 58 hereof, and all the ancillary and consequential provisions of these Articles shall apply with respect to the completion of the sale of the said shares. Notice in writing of such resolution shall be given to the member affected thereby. For the purpose of this Article any person entitled to transfer an Ordinary share under Article 69 hereof shall be deemed the holder of such share.

 

CHAPTER- 2: FACTUAL POSITION

There are 2 Independent transactions which we need to understand

1.       The removal of Cyrus Mistry from post of Executive chairman of Tata Sons

2.       Allegations of oppression & Mis-management by Palonji Group against Tata sons & Ratan Tata such as Porus transaction, Nano Project, trust involvement, per se oppressive nature of AOA

NCLT dismissed the Petition because of lack of maintainability as holding was below 10% Equity share capital but NCLAT gave the waiver and thereafter NCLT heard the matter on merits and dismissed it holding no allegations proved by Petitioner. NCLAT in appeal set-aside the NCLT order and also given various relief such as reinstate of Cyrus Mistry as Executive chairman, injunction against Tata Trust select committee to interfere in decisions of board and direct ROC to rename Tata Sons as Public Co.

NCLT order dated 06.03.2017 dismissed the petition because Petitioner was holding only 2% Issued capital& by 17.04.2017, application for waiver also dismissed by NCLT but NCLAT by order dated 21.09.2017 allowed the waiver and direct NCLT to heard it on merits and NCLT via order dated 09.07.2018 dismissed on merits

NCLAT via order dated 18.12.2019 set aside the NCLT order and passed various reliefs

ROC filed IA against this order but NCLAT via order dated 06.01.2020 them and asking it to correct its record by re-naming Tata sons as Public company

 

CHAPTER:3- PROCEEDINGS & CONTENTIONS

There are total 15 appeals out of which 12 appeals filed by Tata Sons & Operating Companies whereas 2 appeals filed on behalf of ROC by Tata and 1 appeal filed by Palonji Group seeking extra reliefs

Company petition filed on dated 20.12.2016 in C.P No.82 of 2016 before NCLT on 3 grounds

-          Prejudice

-          Oppressive

-          Mismanagement

Appeals	Remarks
Civil Appeal No’s .440-441 of 2020, 442-443 of 2020 and 448-449 of 2020 (6 appeals by Group companies)	Filed  by Tata Group Operating Companies because of Cyrus Reinstate as Director in their company for rest of tenure
Civil Appeal No’s .444-445 of 2020 ( 2 appeals by trustee)	Trustees of two Trusts namely Sir Ratan Tata Trust and Sir Dorabji Tata Trust have filed these appeals because  of injunctive order restraining him to take decisions on Board
Civil Appeal No’s .19-20 of 2020 (2 appeals by Ratan Tata)	Ratan Tata has come up with two independent appeals  because of injunctive order restraining him to take decisions on Board
Civil Appeal No’s. 13-14 of 2020 (2 appeals by Tata sons)	Tata Sons (Private) Limited filed them because the entire allegation of oppression and mismanagement has made against it
Civil Appeal No.1802 of 2020 (1 appeal by Palonji Group)	Cyrus Investments Private Limited & Sterling Investment Corporation filed them for additional relief in nature of proportional representation on Board of Tata sons & committee meetings and to delete the requirement of additional vote in hands of select directors under Article 121 or restrict their voting
Civil Appeal No’s. 263 and 264 of 2020 (2 appeals by Tata Group Companies because of ROC IA against final order)	Filed by Tata companies because Registrar of Companies, Mumbai, filed IA against final order of NCLAT seeking amendment of the final order passed by NCLAT but same was dismissed NCLAT dismissed these 2 applications by an order dated 06.01.2020, not merely holding that there were no adverse remarks against the Registrar of Companies but also giving additional reasons to justify its findings in the disposed of appeals, in the purported exercise of the power available under section 420 of the Companies Act, 2013

 

NCLAT which has set-aside the order of NCLT dismissed the Petition under Section 241 of CA, 2013 filed by Palonji Group (Minority Shareholder) against Tata Sons.

 

CHAPTER:4- NCLT, NCLAT & COMPARISON BETWEEN THEIR FINDINGS

NCLT Judgment dated 09.07.2018

Allegations	NCLT observations
That Mr. Siva and Sterling Group earned big gain on selling shares of Tata Docomo because Ratan Tata given him information and it was dubious transactions	The petitioner hide the fact that he himself made more gain than Mr. Siva & Sterling Group Company and also that the issue of Tata Docomo is well settled in year 2013 itself     Hence that letter cannot be linked to DoCoMo issue to show as if RNT was encouraging Mr. Siva not to pay money to the company.
Air Asia JV allegations	Cyrus never raised any objection prior to JV approval and their statement is full  of oxymoron where one hand they say they are not privy to transactions and other hand they claimed that have protected the interest of company by limiting 30% equity exposure
On Transactions with Mehli Mistry& the sale of the flat at Bhakthawar and a land Alibaug  and that Ratan Tata got itself enriched on these transactions	These all transactions has happened in year 2000 and Cyrus never raised any objection at time when transactions were approved by board
On Nano car project and the losses suffered by Tata Motors	The Transactions happened when Ratan Tat was not director of Tata Motors and JV incorporated under guidance of Cyrus
Acquisition of Corus	The Cyrus has given approval to acquisition and he was director of Tata steel and there was no dissent of any shareholder and no price inflation were there
Private company v. Public company	No entrenchment article inserted
On the contention that a few Articles were oppressive or that they were abused	The amendment to AOA made when Cyrus was deputy chairman and he consented to it and Article 75 was in existence from beginning and fact that directors stepped out to consult Ratan tata doesn’t make big issues because anyway he had to be consulted
Allegation of Breach of fiduciary duties by the Directors	The onus is on them to show the breach and there is no evidence except minutes of BOM of removal of Cyrus and his removal had nothing to do with companies and his removal is not oppression on minority merely because he holds controlling interest in them. The provision of affirmative voting of two trust is mere curtailment of right to appoint majority of director and not oppressive
On the removal of CPM	Trust deficit was main reason and there was no question of a selection committee to look into his removal and his removal from directorship because of his leaking of confidential information

 

NCLT v. NCLAT Difference in Judgment

-          NCLT dealt with every one of the allegations of oppression and mismanagement and recorded reasoned findings. Instead, the NCLAT summarized in one paragraph, namely paragraph, its conclusion on some of the allegations, without any kind of reasoning

 

-          The allegations relating to (i) over priced and bleeding Corus acquisition (ii) doomed Nano car project (iii) undue favours to Siva and Sterling (iv) loan by Kalimati to Siva (v) sale of flat to Mehli Mistry (vi) the unjust enrichment of the companies controlled by Mehli Mistry (vii) the Aviation industry misadventures (viii) losses due to purchase of the shares of Tata Motors etc., were not individually dealt with by NCLAT, though NCLT had addressed each one of these issues and recorded findings in favour of Tata Sons.

 

-          Therefore, there is no escape from the conclusion that NCLAT did not expressly overturn the findings of facts recorded by NCLT, on these allegations. We are constrained to take note of this, even at the outset, in view of a contention raised by Shri Shyam Divan, learned Senior Counsel for the SP group, that in an appeal under Section 423 of the Companies Act, 2013, this court will not normally interfere with a finding of fact reached by NCLAT, unless it is found to be wholly perverse.

 

CHAPTER:5- QUESTION OF LAW BEFORE SUPREME COURT

 

1.       Whether NCLAT opinion regarding facts of Oppression and mismanagement justify the winding up in lights of settled principles especially because each facts were not individually overturned by NCLAT

 

2.       Relief granted by NCLAT were in consonance to

(i)                  Pleading made

(ii)                Relief sought

(iii)               Scope of Power under Section 242(2)

 

3.       Can tribunal muted the power of company under Article 75 of AOA and demand any member to transfer his shares and injunction the company from exercising its rights without setting aside AOA

 

4.       Declaring Article 121 affirmative voting rights as oppressive was justified especially when same was given up during arguments

 

 

5.       Whether re-conversion from public to Private required approval under Section 14 or action under Section 434 A(4) of 1956 act from year 2000 to 2013

 

CHAPTER:6-  HISTORY OF COMPANY LAW IN ENGLAND & IN INDIA

 

HISTORY OF COMPANIES ACT IN ENGLAND & INDIA

England

The history of legislative action to regulate incorporated companies, in England, is just 176 years old. It begins with the Joint Stock Companies Act, 1844. Until then, the government created corporations under a Royal Charter or an Act of Parliament with the grant of a monopoly over a specified territory. The best known example is the British East India Company, to which Queen Elizabeth I granted the exclusive right to trade with all countries to the east of the Cape of Good Hope.

A chartered company (similar to East India Company), known as the South Sea Company, was established in 1711 to trade in the Spanish South American colonies. The South Sea Company's monopoly rights were supposedly backed by the Treaty of Utrecht, signed in 1713 as a settlement following the War of Spanish Succession. Investors in the UK were promised high returns of unimaginable proportions, which led to the shares of the company being traded by avaricious investors at high premium. By 1717, the South Sea Company became so wealthy despite having done no real business that it assumed the public debt of the UK government. This was the first speculative bubble that the country (or perhaps the world) saw, but by the end of 1720, the bubble had "burst", leading to bankruptcies and the passage of The Bubble Act, 1720.

The UK Bubble Act, 1720 prohibited the establishment of companies without a Royal Charter and it remained in force until its repeal in 1825. By 1825, Industrial Revolution had gathered pace, necessitating a legal change. The Bubble Companies Act 1825 lifted the restrictions, but it did not resolve the problem fully

And thereafter 1843 report lead to formation of Joint Stock Companies Act 1844 and this act allowed ordinary people to incorporate company but limited liability was not available

Then came the Limited Liability Act, 1855, which allowed investors to limit their liability in the event of business failure, to the amount they invested in the company. These two features a simple registration procedure and limited liability were subsequently codified in the first modern company law enactment, namely the Joint Stock Companies Act 1856

Thereafter, Companies Act 1862, which was described by Francis Palmer as the Magna Carta of Cooperative enterprises. Though this act provides for incorporation, winding up etc. but this act also did not contain any provision of oppression and mismanagement and  thereafter the companies act, 1929

Then WW-II happened and Lord Cohen committee formed in 1943 to suggest reforms for protecting public Interest and safeguard Investor interest and committee also dealt with issue of siphoning off funds in form of huge remuneration but there were 2 criticism to it that (i) requirement to establish ground of just & equitable was harsh and (ii) Section 210 applies only to course of conduct and not isolation

Thereafter 1962 committee suggested incorporation of word unfairly prejudicial and in Companies act,  1985, Section 459 read as protection of members against unfair  prejudice

Companies act, 1985 was repealed by Companies act, 2006 which is a bunch of 1300 sections & 16 schedules where Section 994-998 deals with protection of members against unfair prejudice  

Thus the English legislative history of the provisions relating to oppression, mismanagement and prejudice, show 3 milestones, namely

(i)                  the introduction in the year 1862, of the ‘just and equitable clause’ for winding up and the conferment of a limited right on the dissentient member, whenever a transfer or sale took place in the course of winding up proceedings,

(ii)                the provision of an alternative remedy to winding up, in case of oppression of minority, in the year 1948 and

(iii)               the shift from oppression to the ‘unfair prejudice’ quotient in 1980/1985.

The journey, in other words, was from “winding up on just and equitable cause” to “oppression” to “unfair prejudice”.

India

The earliest legislation made for the ‘Regulation of Registered Joint Stock Companies’ was Act No. XLIII of 1850.  And Supreme Courts of Judicature at Calcutta, Madras and Bombay were conferred not only with the power of registration of such companies but also with a power to enforce the performance by the directors of any of their duties under the Act or the deed of partnership. The concepts such as minority, majority, oppression, mismanagement etc., were alien to this Act of 1850.

Then came Act No. XIX of 1857 which provided for the incorporation and regulation of joint stock companies and other associations either with or without limited liability of the members thereof

But even in this Act the concepts such as oppression and mismanagement etc., were not dealt with

Thereafter, a full-fledged enactment known as The Indian Companies’ Act, 1866 was passed with a view to consolidate and amend the laws but even this Act, did not provide for any remedy in the case of oppression and mismanagement, though provisions were made for winding up including voluntary winding up.

The act of 1866 repealed by The Indian Companies Act No. VI of 1882. This Act also did not contain provisions for an individual or group of shareholders/members to seek redressal against oppression, mismanagement or any unfair prejudicial treatment

Then came The Indian Companies Act, 1913 (Act No.VII of 1913) which repealed the 1882 Act and the amendments made thereof. Interestingly, this 1913 Act also repealed one particular provision in the Indian Arbitration Act, 1899. Though in the original enactment of 1913, there was no provision relating to oppression but by 1951 amendment it added Section 153C which provides for power of court to act when company acts in a prejudice or oppressive way

Thereafter by 1956 act Sections 397, 398 and 402 provides for Application for relief in cases of oppression, application to court for relief in case of mismanagement and Section 402 provides for power of court in such applications

After LPG, Companies amendment bill, 2009 introduced but lapsed and thereafter 2011 bill introduced and it took shape of Companies act, 2013 where statement of objects has stated in clear words that it is aim to protect the interest of minority shareholders

Chapter 16- Section 241 to 246 deals with oppression & mismanagement where Section 241 provides for application in case of oppression, etc. and Section 242 provides for power of tribunal

What was incorporated in section 210 of the English Companies Act, 1948, inspired the insertion of section 153C of the Indian Companies Act, 1913, by way of an amendment in 1951 and then came Section 397 & 398 of 1956 act and lastly consolidation in Section 241 of CA 2013 on model of Section 459 of English Companies act, 1985 & Section 998 of English Companies act, 2006

 

-          The company’s affairs in a manner that warrant interference, should be “present and continuing”, under the 1913 Act and 1956 Act, as seen from the usage of the words “are being”, the conduct could even be “past or present and continuous” under the 2013 Act as seen from the usage of the words “have been or are being” (But the conduct cannot be of a distant past)

 

-          Prejudice to public interest and prejudice to the interests of any member or members were not among the parameters prescribed in the 1913 Act, but under the 1956 Act prejudice to public interest was included both under the provision relating to oppression and also under the provision relating to mismanagement. Prejudice to the interest of the company was included only in the provision relating to mismanagement. But under the 2013 Act conduct prejudicial to any member or prejudicial to public interest or prejudicial to the interest of the company are all added along with oppression;

 

-          Under the 1913 Act, the Court should be satisfied that winding up under the just and equitable clause will not only unfairly prejudice but “also materially prejudice” the interests of the company or any part of its members. But in the 1956 Act and 2013 Act, the words “and materially” do not follow the word “unfairly”. Moreover, under the 1956 Act and 2013 Act all that is required to be seen is whether the winding up will unfairly prejudice “such member or members” indicating thereby that the focus was on complaining/affected members

In all the 3 Indian enactments, namely the 1913 Act, 1956 Act and the 2013 Act, the Court is ordained, generally to pass such orders “with a view to bringing to an end the matters complained of”. This sentence is found in Section 153C(4) of the 1913 Act. It is found in Section 397(2) as well as 398(2) of the 1956 Act and it is also found in Section 242 (1) of the 2013 Act. This is also the common thread that runs through the statutory prescriptions contained in the English Acts of 1948, 1985 and 2006. Therefore, at the stage of granting relief in an application under these provisions, the final question that the Court should ask itself is as to whether the order to be passed will bring to an end the matters complained of

CHAPTER:7- SUPREME COURT OBSERVATIONS ON

 

(I)                 REMOVAL OF MISTRY

(original petition nowhere had relief of reinstatement because he was not removed but it is when he started leaking confidential information and passing documents to Income tax authorities under garb of law abiding citizen, he had to be removed from post of director and therefore he added prayer of re-instatement but then later he realized that his removal of director was justified so he then added relief to have proportional representation on board and give up earlier prayer when these prayer itself give up then how come NCLAT granted them and also NCLAT granting his reinstatement for rest of tenure itself bad because 5 years of appointment had already lapsed)

 

-          That failed business decisions and the removal of a person from Directorship can never be projected as acts oppressive or prejudicial to the interests of the minorities

 

-          An important aspect to be noticed is that in a petition under Section 241, the Tribunal cannot ask the question 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 a 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 a relief under Section 242. The Company Tribunal is not a labour Court or an administrative Tribunal to focus entirely on the manner of removal of a person from Directorship.

 

 

-          There is a thin line of demarcation between a well-conceived plan and a premeditated one and the line can many times be blurred.

 

The removal of a person from the post of Executive Chairman cannot be termed as oppressive or prejudicial. The original cause of action for the complainant companies to approach NCLT was the removal of CPM from the post of Executive Chairman. Though the complainant companies padded up their actual grievance with various historical facts to make a deceptive appearance,

-          Firstly, the legality and validity of removal need not to go into to find out whether majority is working prejudice or oppressive rather it is the effect of such removal that court has to look into

 

-          Secondly, the entire pitch of 241 petition was removal from post of chairman which is a creation of AOA and nothing more

 

-          Thirdly, Later on more historical facts added to make petition more beautiful to get relief but those transactions as recorded by NCLT were too remote (Section 241 consider past transactions but not too past) and also those contentions had no basis because no objection ever raised by him

 

-          Fourthly, even the process of removal of chairman was valid because (i) affirmative votes were given and same process does not mean constitution of select committee, (ii) Board lost confidence in him, (iii) BM was competent for his removal because this matter has to take in board and not GM, (iv) requirement of advance notice not required because the matter was taken by board in BM

 

-          Fifthly, even if removal was not valid or due process not followed, same was not justified to hold a valid ground to wind up the company

 

INVOCATION OF JUST AND EQUITABLE CLAUSE

So following are the tests

-          Whether business is as per objects of MOA

-          Whether business carried on by elected people

-          Whether business conducted as per principles of commercial administration defined in law such as proper board meetings, approvals, fillings, sanctions, expenses, deliberations

-          Test of deliberate violations

-          Effect test i.e. how these violations are impacting the members concerned

-          Test of Equitable consideration but only if there is history of Partnership

-          Functional dead lock

In present case, the same minority who is not only given status in board but also made as chairman cannot complaint oppressive of majority

The origin of just and equitable clause is to be traced to the Law of Partnership which has developed, according to the House of Lords, “the conceptions of probity, good faith and mutual confidence”. Having said that, Ebrahimi pointed out that the reference to quasi partnerships or “in-substance partnerships” is also confusing for the reason that though the parties may have been partners in their ‘Purvashrama’, they had become co-members of a company accepting new obligations in law.

Hence, a company, however small, however domestic, is a company and not a partnership or even a quasi-partnership

Therefore to apply equitable fetter on company there must be SOME HISTORY of PARTNERSHIP of that company but in TATA SONS, there was no such history of Partnerships with Cyrus Misty Group

In the case in hand there was never and there could never have been a relationship in the nature of quasi partnership between the Tata Group and S.P. Group. S.P. Group boarded the train halfway through the journey of Tata Sons. Functional dead lock is not even pleaded nor proved.

 

Hence, invocation of Just & Equity clause was not justified because there is no ground justify it

REINSTATEMENT OF CPM

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. Thereafter, it was modulated into a cry for proportionate representation on the Board.

But interestingly, NCLAT understood what the complainant companies and CPM actually wanted

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

In fact NCLAT has gone to the extent of reinstating CPM not only on the Board of Tata Sons, but also on the Board of Tata group companies, without they being parties, without there being any complaint against those companies under section 241 and without there being any prayer against them. These companies have followed the procedure prescribed by Statute

Hence, NCLAT giving relief of Re-instatement was without any pleading, without any prayer and without any legal basis. Due to such a basis even Cyrus it not able to support the findings and thus he has come in apex court for representation of its group company on board

SECTION 241 & 242 & REINSTATEMENT POWERS

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.

Moreover, it has been held in the case of Vaish Degree College  that the general rule is that a contract of personal services is not specifically enforceable unless a person who is removed from service is (a) a public servant who has been dismissed from service in contravention of provisions of Article 311 of the Constitution of India; (b) dismissed under Industrial Law seeking reinstatement by Labour or Industrial Tribunal; and (c) terminated in breach of a mandatory obligation imposed by statute by a statutory body

The position in law that a contract of personal services cannot be enforced by 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

Thus the relief of reinstatement granted by the Tribunal, was too big a pill even for the complainant companies (and perhaps CPM) to swallow

RELIEF RELATING TO ARTICLE 75

Fundamentally, the object for the achievement of which, the Tribunal is entitled to pass an Order under Section 242(1) of the 2013 Act, remains just the same, as in the 1956 Act. The words “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit”, found in the last limb of Subsection (2) of Section 397 of the 1956 Act, is also repeated in the last limb of Subsection (1) of Section 242 of the 2013 Act. These words also found a place in the last limb of Subsection (4) of Section 153C of the 1913 Act.

Even Section 210 of the English Companies Act of 1948 used the very same words namely “the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit”. Section 996 of the English Companies Act, 2006 retained the very same wordings

Therefore, despite the law relating to oppression and mismanagement undergoing several changes, the object that a Tribunal should keep in mind while passing an order in an application complaining of oppression and mismanagement, has remained the same for decades  This object is that the Tribunal, by its order, should bring to an end the matters complained of

In other words the purpose of an order both under the English Law and under the Indian Law, irrespective of whether the regime is one of “oppressive conduct” or “unfairly prejudicial conduct” or a mere “prejudicial conduct”, is to bring to an end the matters complained of by providing a solution. The object cannot be to provide a remedy worse than the disease.

The Tribunal should always keep in mind the purpose for which remedies are made available under these provisions, before granting relief or issuing directions.

Hence, the relief granted regarding restricting Article 75 was not in consonance to the pleading, prayer and law

The 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 in the application for amendment. Therefore, NCLAT could not have and should not have made Article 75 completely ineffective by passing an order of restraint

NCLAT has agreed, on first principles, that it has no jurisdiction to declare any of the Articles of Association illegal. NCLAT has stretched Section 241(1)(a) to cover the likelihood of a future bad conduct, which is impermissible in law.

That Articles of Association of a company constitute a contract among shareholders, is the bedrock of Company Law. In fact, Article 75 was not an invention of the recent origin in Tata Sons. It has been there for nearly a century in one form or the other.

A person who willingly became a shareholder and thereby subscribed to the Articles of Association and who was a willing and consenting party to the amendments carried out to those Articles, cannot later on turn around and challenge those Articles. The same would tantamount to requesting the Court to rewrite a contract to which he became a party with eyes wide open

The pleading my most stretch has asked for future possible misuse of Article 75. Section 241 is not intended to discipline a Management in respect of a possible future conduct

It is no doubt true that the Tribunal has the power under Section 242 to set aside any amendment to the Articles that takes away recognized proprietary rights of shareholders. But this is on the premise that the bringing up of amendment itself was a conduct that was oppressive or prejudicial.

Even the contention revolving around Section 58(2) is wholly unsustainable, as Section 58(2) deals with securities or other interests of any member of a Public Company

Hence, the order of NCLAT giving modification to Article 75 was not correct because firstly there was no pleading stating instance of its abuse, secondly it is not per se abusive because nothing is contrary to law and thirdly asking for more would be extending the illegality

AFFIRMATIVE RIGHTS

The swing that the S.P. Group has taken in their position relating to affirmative voting rights is quite funny.

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.

SHIFT OF CORPORATE GOVERNANCE – GENERATIONS & AFFIRMATIVE RIGHTS

There are 3 time periods through which development of corporate entities have passed.

In the first period, large corporate houses were established by individuals with their own funds and those individuals and their families controlled both ownership and management of these enterprises.

In the second time period, when professionalismbecame the ‘Taraka mantra’, families which promoted enterprises, retained ownership, but appointed professional managers to run the show Thus ownership got divested from management.

In the third time period, social participation increased by leaps and bounds through public issues and listing. This increased the social accountability and social responsibility of corporate entities.

Every time a historical shift/change took place, the legal regime had to undergo a change, albeit at snail’s pace.

It is true that the 2013 Act brought a lot of drastic changes

But it must be remembered that the shift under the Companies Act, 2013 is focused on listed and unlisted public companies. The requirement under Section 149(4) to have at least One-third of the total number of Directors as independent Directors applies only to every listed public company. The requirement under Section 151 to have one Director elected by small shareholders is also applicable only to listed companies. The requirement to constitute an Audit Committee in terms of Section 177(1), a Nomination and Remuneration Committee and the Stakeholders Relationship Committee in terms of Section 178(1) are also only on listed public companies

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. Yet Tata Sons has a Board packed with many people who are ranked outsiders. If the idea was to run Tata Sons purely as a family business, RNT need not have stepped down from the Chairmanship. Today nobody wants to step down from any office, except if afflicted by brain stroke or sun stroke

The provisions of sections 135, 149, 151, 166 and 177 around which the argument relating to corporate governance is fantasized, 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 majority of the shares. Section 149 deals with the requirement to have Directors, section 151 provides for 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 affirmative voting rights, according to S.P.Group, disabled the nominee Directors from acting independently in the best interests of the company and its stakeholders and that once appointed, the loyalty of the nominee Directors should be to the Company and not solely to the Trusts which nominated him. It was further contended that under Articles 121, 121A and 122, Tata Sons was to be a Board managed Company and that the protective rights conferred under Article 121 were intended to take care of the interests of the Tata Trust, in case they became a minority.

Tata Sons is not a company engaged either in any manufacturing activity or in any trading activity. As per the pleadings, on which there is no dispute, Tata Sons is a Principal Investment Holding Company and is a promoter of Tata Companies. Tata Sons holds a controlling interest in all the operating companies of the Tata Group. Other than being the Principal Investment Holding Company, Tata Sons, by itself is not engaged in any direct business activity.

If we take these two important factors into consideration namely:

(i)                  that Tata Sons is only a Principal Investment Holding Company; and

(ii)                that the majority shareholders of Tata Sons are only philanthropic charitable Trusts

It will be clear that the Directors nominated by the Trusts are not like any other Directors who get appointed in a General Meeting of the Company in terms of Section 152(2) of the Act. In fact it is a paradox to claim that by virtue of Subsections (2) and (3) of Section 166, every Director of a Company is duty bound to act in good faith in order to promote the objects of the company for the benefits of its members and in the best interests of all the stakeholders as well as environment and a duty to exercise independent judgment, and yet mandate the appointment of independent Directors under Section 149(4). If all Directors are required under Section 166(3) to exercise independent Judgment, we do not know why there is a separate provision in Section 149(4) for every listed Public Company to have at least 1/3^rd of the total number of Directors as independent Directors. We do not also know whether the prescription in Section 149(4) is a tacit acknowledgment that all the Directors appointed in a General meeting under Section 152(2) may not be independent in practice, though they may be required to be so in theory.

A person nominated by a charitable Trust, to be a Director in a company in which the Trust holds shares, also holds a fiduciary relationship with the Trust and fiduciary duty towards the nameless, faceless beneficiaries of those Trusts. As we have pointed out elsewhere, the history of evolution of the corporate world shows that it has moved from the (i) familial to (ii) contractual and managerial to (iii) a regime of social accountability and responsibility. This is why Section 166(2) also talks about the duty of a Director to protect environment, in addition to his duties to (i) promote the objects of the company for the benefit of its members as a whole; and (ii) act in the best interests of the company, its employees, the shareholders and the community. It is common knowledge that some of the industries which take good care of its shareholders and employees also run polluting industries. Therefore there is always a conflict, a tug of war between competing interests and statutes cannot resolve these conflicts effectively

 

Affirmative voting rights for the nominees of institutions which hold majority of shares in companies have always been accepted as a global norm. As a matter of fact the affirmative voting rights conferred by Article 121 of the Articles of Association, confers only a limited right upon the Directors appointed by the Trusts under Article 104B. Article 121 speaks only about the manner in which matters before any meeting of the Board shall be decided. If it is a General Meeting of Tata Sons, the representatives of the two Trusts will actually have a greater say as the Trusts have 66% of shares in Tata Sons. Therefore, if we apply Section 152(2) strictly, the Trusts which own 66% of the paid up capital of Tata Sons will be entitled to pack the Board with their own men as Directors. But under Article 104B, only a minimum guarantee is provided to the two Trusts, by ensuring that the Trusts will have at least 1/3rd of the Directors, as nominated by them so long as they hold 40% in the aggregate of the paid up share capital

 

Section 47(1)(b) of the 2013 Act (equivalent to Section 87(1)(b) of the 1956 Act), declares that the rights of a member of a company limited by shares, shall be in proportion to his share in the paid up equity share capital of the company. This right is subject to the provisions of Section 43, Section 50(2) and Section 188(1) of the 2013 Act. The restrictions under Sections 43, 50(2) and 188(1) respectively are, (i) shares with differential voting rights; (ii) disentitlement to voting rights, of a member who has not paid the unpaid share capital; and (iii) the disentitlement of a member to vote on a resolution for the approval of any contract entered into by the company with a related party.

Under Section 10(1) of the Companies Act, 2013, the Articles of Association bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member. However, this is subject to the provisions of the Act.

Article 94 of the Articles of Association of Tata Sons is in tune with Section 47(1)(b), as it says that upon a poll, the voting rights of every member, whether present in person or by proxy shall be in proportion to his share of the paid up capital of the company. Therefore, a shareholder or a group of shareholders who constitute majority, can always seek to be in the driving seat by reserving affirmative voting rights. So long as these special rights are incorporated in the Articles of Association and so long as they are not in contravention of any of the provisions of the Act, the same cannot be attacked on these grounds.

Directors have fiduciary duty towards 2 companies, one of which is the shareholder which nominated them and the other, is the company to whose Board they are nominated. If this is understood, there will be no confusion about the validity of the affirmative voting rights. What is ordained under Section 166(2) is a combination of private interest and public interest. But what is required of a Director nominated by a charitable Trust is pure, unadulterated public interest. Therefore, there is nothing abhorring about the validity of the affirmative voting rights.

The decision of Vodafone case which stated that the minority investor has what is called “participative rights, which is a subsect of protective rights” and that these participative rights enable the minority to overcome the presumption of consolidation of operations or assets by the controlling shareholder is of no help It was in different context that this Court analysed the independent legal existence of a subsidiary and held that even if directors are appointed at the behest of the parent company or removable by the parent company, such directors of the subsidiary company will owe their duty to those companies and are not to be dictated by the parent company if it is not in the interest of the subsidiaries.

The question as to

(i)                 what is in the interest of the company,

(ii)               what is in the best interest of the members of the company as a whole and

(iii)             what is in the interest of a nominator,

Success and profit making are at the core of business enterprises. Therefore, the best interest of the majority shareholders need not necessarily be in conflict with the interest of the minority or best interest of the members of the company as a whole, unless there is siphoning of or diversion. Such a question does not arise when the majority shareholders happen to be charitable Trusts engaged in philanthropic activities. 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

PRE- LEGAL OPINION ON REMOVAL

Much ado was made about pre-consultation and preclearance by the Trustees, even before the Board took a call. But it was actually about nothing. Whenever an institution happens to be a shareholder and a notice of a meeting either of the Board or of the General body is issued, it is but normal for the institution to have an idea about the stand to be taken by them in the forthcoming meeting.

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

 

QUESTION - PROPORTIONAL REPRESENTATION

The Statute confers upon the members of a company limited by shares, a right to vote in a general meeting. And this right is proportionate to his shareholding as per Section 47(1)(b). Section 152 which contains provisions for the appointment of Directors, does not confer any right of proportionate representation on the Board of any company, be it public or private.

Under Section 252(1) of the 1956 Act and under Section 151 of the 2013 Act, the spotlight was only on “small shareholders” and not on “minority shareholders” like the S.P. Group which holds around 18.37%.

It is interesting to note that the smallness conceived by the 1956 Act is virtually minuscule. One would qualify to be a small shareholder only if he holds shares of a nominal value of Rs.20,000/or less, in a public company having a paid-up capital of Rs.5 crores or more. This proportion works out to 1/2500 or 0.04%.

Hence, right to claim proportionate representation is not available even to a minority shareholder statutorily, both under the 1956 Act and under the 2013 Act. It is available only to a small shareholder, which S.P. Group is certainly not.

 

The right to claim proportionate representation is not available for the S.P. group even contractually, in terms of the Articles of Association. Neither S.P. Group nor CPM can request the Tribunal to rewrite the contract, by seeking an amendment of the Articles of Association. The Articles of Association, as they exist today, are binding upon S.P. Group and CPM by virtue of Section 10(1) of the Act.

CPM’s father was inducted into the Board in 1980, after 15 years of acquisition of shares and such induction was not in recognition of any statutory or contractual right. After his father’s exit in 2004, CPM was inducted in 2006, neither in recognition of a contractual right nor in recognition of a hereditary or statutory right.

The claim for proportionate representation on the Board is neither statutorily or contractually sustainable nor factually justified.

The claim of Proportional representation rejected because

-          Section 151 applies only to small shareholder and SP group is not

-          There is no hereditary right because there was no quasi-partnership

-          There is nothing wrong about affirmative/ special rights as long as they are in conformity with law and court cannot re-write the contract because they are binding as per section 10(1)

-          Proportional representation is not same as representation on basis of proportion

Therefore, the fourth question of law is also to be answered in favor of the Tata group and the claim in the cross appeal relating to affirmative voting rights and proportionate representation are liable to be rejected

QUESTION:5 : RE-CONVERSION OF PUBLIC TO PRIVATE

Needle Industries (India) Ltd vs Needle Industries Newey (India) Ltd (1981) 3 SCC 333

This court pointed out (A) that there are 3 distinct types of companies, namely Private companies, Public Companies and deemed to be public companies which occupy a distinct place in the scheme of the Act (B) that private companies, which become public companies, but which continue to retain in their articles those matters “the policy of the Act if anything, points in the direction that the integrity and structure of section 43A proviso companies should, as far as possible, not be broken up

By virtue of subsection (11), all the provisions of Section 43A except subsection (2A) were made inapplicable on and after the commencement of Act 53 of 2000. This meant that with effect from 13.12.2000, the whole of Section 43A except Subsection (2A) got washed out.

In other words, the Articles of Association of such a company should contain all the 4 prescriptions namely

(i)                  restriction on the right to transfer shares

 

(ii)                limitation on the number of members

 

(iii)               prohibition of any invitation to the public to subscribe for shares/debentures and

 

(iv)              prohibition of any invitation or acceptance of deposits from persons other than members/Directors or their relatives.

The Articles of Association of Tata Sons had the prescriptions contained in subclauses (a), (b) and (c), but not sub-clause (d). Therefore, they did not take any steps in terms of subsection (2A) of section 43A after the advent of Act 53 of 2000

CA 2013 CHANGED RE-STORED THE POSITION AND REMOVED THE OMISSION

But Companies Act, 2013 changed the complexion of the game. It not merely put an end to the concept of deemed public companies, but also restored the definition of the expression ‘private company” to the position that prevailed before Act 53 of 2000. Section 2(68) of the 2013 Act which defines a “private company” incorporated only the original 3 prescriptions contained in subclauses (a), (b) and (c) of clause (iii) of subsection (1) of section 3. The stipulation inserted as subclause (d) by Act 53 of 2000, is omitted in section 2(68).

CA 2013 & CONFUSION OF DIFFERENT DATES

But Companies Act, 2013, created one confusion. Different provisions of the Companies Act, 2013, came into force on different dates (driving people crazy). Section 2(68) which defines a private company, came into force on 12.09.2013 vide S.O. 2754 (E) dated 12.09.2013. This notification issued under section 1(3) of the 2013 Act, fixed 12092013 as the appointed date for the coming into force of section 2(68).  But on 12092013, the date appointed for the coming into force of section 2(68) of the Companies Act, 2013, the old Act, namely the Companies Act, 1956 had not been repealed.

CA 1956 NOT REPEALED FULLY

The provisions for repeal are contained in Section 465 of The Companies Act, 2013. Section 465(1) repeals the 1956 Act, subject to certain stipulations mentioned in the provisos there under. Subsection (2) of Section 465 of the Companies Act, 2013 provides a list of matters which will stand saved despite the repeal of the 1956 Act. Subsection (3) of Section 465 makes it clear that the mention of particular matters in Subsection (2) shall not be held to prejudice the general application of Section 6 of the General Clauses Act, 1897.

The provisions of Section 465, in so far as they relate to the repeal of the 1956 Act are concerned, came into force on 30012019, vide S.O. 560 (E) dated 30012019. In other words, the provisions of the 1956 Act continued to be in force till repealed on 30.01.2019. It means that the criteria for a “private company” under subclauses (a), (b), (c) and (d) of clause (iii) of subsection (1) of section 3 of the 1956 Act, did not stand repealed until 30012019. But the new definition of a “private company” under section 2(68) of the 2013 Act had already come into effect on and from 12.09.2013.

2 DEFINITIONS OF PRIVATE COMPANY

As a result, we had 2 definitions of the expression “private company” from 12.09.2013 [the date appointed for the coming into force of section 2(68) of the 2013 Act] to 30.01.2019 (the date on which section 3(1) of the 1956 Act became a dead letter consequent upon the repeal of the 1956 Act through the notification of the repeal provision under section 465).

Therefore, we have to fall back upon section 465(3) of the 2013 Act to conclude that section 2(68) of the 2013 Act will prevail over section 3(1)(iii) of the 1956 Act. In other words, on and from 12.09.2013, the question whether a company is a private company or not, will be determined only by the definition of the expression “private company” found in section 2(68) of the 2013 Act.

The articles of association of Tata sons contain the restrictions prescribed in subclauses (a), (b) and (c) of Section 3(1) (iii) of the 1956 Act, but they do not satisfy the requirement of subclause(d) incorporated in the year 2000. Tata Sons satisfy the requirements of Section 2(68) of the 2013 Act. Therefore, it was and it continues to be a private company

The status of Tata Sons

(i) was that of a private company till 31.01.1975;

 (ii) was that of a deemed public company under section 43A from 31.01.1975 till 12.12.2000;

(iii) was that of a company that continued to be a deemed to be public company from 13.12.2000 till 11.09.2013  by virtue of section 3(1)(iii) of the 1956 Act as amended by Act 53 of 2000 with effect from 13.12.2000;

 (iv) was that of a private company with effect from 12.09.2013 within the meaning of section 2(68) of the 2013 Act

FINDINGS OF NCLAT FLAWED BECAUSE PUT BLAME OF LETHARGY ON TATA SONS

. NCLAT was surprised (quite surprisingly) that Tata Sons remained silent for more than 13 years from 2000 to 2013 without taking steps for reconversion

But what NCLAT failed to see was that Tata sons did not become a public company by choice, but became one by operation of law. Therefore, we do not know how such a company should also be asked to follow the rigors of Section 14(1)(b) of the 2013 Act.

By virtue of the proviso to subsection( 1A) of Section 43A of the 1956 Act, Tata Sons continued to have articles that covered the matters specified in sub clauses (a), (b) and (c) of Clause(iii) of Subsection(1) of Section 3 of the 1956 Act. Though it did not have the additional stipulation introduced by Act 53 of 2000, namely the stipulation relating to acceptance of deposits from public, this additional requirement disappeared in the 2013 Act. Therefore, Tata Sons wanted a mere amendment of the Certificate of Incorporation, which is not something that is covered by Section 14 of the 2013 Act.

NCLAT was wrong in thinking that Tata Sons ought to have taken action during the period 20.00.2013 and obtained approval of the Central Government to become a private company under Subsection (4) of Section 43A of the 1956 Act. Subsection (11) of section 43A, inserted under Act 53 of 2000 made all subsections of Section 43A except subsection (2A), inapplicable on and after the commencement of the Act. Therefore, it is clear that Subsection (4) ceased to exist on and from 13.12.2000 and hence the question of Tata Sons seeking the approval of the Central Government under Subsection  (4) during the period 2000 to 2013 did not arise.

The only provision that survived after 13.12.2000 was Subsection (2A) of Section 43A. It survived till 30.01.2019 until the whole of the 1956 Act was repealed.

There are two aspects to Subsection (2A).

The first is that the very concept of “deemed to be public company” was washed out under Act 53 of 2000. The second aspect is the prescription of certain formalities to remove the remnants of the past. What was omitted to be done by Tata Sons from 2000 to 2013 was only the second aspect of Subsection (2A), for which Section 465 of the 2013 Act did not stand as an impediment. Section 43A(2A) continued to be in force till 30.01.2019 and hence the procedure adopted by Tata Sons and the RoC in July/August 2018 when section 43A(2A) was still available, was perfectly in order.

In simple terms, a company which becomes a deemed public company by operation of law, cannot be taken to have undergone a process of fermentation or coagulation like milk to become curd or yogurt, having an irreversible effect.

Therefore, NCLAT was completely wrong in holding as though Tata Sons, in connivance with the Registrar of companies did something clandestinely, contrary to the procedure established by law. The request made by Tata Sons and the action taken by the Registrar of Companies to amend the Certificate of Incorporation were perfectly in order.

The description of the company in the forms filed under Rule 10, reflected the true position that prevailed then and they would not act as estoppel when the company was entitled to take advantage of the law.

The real reason why SP group and CPM are aggrieved by the conversion is, that most of their arguments are traceable to provisions which apply only to public and listed public companies.

Therefore, question of law No. 5 is accordingly answered in favour of Tata Sons and as a consequence, all the observations made against the appellants and the Registrar of companies in Paragraphs 181, 186 and 187 (iv) of the impugned judgment are set aside.

 

FAIR COMPENSATION OF VALUE DENIED AND TO BE DECIDED BEFORE NCLT

S.P. Group cannot ask this Court to go into the question of fixation of fair value compensation for exercising an exit option. Therefore, this Court cannot adjudicate on the fair compensation.

 

 

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[1] Company Secretary, LLB Final Year, BCOM(H)