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Cyrus Investments Private Limited & Another v. Tata Sons Limited & Others: NCLT case

Case Covered:

Cyrus Investments Private Limited & Another 

Versus

Tata Sons Limited & Others

Case Summary:

The National Company Law Tribunal, Mumbai Bench (“NCLT”) delivered a landmark decision in the case of Cyrus Investments Private Limited. & Another (“Petitioners”) v. Tata Sons Limited & Others1 (“Respondents”) on 12 July 2018 pertaining to oppression and mismanagement under the company law regime. The decision was delivered by the Bench comprising Hon’ble Mr. B.S.V. Prakash Kumar, Member (Judicial) and Hon’ble Mr. V. Nallasenapathy, Member (Technical).

Facts of the case:

The Petitioners, minority shareholders of Tata Sons Limited (“Company”), holding 18.37% equity shareholding in the Company had filed a company petition before the NCLT against the Company, Mr. Ratan Tata (former chairman of the Company), Mr. Noshir Soonawala (a trustee of Tata Trusts) and various other persons, wherein they had alleged acts of oppression and mismanagement in the affairs of the Company which includes grounds of expulsion of Mr. Cyrus Mistry.

Further, other allegations were raised by the Petitioners during the proceedings, which include that the articles of association (“AOA”) of the Company were oppressive against the Petitioners. Furthermore, it was also alleged by the Petitioners that Mr. Ratan Tata was involved in insider trading and was abusing his powers by acting as a shadow director (along with Mr. Noshir Soonawala), funding terrorist activities, enriching other parties at the cost of the Company, etc.

Hence, based on the abovementioned allegations, the Petitioners sought relief under Sections 241-244 of the Companies Act, 2013 (“Act”).

Allegations and NCLT Ruling:

Key highlights of the judgment are summarised below:

1. Mr. Ratan Tata and Mr. Noshir Soonawala acted as shadow directors in influencing the board of directors of the Company and interference to the affairs of the Company.

The concept of shadow director has not been incorporated in the Act or the Companies Act 1956. However, the concept has been included in the definition of “officer who is in default” under Section 2(60) of the Act which deals with causing default through the board of directors. Therefore, the NCLT dismissed the allegation of the Petitioners on the ground that advice and suggestions of Mr. Ratan Tata and Mr. Noshir Soonawala as shadow directors deserve no merit to be treated as actions falling under Section 241 and 242 of the Act. Further, NCLT stated that any advice and suggestions by shareholders of the company should be treated for the benefit of the company and not as interference, as long as it is not fraught/accompanied with a mala fide intention. Once the advice (solicited or unsolicited) is accomplished through the company’s board of directors then, the board members privy to the approval cannot complain over the same. Thus, NCLT held no merit on the allegation on the ground of interference of Mr. Ratan Tata, who is the Chairman of majority shareholders of the Company and Mr. Noshir Soonawala, who is one of the trustees of the Tata Trust.

2. Expulsion of Mr. Cyrus Mistry as executive chairman of the Company in violation of the principle of justice, transparency and righteousness.

The NCLT rejected the argument of Petitioners that Mr. Cyrus Mistry was removed as executive chairman of the Company as he was attempting to rectify irregularities and stop misgovernance of the Tata group. The NCLT held that the removal of Mr. Cyrus Mistry was on the ground that the board of directors and the majority of shareholders of the Company had lost confidence in him. The Petitioners failed to prove the ground on which removal of Mr. Cyrus Mistry would become a grievance to minority shareholders since he was not appointed as the executive chairman on the basis of his minority shareholding in the Company. Moreover, directorial issues are not dealt with under Section 241 of the Act which only addresses the shareholder grievances. The board of directors is competent and within their legal rights to remove Mr. Cyrus Mistry from his position as the executive chairman of the Company.

Further, the NCLT held that the contention of Petitioners regarding the violation of AOA of the Company or any provisions of the Act in removing Mr. Cyrus Mistry should be dealt by the court of civil law in order to possibly declare such action as invalid in the eye of the law if any.

3. Corporate governance lapses and breach of fiduciary duty by the board of directors of the Company.

The NCLT relied on the UK law to deal with the contention of the Petitioners that the Company is not governed by corporate governance in conducting its affairs as there is no specific definition of corporate governance in the Act. Corporate governance essentially aims to have transparency of operations of a corporate, accountability towards its shareholders and fairness in dealings of the affairs of a company. Thus, the NCLT concluded that if in case there was no accountability towards the shareholders of the Company then, it is Mr. Cyrus Mistry himself, who was the executive chairman of the Company, who can be held liable for such lapse of corporate governance. The NCLT stated that the principle of corporate governance is not defeated by the right of the majority to take decisions on the board.

4. Conflict of interest in the nominated directors of Tata Trust in attending the meeting who brought a motion for removal of Mr. Cyrus Mistry as executive chairman.

The NCLT stated that if any of the shareholders or directors give any requisition for removal of the director or executive chairman, it cannot be said that since they have an interest in the removal they shall abstain from attending the board meeting and voting. The interest that has been mentioned in Section 166 and 184 of the Act should be taken in the spirit that it has been mentioned with respect to commercial transactions. Thus, the NCLT found no merit in the allegation of the Petitioners in this regard and dismissed the same.

5. Act of oppression and mismanagement in the removal of Mr. Cyrus Mistry from the position of director.

The NCLT did not find any merit in the allegation of the Petitioners that the removal of Mr. Cyrus Mistry from the position of director falls within ambit of Section 241 of the Act and held that Mr. Cyrus Mistry was removed from his position as a director due to the fact that he had leaked the sensitive information of the Company to the media, admittedly sent the Company’s information to income tax authorities and openly came out against the board of directors and the trusts of the Company.

6. Business of Nano car project continued to be undertaken by Tata Motors Limited (“TML”) upon persistence of Mr. Ratan Tata, incurring huge loss to the Company and further divulging sensitive information of TML to Jayem Automotives Private Limited (“Jayem Auto”), by Mr. Ratan Tata in which he made a significant investment.

The Petitioners failed to prove that Mr. Ratan Tata was resisting the closure of the Nano car project. Further, the Petitioners also failed to provide any material evidence to show that the regular meeting of Mr. Tata with Mr. Anand, who is managing director of Jayem Auto, was to do some harm to TML and that Jayem Auto profited at the cost of TML on account of Mr. Ratan Tata leaking commercially sensitive information of TML if any. Thus, the NCLT dismissed the aforementioned allegation of the Petitioners.

The NCLT held that the Petitioners tried to make their grievance in a subsidiary company as the grievance of the holding company but failed to make TML (a subsidiary company of the Company) as the respondent in the case, thus, the people who actually dealt with the matter could not appear before the NCLT.

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