A watershed decision in 2012 captured the imagination of an aspirational India, giving a first-hand glimpse of Indian corporates adopting a paradigm shift in perspective – of professionalism and aptitude finally taking over the reins of family controlled legacy businesses; this moment was the appointment of Cyrus Pallonji Mistry (“CPM”) as the official Corporate Heir of Mr. Ratan Tata with his formal designation as only the 6th person in the history of the group to be the Executive Chairman of the then Tata Sons Limited (“the Company”).

Four years down the line in a rather unceremonious turn of events (uncharacteristic for the reputed salt-to-software conglomerate) CPM was asked to step down before a scheduled board meeting on 24th October 2016 as the Executive Chairman, and then when he declined, the board of the Company (“Board”) passed a resolution having the overwhelming consensus of members of the Board (including nominees of the Tata Trusts) to remove CPM from his post as the Executive Chairman. It is important to note that the directorship of CPM was not put to question at this stage.

To put today’s scenario into context, it would be pertinent to take a trip down memory lane. Shapoorji Pallonji Group (“S.P. Group”) first acquired shares in Company back in the year 1965, nearly 50 years after the incorporation of the Company. Despite no statutory or contractual obligation, Mr. Pallonji Mistry, father of CPM was inducted as a non-executive director of the Company in the year 1980, retaining the position for almost 25 years till 2004. and thereafter, CPM joined the Company as a non-executive director in 2006 . The Shapoorji Pallonji Group’s aggregate shareholding in the Company at present stands at 18.37%, while Sir Ratan Tata Trust and Sir Dorabji Tata Trust (collectively “Tata Trusts”) holds 65.89% shareholding of the Company. Hence, the association was long-standing with time tested bona fide co-existence.

Irate by the injury to his stature, CPM took certain contentious actions namely – alleged leaking of a “confidential” email addressed to the Board of the Company to the media causing unwarranted frenzy and making unauthorised disclosures to the Income Tax Department by sharing of confidential data of the Company . In line with the disgraceful conduct, the Company conducted an Extra Ordinary General Meeting to remove CPM from the post of Directorship.

CPM had by then also initiated proceedings under Sections 241 (Application to Tribunal for Relief in Cases of Oppression, etc) and 242 (Powers of Tribunal) of Chapter XVI – Prevention of Oppression and Mismanagement of the Companies Act, 2013 against the Company before the National Company Law Tribunal (“NCLT”) alleging unfair prejudice, oppression, and mismanagement . The allegations were of a serious nature, personally attacking the conduct of the majority shareholders and contending that: the affairs of the Company are carried out as if it were a “proprietary concern” of Shri Ratan Tata, certain prior business decisions were dubious or fraudulent or detrimental, unjust enrichment of Shri Ratan Tata and unlawful gain of few others at the adverse behest of the Company, abuse of Articles of Association by the majority shareholders and even going so far as to attributing terror-financing and fund diversion to Shri Ratan Tata .

The NCLT dealt with each of the allegations and put forth well-justified categorical findings to arrive at the conclusion on merits and ordered dismissal of petitions filed by two of S. P. Group of Companies namely Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited acting on behalf of CPM .
As expected, the next step for the Pallonji clan was to prefer an appeal before the National Company Law Appellate Tribunal (“NCLAT”) who allowed the same and went on to provide remedies considered to be excessive and unsubstantiated.

The NCLAT importantly contended that “the company’s affairs have been or are being conducted in a manner ‘prejudicial’ and ‘oppressive’ to members including Appellants, Mr. Cyrus Pallonji Mistry as also ‘prejudicial’ to the interests of the Company and its group Companies i.e., ‘Tata Companies’ and winding up of the Company would unfairly prejudice the members, but otherwise the facts, as narrated above, would justify a winding up order on the ground that it was just and equitable that the Company should be wound up and thereby, it is a fit case to pass order under Section 242 of the Companies Act, 2013.”

By virtue of the NCLAT order dated December 18, 2019 :
• CPM was reinstated as the Executive Chairman of ‘Tata Sons Limited’ and consequently as Director of the ‘Tata Group Companies’ for rest of the tenure. It is interesting to note that in some of the Group Companies, the tenure of CPM had already ended and in some others, CPM had voluntarily resigned . Additionally, proportionate representation on the Board and its Committees and not reinstatement was sought by CPM .

• Shri Ratan Tata and the nominee of the Tata Trusts shall desist from taking any decision in advance. Although, CPM at the time of his appointment as the Chairman insisted on designated Mr. Tata as the “Chairman Emeritus” expressly asking for his continued guidance to the Board.

• Limiting the invocation of Article 75 of the Articles of Association of the Company (Dealing with compelling power in directing Transfer of Ordinary Shares of the Company) to only exceptional circumstances. It should however be pointed out that no single instance of invocation or misuse of Article 75 had been alleged in the main petition or its subsequent amendment .

• Reversing decision of the Registrar of Companies recognising Tata Sons as a Private Company

Thus, round two of the litigation was dramatically overturned in favour of the S.P. Group, ironically overwhelming the supposedly prejudiced “minority” with some reliefs not even sought for and some tactfully given up.

As against the NCLAT Order, Tata Group moved an appeal before the Hon’ble Supreme Court (“SC”) of India which stayed the Order in January 2020. Later in December 2020, the same bench reserved the verdict in the matter and finally pronounced its judgement on March 26, 2021 .

Overruling the order of the NCLAT in its entirety and allowing all the appeals of Tata Group, SC identified and answered the following five pertaining questions of Law thereby restricting its jurisdiction only to the questions of law as prescribed under Section 423 of the Companies Act, 2013 :

> Whether NCLAT’s opinion that the facts of the case justify the winding up on the Company on just and equitable ground is in line with the well settled principles and parameters especially since the findings of NCLT on facts were not individually and specifically overturned by the NCLAT?

Specific findings of the NCLT on dealings with 1) Mr. C. Sivasankaran and his Group of Companies, 2) Air Asia Transaction, 3) Transactions with Mr. Mehli Mistry, 4) Losses suffered by Tata Motors in Nano Car Project, 5) Corus Acquisition, 6) Diversion of Fund through a global terrorist, 7) Wellspun Acquisition by Tata Power, 8) oppressive nature of some of Articles of Association of the Company such as 104B, 121, 121A and 75, 9) Entitlement of the Tata Trusts to have 1/3 of the directors with affirmative vote being prejudicial were not specifically overturned by NCLAT. The findings of the NCLT, not specifically modified or set aside by NCLAT should be taken to have reached finality unless the parties aggrieved by such non-interference by NCLAT have approached this Court, raising this as an issue. Therefore, points 1 to 7 were concluded to reach finality .

In other words, there are four areas in which NCLAT can be taken to have undertaken a scrutiny and reversed the findings of NCLT namely the removal of CPM, the affirmative voting rights, interference by nominee Directors and the conversion of Tata Sons into a private company.

The Supreme Court berated that the undignified conduct of CPM post his ouster as the Executive Chairman validly and justifiably led to his untimely removal from the Directorship of the Company and the Group Companies and reiterated that 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 . It was also confirmed that that a provision for inclusion of a representative of small shareholders in the Board of Directors under Section 151 (Appointment of Director Elected by Small Shareholders) of the Companies Act, 2013 is applicable only to a listed company whereas 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. Moreover, S.P. Group with its scale of investment will not fit into the traditional financially miniscule idea of “small shareholder” as envisaged under the Companies Act, 2013.

Additionally, to justify a winding up order on “just and equitable grounds”, reliance can only be placed on irremediable circumstances such as functional dead lock and irretrievable breakdown in trust and confidence between the participating members of a corporate quasi partnership.

In Supreme Court’s own words: “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.” A mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient for invocation of just and equitable clause . Besides, Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts, 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 .

> Whether the reliefs granted, and directions issued by NCLAT including the reinstatement of CPM into the Board of Tata Sons and other Tata Companies are in consonance with the pleadings made and the reliefs sought and the powers available under Section 242(2)?

NCLAT failed to appreciate that ordering reinstatement “for the rest of the tenure” was in effect infructuous since question of reinstatement will not arise after the tenure of office of CPM had run its course in many of his held positions in the Company and the Tata Group Companies. Also, reinstating CPM as a Director on Board of Tata Group Companies without these Companies first being made parties to the proceedings and in disregard of due process of law pertaining to removal followed by them, was erroneous . “NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law.”

The dismissal of CPM if found illegal by NCLAT should have been reimbursed with damages and not reinstatement as per the settled principal of law. 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 . It was also emphasised that NCLAT cannot make an order enforcing a contract dependent on personal qualifications .

Interestingly, S.P. Group in their appeal against the NCLAT order expressed that reinstatement was not sought and mere representation on the Board of the Company and its Committee would have sufficed .

> Validity of Article 75

The Supreme Court designated the Articles of Association as the bedrock of Company Law constituting a contract amongst shareholders and testified the long-surviving and unopposed position of the contentious Article witnessing several rounds of amendments and reiterations to which the S.P. Group, Shri Pallonji Mistry and CPM were consenting parties.

Touting Article 75 as a safe and honourable exit option to an unwilling partner, the Supreme Court expressed displeasure over the observation that NCLAT at the first instance agreed that it had no jurisdiction to declare any Articles of Association illegal and yet “neutralised” Article 75 on the basis of future misuse. The top Court specified that “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.”

> Adjudicational Position on Legitimacy of the Affirmative Voting Rights

Article 121 of the Company provides that the matters which require to be decided by a majority of the Directors, shall require the affirmative vote of the majority of Directors appointed under Article 104B (1/3rd Nominated Directors of the Tata Trusts).

It was noted that the very same Nominee Directors were instrumental in appointment CPM as the Executive Chairman to spearhead the massive empire albeit having only an approximate stake of 18% and that corporate governance was voluntarily followed by the group in spirit even though some of the provisions were not applicable owing to its private company status. Such Nominated Directors can legitimately hold a dual fiduciary relationship both with the Company and the Trusts owing to its strong allegiance to philanthropic as opposed to commercial motives.

As a matter of fact, in the present case 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 whereas at a General Meeting of Tata Sons they can yield unconfined power owing to its 66% shareholding. Therefore, this prejudiced opinion by NCLAT on the illegitimacy of the affirmative voting rights was rejected.

> Status of Tata Sons – whether public or private?

The last relevant question to be resolved by SC was 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 to 2013 as held by NCLAT?

Laying down the legislative history in this regard, the Hon’ble Court held that the Articles of Association of Tata sons contained the restrictions prescribed in sub-clauses (a), (b) and (c) of Section 3(1) (iii) of the erstwhile Companies Act, 1956 Act, but they did not satisfy the requirement of sub-clause (d) incorporated in the year 2000 as an amendment. However, on and from September 12, 2013, which is the date appointed for the coming into force of Section 2(68) defining “private company” under Companies Act, 2013, it can be observed that the articles of association of Tata Sons satisfy the requirements of Section 2(68) of the 2013 Act. Therefore, it was, and it continues to be a private company .

Thus, SC accepted all the appeals of the Tata Group in complete dismissal of petitions filed by S.P. Group. However, important questions pertaining to the separation of ownership and the contentious issue of fair valuation of shares pleaded S.P. Group was left unresolved, ironically instructing Parties to resort to the contentious Article 75 or other legally available route in this regard.

As on date, S.P. Group has preferred a review petition stating the judgement is egregious with “patent errors” and personifies a complete miscarriage of justice on the rights of minority shareholders . Ex Chief Justice S.A. Bobde being a part of the deciding bench has retired with effect from April 23, 2021. This becomes relevant because review petitions have a limited operation with typical referral to the same Bench not warranting a fresh hearing .

While NCLAT overstepped its boundaries by justifying the winding up of the strategically important Tata Group over a relatively trivial corporate infighting, the SC too extensively dwelled into the philanthropic ideology and conferring bona fides on the Trusts and its Trustees.

The legal tussle that began in 2016 continues to this date with one-sided resolution and a gamut of open-ended questions with no authority willing to logically solve the corporate labyrinth involved in the operation of this “private” company with myriad corporate structures and massive economic effects beneath it amidst its own larger-than life shareholding. For now, the current legal position leans in favour of the romanticised idealism of “Corporate democracy”, in other words primacy of the majority shareholders to control tightly held promoter companies, rendering the questions of corporate governance, independent judgment driven operation of enterprises and consequential minority say, unanswered.

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