Tata Consultancy Services Limited vs Cyrus Investments Pvt. Ltd. and Ors.

Company Law – Winding up order on just and equitable grounds – Held: There must lie a justifiable lack of confidence in the conduct and management of the company’s affairs, at the foundation of applications for winding up – The case on hand does not fall anywhere near the just and equitable standard, for the simple reason that it was the very same complaining minority whose representative was not merely given a berth on the Board but was also projected as the successor to the Office of Chairman – For invocation of just and equitable clause, there must be a justifiable lack of confidence on the conduct of the directors – A mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient – On facts, Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts – The majority shareholders are not individuals or corporate entities having deep pockets into which the dividends find their way if the Company does well and declares dividends – The dividends that the Trusts get are to find their way eventually to the fulfilment of charitable purposes – Therefore, NCLAT should have raised the most fundamental question whether it would be equitable to wind up the Company and thereby starve to death those charitable Trusts, especially on the basis of un-charitable allegations of oppressive and prejudicial conduct – Finding of NCLAT that the facts otherwise justify the winding up of the Company under the just and equitable clause, was completely flawed.

Companies Act, 2013 – ss. 241 and 242 – ss.241 and 242 do not specifically confer the power of reinstatement, nor there is any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred – The architecture of ss.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 s.14 of the Specific Relief Act, 1963 with or without the amendment in 2018.

Company Law – Law relating to oppression and mismanagement – Held: 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 – 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 object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders.

Company Law – Articles of Association of a company – Held: That Articles of Association of a company constitute a contract among shareholders, is the bedrock of Company Law – 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.

Companies Act, 2013 – s.241 – s.241 is not intended to discipline a Management in respect of a possible future conduct. Companies Act, 2013 – s.242 – Articles of Association of a company – Held: The Tribunal has the power u/s.242 to set aside any amendment to the Articles that takes away recognised 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 – On facts, the order of NCLAT tinkering with the power available under Article 75 of the Articles of Association was wholly unsustainable.

In the instant matter, Tata Sons (Private) Limited challenged a final order dated 18-12-2019 passed by the National Company Law Appellate Tribunal (NCLAT) (i) holding as illegal, the proceedings of the sixth meeting of the Board of Directors of TATA Sons Limited held on 24.10.2016 in so far as it related to the removal of Shri Cyrus Pallonji Mistry (“CPM”); (ii) restoring the position of CPM as the Executive Chairman of Tata Sons Limited and consequently as a Director of the Tata Companies for the rest of the tenure; (iii) declaring as illegal the appointment of someone else in the place of CPM as Executive Chairman;

(iv) restraining Shri Ratan N. Tata (“RNT”) and the nominees of Tata Trust from taking any decision in advance; (v) restraining the Company, its Board of Directors and Shareholders from exercising the power under Article 75 of the Articles of Association against the minority members except in exceptional circumstances and in the interest of the Company; and (vi) declaring as illegal, the decision of the Registrar of Companies for changing the status of Tata Sons Limited from being a public company into a private company.

The questions of law that arose for consideration were:

(i) Whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of NCLT on facts were not individually and specifically overturned by the Appellate Tribunal?

(ii) Whether the reliefs granted and the directions issued by the Appellate Tribunal, including the reinstatement of CPM into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Sub-section (2) of Section 242 of the Companies Act, 2013?

(iii) Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the company from exercising such a right without setting aside the Article?

(iv) Whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee Directors virtually nullifying the effect of these Articles ?

(v) whether the re-conversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT ? Answering all the questions of law in favour of the Tata Group, the Court

HELD:

Question No.1

1.1. The real reason why the complainant companies thought fit, quite tactfully, not to press for the reinstatement of CPM is that the mere termination of Directorship cannot be projected as something that would trigger the just and equitable clause for winding up or to grant relief under Sections 241 and 242. [Para 16.21][1002-A-B]

1.2. It must be remembered : (i) that a provision for inclusion of a representative of small shareholders in the Board of Directors, is of a recent origin under Section 151 of the Companies Act, 2013 and it is applicable only to a listed company;

(ii) that Tata sons is not a listed Company; (iii) that the Articles of Association of Tata sons, to which the complainant companies, CPM and his father had subscribed, do not provide for any representation; (iv) that despite there being no statutory or contractual obligation, Tata Sons inducted CPM’s father as a director on the board in the year 1980 and continued him for a period of almost 25 years; (v) that CPM himself was inducted, again without reference to any statutory or contractual obligation, as a Director on the Board in August, 2006; and (vi) that within 6 years of such induction, CPM was identified as a successor to RNT and was appointed as Executive Deputy Chairman and elevated to the position of Executive Chairman. [Para 16.22][1002-B-E]

1.3. It is an irony that the very same person who represents shareholders owning just 18.37% of the total paid up share capital and yet identified as the successor to the empire, has chosen to accuse the very same Board, of conduct, oppressive and unfairly prejudicial to the interests of the minorities. [Para 16.23] [1002-E-F]

1.4. The fact that the removal of CPM was only from the Executive Chairmanship and not the Directorship of the company as on the date of filing of the petition and the fact that in law, even the removal from Directorship can never be held to be an oppressive or prejudicial conduct, was sufficient to throw the petition under section 241 out, especially since NCLAT chose not to interfere with the findings of fact on certain business decisions. [Para 16.24][1002-G-H; 1003-A]

1.5. The subsequent conduct on the part of CPM in leaking his mail dated 25-10-2016 to the Press and sending replies to the Income Tax Authorities enclosing 4 box files, even while continuing as a Director, justified his removal even from the Directorship of Tata Sons and other group companies. 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 (not just the Board of a company). [Para 16.25][1003-B-C]

1.6. In a petition under Section 241 of the Companies Act, 2013, 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. [Para 16.28][1003-H; 1004-A-B]

1.7. 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. [Para 16.29][1004-B-C]

1.8. The validity of and justification for the removal of a person can never be the primary focus of a Tribunal under Section

242 unless the same is in furtherance of a conduct oppressive or prejudicial to some of the members. In fact the post of Executive Chairman is not statutorily recognised or regulated, though the post of a Director is. CPM was removed only from the post of (or designation as) Executive Chairman and not from the post of Director till the Company Petition was filed. But CPM himself invited trouble, by declaring an all out war, which led to his removal from Directorship. [Para 16.31][1004-E-F]

1.9. It is true that as per the evidence available on record he was requested before the Board meeting, to step down from the post of Executive Chairman. That does not tantamount to the act being pre-meditated. The induction of new members on 8.8.2016 into the Board and the Board securing a legal opinion prior to the Board meeting, cannot make the act a pre-meditated one. There is a thin line of demarcation between a well-conceived plan and a pre-meditated one and the line can many times be blurred. [Para 16.32][1004-G-H]

1.10. In any event 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, the causa proxima for the complaint was the removal of CPM from the office of Executive Chairman. His removal from Directorship happened subsequent to the filing of the original complaint and that too for valid and justifiable reasons and hence NCLAT could not have laboured so much on the removal of CPM, for granting relief under Sections 241 and

242. [Para 16.42][1008-B-C]

1.11. NCLAT has recorded a finding, though not based upon any factual foundation, that the facts otherwise justify the making of a winding up order on just and equitable ground. But as held by the Privy Council in Loch v. John Blackwood ,”there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs, at the foundation of applications for winding up.” More importantly, “the lack of confidence must spring not from dissatisfaction at being out-voted on the business affairs or on what is called the domestic policy of the company”. But, “wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter.” [Para 16.43][1008-D-F]

1.12. The case on hand will not fall anywhere near the just and equitable standard, for the simple reason that it was the very same complaining minority whose representative was not merely given a berth on the Board but was also projected as the successor to the Office of Chairman. [Para 16.45][1009-C-D]

1.13. For invoking the just and equitable standard, the underlying principle is that the Court should be satisfied either that the partners cannot carry on together or that one of them cannot certainly carry on with the other. [Para 16.50][1011-C]

1.14. 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 half-way through the journey of Tata Sons. Functional dead lock is not even pleaded nor proved. [Para 16.51][1011-C-D]

1.15. For the invocation of just and equitable clause, there must be a justifiable lack of confidence on the conduct of the directors. A mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient. [Para 16.52][1011-E]

1.16. Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts. The majority shareholders are not individuals or corporate entities having deep pockets into which the dividends find their way if the Company does well and declares dividends. The dividends that the Trusts get are to find their way eventually to the fulfilment of charitable purposes. Therefore, NCLAT should have raised the most fundamental question whether it would be equitable to wind up the Company and thereby starve to death those charitable Trusts, especially on the basis of un-charitable allegations of oppressive and prejudicial conduct. Therefore, the finding of NCLAT that the facts otherwise justify the winding up of the Company under the just and equitable clause, is completely flawed. [Para 16.54][1012-A-C]

Question No.2

2.1. Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement, nor there is any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred. [Para 17.17][1024-C]

2.2. The following words at the end of sub-section (1) of

242 “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit” cannot be interpreted as conferring on the Tribunal any implied power of directing reinstatement of a director or other officer of the company who has been removed from such office. These words can only be interpreted to mean as conferring the power to make such order as the Tribunal thinks fit, where the power to make such an order is not specifically conferred but is found necessary to remove any doubts and give effect to an order for which the power is specifically conferred. For instance, sub-section (2) of Section 242 confers the power to make an order directing several actions. The words by which sub-section (1) of Section 242 ends, supra can be held to mean the power to make such orders to bring an end, matters for which directions are given under subsection (2) of Section 242. [Para 17.18][1024-C-F]

2.3. 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. [Para 17.19][1024-F-G]

2.4. 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. [Para 17.33][1029-B-C]

2.5. 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 object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders. [Para 17.34][1029-D]

2.6. The NCLAT could not have granted the reliefs of (i) reinstatement of CPM (ii) restriction on the right to invoke Article

75 (iii) restraining RNT and the Nominee Directors from taking decisions in advance and (iv) setting aside the conversion of Tata Sons into a private company. [Para 17.35][1029-F-G] Question No.3

3.1. 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. [Para 18.3][1030-E-F]

3.2. As a matter of fact, NCLAT has agreed, on first principles, that it has no jurisdiction to declare any of the Articles of Association illegal. After having set a benchmark correctly, NCLAT neutralised Article 75 merely on the basis of likelihood of misuse. Section 241(1)(a) provides for a remedy, only in respect of past and present conduct or past and present continuous conduct. NCLAT has stretched Section 241(1)(a) to cover the likelihood of a future bad conduct, which is impermissible in law. [Para 18.4][1030-G]

3.3. 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. The Company was incorporated in the year 1917 and S.P. Group acquired shares nearly after 50 years in the year 1965. Even at that time Article 75 was in existence in a different form. After 1965, Article 75 underwent several rounds of amendments, to which the S.P. Group, CPM’s father and CPM were parties. CPM himself was a party to an amendment made to Article 75 on 13.09.2000. The Article in its present form was made only on 13.09.2000 and the amendment was unanimously carried through in the presence of and with the consent of CPM. [Para 18.5] [1030-H; 1031-A-C]

3.4. 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. [Para 18.6][1031-C-D]

3.5. It is not as though CPM or his father who was also a Director for nearly 25 years, were not aware of or blind to the existence of Article 75. The pleading on the part of the complainant companies was sufficient to throw the challenge to Article 75 out, as it did not correlate to an actual conduct but the possibility of a future conduct. Section 241 is not intended to discipline a Management in respect of a possible future conduct. [Para 18.7][1031-D-G]

3.6. 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 recognised 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. [Para 18.8] [1031-G-H]

3.7. The order of NCLAT tinkering with the power available under Article 75 of the Articles of Association is wholly unsustainable. [Para 18.11][1032-D]

Question No.4

4. The fourth question of law - whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee directors virtually nullifying the effect of these Articles - is also to be answered in favour of the Tata group and the claim in the cross appeal relating to affirmative voting rights and proportionate representation are liable to be rejected. [Para 19.1 and 19.50][1032-F; 1052-B]

Question No.5

5. The 5 th question of law formulated - whether the reconversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT – is 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. [Para 20.1 and Para 20.44][1052-C-D; 1069-C-D] Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd. AIR 1965 SC 1288; M.I. Builders Pvt. Limited v. Radhey Shyam Sahu & Others (1999) 6 SCC 464: [1999] 3 SCR 1066 and Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613: [2012] 1 SCR 573 – distinguished.

Hanuman Prasad Bagri & Ors. v. Bagress Cereals Pvt. Ltd. (2001) 4 SCC 420: [2001] 2 SCR 811; Rajahmundry Electric Supply Corpn. Ltd. v.

Nageshwara Rao [1955] 2 SCR 1066; S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 : [1965] 2 SCR 720; Ram Parshotam Mittal v. Hillcrest Realty (2009) 8 SCC 709 : [2009] 10 SCR 1121 and Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd (2015) 14 SCC 277:[2014] 11 SCR 1119 – relied on.

Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Ltd. and ors. (1981) 3 SCC

333 : [1981] 3 SCR 698; Raj Kumar Dey v. Tarapada Dey (1987) 4 SCC 398 : [1988] 1 SCR 118; Mohd. Gazi v. State of Madhya Pradesh (2000) 4 SCC 342: [2000] 2 SCR 871 and Dr. S.B. Dutt v.University of Delhi [1959] SCR 1236 – referred to.

Scottish Cooperative Wholesale Society v. Meyer 1959 A.C.324; Loch v. John Blackwood [1924] AC 783; Baird v. Lees, (1924) SC 83 Scottish Supreme Court; Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 WLR 1289; Lau v. Chu [2020] 1 WLR 4656; In Re Sailing Ship Kentmere Co. [1897] WN 58; Nelson v. James Nelson 1914-2 K.B. 770; Central Bank of Ecuador and others v. Conticorp SA and others (Bahamas) (2015) UKPC 11 Judicial Committee of the Privy council (UK) and Re: Neath Rugby Limited (2010) B.C.C. 597 – referred to.