Oppressive issues for the minority - TCS vs. Cyrus investments
Published: Apr 07, 2021
By S Ramanujam, Chartered Accountant
Introduction:
MANY professionals - especially senior advocates - have lauded the SC judgment delivered recently in the above case as according to them, it sets at rest many issues in the interpretation of various provisions of the Companies act, 2013 and also the functions and the role of the NCLT& NCLAT. Though these views of these eminent persons are really welcome in the given context of the biggest corporate dispute India has witnessed in the recent years, (which as many pointed out, has only partly ended, like amany part serial) there are few other legal aspects which are really blurred and buried in this judgment. Any student of law who reads (disjointly!) some excerpts from this judgment will get trapped and will get lostdeep down in this well and may lay abandoned for a long time!The idea of this article is to highlight few significant new thoughts of the Court expressed in this judgment, which the author would like to say (with due respect)looks odd and prima facie contrary to the commentaries and the knowledge imparted till now by various teachers on this subject of Companies Act and other allied laws! In the view of the author, this judgment (which will be surely relied upon in many other future cases), will be better explained or may be distinguished, as it happens in many tax cases, in the years to come!
Questions of law answered by the Hon'ble SC [2021-TIOLCORP-19-SC-CA-LB]:
Before we plunge into the subject, let us look at all the questions that were answered in this judgment. These are:
(1) Whether the formation of opinion by NCLAT that the Company's affairs have been or are being conducted in a manner prejudicial, and oppressive to some members and the facts otherwise justify the winding up of the company on just and equitable grounds 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?
(2) 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 (i) the pleading smade, (ii) the reliefs sought and (iii) the powers available under sub-section (2) of Section 242?
(3) Whether NCLAT 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 shares, by injuncting the company from exercising the rights under the Article, even while refusing to set aside the Article?
(4) 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?
(5) 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 from2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT?
(Though these questions could have been easily summarised for the purpose of easy understanding, they are extracted as it is from the judgment to portray the correctness of the answers given by the SC)
All these legal questions were answered in favour of Tata group.
The dilemma before the respondent& their legal team
(The SC referred Mr. Mistry and Mr. Ratan Tata by abbreviating their expanded names - CPM & RNT. The same abbreviations are used in this article also)
How to respond to a case and defend one's position - when in the lower Courts the case had been won, sometimes on technicalities or sometimes on the wrong appreciation of facts by the lower court - was the dilemma, faced by the respondent team of CPM. In their esteemed view, the lower Court Judgment was correct but reliefs provided were greater than what was anticipated by them. On account of this, their advocates changed many pleas and filed multiple prayers (in the process abandoning few earlier prayers) before the case was taken up by SC. Alas!All this was tabulated and used against them by the Court in this judgment.Thus the combined strategies of the respondent's team backfire das evident in this judgment.
Equally, the respondent's team never thought that a comment made in the year 2012 by CPM at the time of taking over as chairman stating that "he is extremely pleased to avail the continuous guidance of the erstwhile Chairman" will be quoted and used against him when he gave a press statement against the very same chairman in 2016 - a frequent common occurrence in every corporate CEO / CFO exit (Infosys - to cite an example) - giving almost a message to an investor joining as a shareholder in a company, not to go overboard in praising the promoters; after all one day, he also may have to exit in trying circumstances!
The respondent CPM, already peeved at the interference in his work by the erstwhile Chairman and the Trustees of the charitable trusts possessing affirmative votes, try to seek the media's help by leaking out an e-mail. Though everyone is aware that corporate battles are fought at different levels by parties fighting against each other, this aspect too was adversely commented upon by the SC for justifying his removal. The other action of answering the Income Tax Officers query issued under section 133(6) with fact and data about the interference by the trustees of the charitable trusts (enjoying tax exemption) in the internal working of Tata Sons was also held as not in consonance with the duties of a director of the company. Many feel that this could be like a whistle blower(as it happened recently in Thapar group company case) and also giving information to government /revenue authorities is the bounden duty of every director. Alas! This action too was misconstrued by the court to justify his exit!
Few aspects of company law and its direct fallout:
Whether RNT could be arraigned as an officer in default?
Any student of law, at the threshold itself, will have a doubt as to whether RNT could be arraigned as an officer in default in any future issue, in case it arises in any of the group companies?Although this question did not arise in this case, it may be worthwhile to look at the relevant definition in the companies Act, 2013. This is extracted below:
Sec 2(60): "officer who is in default" for the purposes of any provisions in this Act which enacts that an officer of the company who is in default shall be liable to pay penalty or punishment by way of imprisonment, fine or otherwise, means any of the officers of a company, namely -----
(i)……..(iv) ….
(v) any person in accordance with whose advice, directions or instructions the board of Directors of the Company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
An analysis of this clause can make even the former chairman (a shadow director) to be branded as officer in default in every Tata company because of his advisory role. Is this is the correct status of RNT? Only future disputes/ judgments will tell the correct legal position.
Chairperson of the Board vs. Executive Chairman - the different posts in Company hierarchy :
This again is a common feature in big corporate groups. There is a Chairman of the group and then,there is an executive Chairman - both draw different types of remuneration. The group chairman may draw commission on profit sat the end of the year, the executive chairman draws remuneration on a monthly basis denoting his employee-director role. These are all common practices followed in many corporates. One cannot say the executive chairman's post is not a recognised statutory post under the Act. What is to be seen is whether his removal from the post automatically makes him vacate the directorship also or any injustice has been done to him and whether that act could be termed as oppression? The point that was glossed over was that whether the action of walking into the board meeting and asking the executive chairman to step down by the nominee directors of the Trusts, and more particularly to the surprise of some of the independent directors, could be construed as an excessive aggressive act from the point of corporate governance.
Applicability of sections 241 & 242 of the Companies Act - sections for minority protection:
There is a great deal of discussion on application to Tribunal for relief in cases of oppression(sec 241) and powers of Tribunal (sec242).
Discussing this further, it is clear that CPM group is empowered to apply under section 244(1)(a)to file the application as they have more than one-tenth of the issued capital in their fold.In terms of the above sections, a valid application was made by CPM group. Needless to say the section covers any oppressive or prejudicial action even in respect of a single member. This section always referred to the protection of minority interest and numerous disputes were settled in the past by many SC / HC /CLB benches.
On this chapter dealing with these provisions, the Hon'ble SC commented in the following manner:
"It is relevant to point out that once upon a time, the provisions for relief against oppression and mismanagement were construed as weapons in the armoury of the shareholders, which when brandished in terrorem, were more potent than when actually used to strike with. While such a position is certainly not desirable, they cannot today be taken to the other extreme where the tail can wag the dog."
"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."
A look at the commentaries in the context of the corresponding provisions under the Companies act, 1956, it is clear that there is no other section under the Act where an (eligible) minority shareholder can complain and although the SC in the extract always talks about plural by referring to members, the section provides relief even in individual cases as it uses the word-'him". Even in this case, CPM was also representing 3 companies of his group and the same nominator argument holds good here also. In other words, if Trustees of Tata trust can represent Charitable Trusts interests all the time, equally CPM can also represent his group companies' interests.
Again interference in the conduct of the executive chairman's activities, that too, are presentative of 18% shareholder group cannot be brushed aside lightly even if it is done by trustee shareholders possessing affirmative votes.
In the view of the Author, sec 241 & 242 is not to be looked as mere company law provisions, but as provisions enacted to render justice based on fairness and equity- Scope is very wide here.
Some odd comments extracted from the judgment:
Role of an independent director vs. other director:
If we look at the following extract, one will wonder whether the SC is not in agreement with the role of a director in a company - to work always for the benefit of the company's interest;
"19.23 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 Sub-sections(2) and (3) of Section 166, every Director of 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 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."
The problem in this case arose because of their unique (singular?)exemption conferred under the Income Tax Act allowing these Charitable Trusts to hold shares in public companies but still avail tax exemption.
Comments on corporate governance:
The following extract too creates a doubt in the mind of a reader as to whether the SC is really concerned about the corporate governance which is now the underlying theme in the corporate functioning / activities.
"It was argued on behalf of SP group that there is a sea change in the law, after the advent of the 2013 Act and that today a paradigm shift has taken place from 'corporate majority/democracy 'to' corporate governance 'and that every action of the Board has to pass the test of fairness. It is further contended that Directors have a fiduciary responsibility with the highest level of duty and that the same cannot be out sourced. According to the SP group, the Directors, once appointed, owe their allegiance only to the company and not to their nominators.
At first blush, these arguments, almost bordering on romantic idealism, appear very attractive. But on a deeper scrutiny, they are bound to get grounded."-
Binding nature of Articles of Association:
Although everyone is aware of this aspect - whether it is a company or a club or an association, all members are bound by the rules of that entity, which in this case is AA, it is seldom objected to by anyone joining the association, unless and until there arises an obstacle in the exercise of member's right.
"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 SC pointed out that Article 76 conferring the powers of affirmative vote to the Charitable trusts was existing for along time right from CPM's father's time and one more amendment occurred during the tenure of CPM. CPM did not object to these articles earlier and consider them to be oppressive.The answer could be - as explained earlier, the objections were raised when the obstacles arose for the first time.
Vetting of minutes by the shadow director:
On the one hand, the Hon'ble SC seems not to be approving the conduct of CPM in sharing the pertinent information to the Income tax department as aviolation of fiduciary responsibility of a director. On the other hand, the objectionraised against the vetting of minutes by former chairman was condoned as revealed by the following excerpt:
"9.36 Objections were raised about RNT vetting the minutes of the meetings of the Board post facto and his participation as ashadow Director. But as we have pointed out elsewhere, CPM himself sought, while accepting the office of Executive Chairmanship, the continued guidance of RNT. When the Board, of which CPM was a Chairman, nominated RNT as Chairman Emeritus and recorded their desire to look forward to his support and guidance, it is not open to the complainant companies to call RNT a shadow Director. If someone, aggrieved after his removal from office can engage in shadowboxing through the companies controlled by him, he cannot accuse the very same person who chose him as successor to be a shadow director. Someone who gained entry through the very same door, cannot condemn it when asked to exit."
The answer to his could be: if there is only one door in the room, everything can happen only through the same door! The words used 10 years ago at the time of joining the board, cannot haunt a person in every walk(!) of his life.
Removal of Director without notice: whether oppression?
The book of Ramaiya - Guide to The Companies Act, contains a host of decisions indicating that even for removal of a director in a private limited company, a notice need to be served and removal is different from resignation. This act of termination of a director was held to be oppressive 140 CC 313 (CLB). If this is applicable to a director, it is also not wrong to assume that for every post - whether statutorily recognised or otherwise, the rule of fairness should apply and one cannot have a coup in the board room, unseating without proper notice an executive Chairman, a salaried employee director (refer also 117CLA 227 (CLB)
In this context, the SC observed as under:
"16.32 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 beingpremeditated.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 premeditated one. There is a thin line of demarcation between a well-conceived plan and a premeditated one and the line can many times be blurred".
About oppression, the Court looked at the return on investments obtained over the years and wondered whether this also is due to oppressive conduct, or despite oppressive conduct.
The other point of view regarding the role and duties of charitable trusts is - whether they can participate in a corporate battle taking sides or should they stay neutral? Will it be deemed to be a part of charitable activities? The SC answered this in the affirmative, going by the previous extracts of the judgment.
Conclusion: As extracted above, though one will be fully satisfied with the answers provided by the SC on the legal questions analysed by it, in that process some far-reaching observations were made as explained in the paragraph headings, leaving the minority shareholders interest unprotected. The colourfull anguage used by the SC (quotations extracted in bold letters) in arriving at the above conclusions can drive many persons controlling companies to create more and more hurdles to the minority.How this judgment will be looked and interpreted by the Madras HC in the other major upcoming dispute where one lady sibling is attempting to establish her right to participate in the group companies affairs of a southern Industrial group will bethel next battle to be watched. After all, in India, every person likes to litigate as arbitration awards - whether national or international - are not palatable to the affected party!
(The views expressed are strictly personal.)
