Cyrus Mistry case: Legal options before Tata Sons after NCLAT verdict5 min read . Updated: 18 Dec 2019, 09:36 PM IST
- The NCLAT today held that appointment of N Chandrasekaran as chairman of Tata Sons as illegal. It restored Cyrus Mistry as the chairman
- Tata Sons has a number of legal options to turn decisions in its favour. Mint spoke to a number of legal experts to find out more about these options
Tata Sons has a number of legal options to turn decisions in its favour. Mint spoke to a number of legal experts to find out more about these options.
Firstly, Tata Sons is likely to challenge the order of NCLAT before the Supreme Court within four weeks and if the salt-to-steel conglomerate wins the case, N Chandrasekaran will continue to be the chairman of Tata Sons.
On the flip side, assuming Tata Sons loses the appeal in the apex court, there is a window of opportunity still available to the company: Tata Sons’ board of directors, post the expiry of the four-week window or post the apex court order, can call for a board meeting first, pass a vote of no-confidence again against Mistry, call for a poll by all shareholders and decide on Mistry’s chairmanship on the basis of the votes of all the shareholders. If both the board and the shareholders vote against Mistry’s appointment Tata Sons can remove Mistry and re-appoint Chandrasekaran or any other board member as the chairman.
It may be recalled that in October 2016 Cyrus Mistry was suddenly removed as Tata Sons’ ‘executive chairman’.
However, under the Companies Act, in order to remove a chairman, the usual procedure is that a board member first proposes a vote of no confidence and this move is seconded by another board member. The chairman has the right to make a representation against the removal and if the chairman disagrees on the reasons for his removal, the matter needs to be put through a voting process. If the chairman loses the vote, he has to quit.
But if a company’s articles of association (AoA) appoint the chairman, the meeting cannot remove him unless it is due to bad faith, impartiality or abuse of authority.
In any case, section 179 of the companies Act gives a chairman discretionary powers to order a poll on any resolution, either of his own motion or when it is demanded by the board members.
Apart from NCLAT’s order on reinstatement of Mistry as the chairman, Tata Sons can also challenge NCLAT’s judgement that Tata Sons’ decisions were “prejudicial" and “oppressive" and the company misused the powers under Article 75 in the AoA.
NCLAT has judged that in view of ‘prejudicial’ and ‘oppressive’ decision taken during last few years, the company, its board of directors and shareholders, which have not exercised their power under Article 75 since inception, “will not exercise its power under Article 75 against Cyrus Investments Pvt Ltd. and other minority members."
“Such power can be exercised only in exceptional circumstances and in the interest of the company, but before exercising such power, reasons should be recorded in writing and intimated to the concerned shareholders whose right will be affected," said NCLAT.
Since NCLAT’s remark implies a reputational hit on Tata Sons, the company may demand adequate concrete proofs from the Mistry camp to prove their argument that Tata Sons has abused the powers under Article 75. This could be tricky because Mistry’s family owned Shapoorji Pallonji Group itself has been a shareholder in Tata Sons for several decades, has been a witness to the creation of the AoA and has chosen to agree to the AoA and remain as Tata Sons shareholders despite being aware of the contents of the AoA.
The Shapoorji Pallonji group currently holds an 18% stake in Tata Sons.
Article 75 states that Tata Sons can transfer ‘ordinary shares’ of any shareholders including that of SP Group without notice through a special resolution in the general meeting of the ordinary shareholders of the company in the presence of nominated directors of ‘Tata Trusts’.
Legal experts feel that even though a tribunal can pass a judgement, keeping in view the interest of all shareholders, neither NCLAT or nor NCLT has any jurisdiction to hold any of the articles in any AoA as illegal or arbitrary, since the terms in an AoA are agreed upon by the shareholders. Therefore, this is a point that can be challenged by Tata Sons.
Mistry’s counsel, on Wednesday, argued that although Article 75 has remained in the AoA for several years, in view of the manner in which the affairs of the company was being conducted as an intrinsically two-group company, the recent events have shown specific attempts at oppressing the minority shareholders.
Article 75 was never viewed by the minority shareholders as a tool of oppression so far. But the recent events have created a more than reasonable apprehension that Article 75 could be sought to use to marginalise and eliminate the minority shareholders from the company, the Mistry counsel argued.
NCLAT has found that there were instances of mismanagement at Tata Sons.
Mistry lawyers have alleged that there were instances of mismanagement and often Tata Sons’ decisions with regard to various group companies were based on the holding company’s sheer misuse of powers, by virtue of its majority shareholding .
Tata Sons is a core Investment company and over 90% of its income comes from dividends from its investments in the various group companies that it controls.
In the affairs of the group companies, decisions have always depended on the will of Tata Sons, argued the Mistry counsel.
Tata Sons may challenge this remark on “mismanagement". And, even if the Mistry side brings evidences, the court’s decision making process may get long-drawn since it will require a thorough scrutiny of a large number of documents and then matching the veracity of the claims with legal provisions.
Tata Sons may also challenge NCLAT’s judgement that the decision of the Registrar of Companies changing Tata Sons from a ‘public company’ to a ‘private company’ is “illegal".
“The company shall be recorded as ‘Public Company’. The ‘Registrar of Companies’ will make correction in its record showing Tata Sons Ltd as ‘Public Company’," said NCLAT.
A corporate lawyer said that since Tata Sons followed the required procedures under the Companies Act to classify itself as a private company—all the required documents with proofs were submitted to the RoC; all records were accessible by the public at large; and the decision was not challenged by any director or any shareholder with a meaningful shareholding—Tata Sons may challenge this NCLAT order.