NCLAT Order Reveals How Articles Of Association Of Tata Sons Were Misused And Went Against The Companies Act

The National Company Law Appellate Tribunal (NCLAT) judgment which reinstated Cyrus Pallonji Mistry as Executive Chairman of Tata Sons has revealed prejudicial and oppressive acts against him.

It has revealed various instances of mismanagement and numerous decisions with regard to various group companies, where acts of mismanagement occurred based on the clout of majority shareholders.

The NCLAT judgment has shown how Ratan Tata and Noshir Soonawala, representing majority shareholders of Tata Sons (66%), indulged in unabashed misuse of Articles of Association of Tata Sons in order to emasculate Mistry.

The NCLAT judgment has highlighted the level and scale of interference on a wide range of topics which extended well beyond legacy hotspots.

It has revealed that more than 550 emails were exchanged between Ratan Tata and Cyrus Mistry demonstrating the level of interference.

The judgment has revealed that such interference fostered a pattern of decision-making which led to the board headed by Mistry being undermined.

The NCLAT judgment has fulminated against the process of Mistry’s removal by stating that no committee was formed for his removal as required under Article 118.

The judgment has mentioned that self-serving and materially misleading arguments were made about the absence of any need to form a committee to remove Mistry as Executive Chairman.

According to the judgment, no legal opinion was taken by the Board of Directors to determine whether the removal of Mistry as the Executive Chairman in such a hasty manner was in accordance with the Articles of Association of Tata Sons.

The NCLAT judgment has come down heavily against the attempt to convert Tata Sons into a private limited company in a marked departure of it being a public limited company, even as the matter was sub judice.

Moreover, Articles 121 and 121A were introduced in 2000 and 2014 to safeguard the interests of the company, but they were blatantly misused and became 'Articles of Oppression' to further the ends of majority shareholders.

Ratan Tata and Noshir Soonawala indulged in oppressive interference, even though both held no official position after Mistry became Executive Chairman.

Several examples of their interference have been laid bare by the judgment once again throwing into stark relief how majority shareholders in this case, Tata Trusts and others, acted as a ‘super board’ which chose to ignore well-laid and statutorily recognized principles of law with regard to management of a company.

The judgment is a tale of woe, since it has described Mistry as someone who was hemmed in and sequestered by the brazen might of majority shareholders.

Appearing for Ratan Tata, eminent counsel Harish Salve denied the allegations against his client saying that the nature of complaints against Mistry were in the nature of directorial complaints which cannot be raised in a petition under Section 241 of the Companies Act 2013.

Furthermore, the senior counsel appearing for independent director Nitin Nohria denied allegations that they were complicit in the October 24 palace coup “for they were not handmaidens, poodles and postmen of Ratan Tata”.

All this, the judgment found, went against the grain of Chapter 16 of the Companies Act 2013, which relates to the provision of prevention of oppression and mismanagement. Section 241 further deals with application to the Tribunal for relief in cases of such oppression. The judgement has been predicated on this chapter and section as well as the rights it gives to minority shareholders.

Innumerable examples of emails from Ratan Tata to Mistry and vice versa have been shown as documentary evidence to support the prejudicial oppression.

One such email on January 29, 2015, contains a question from Mistry to Nitin Nohria that if everything had to be presented to Ratan Tata, then what is the locus standi of the Board of Directors of the company in taking investment decisions. To this email, Nohria had replied that he will formulate a governance framework.

Mistry seemed unaware and not in a position to understand as to how decisions taken by the Tata Trusts before the Tata Sons board were taken. Disturbing questions have been raised over the Welspun acquisition, and Air Asia fraud, among other issues.

The insidious manner of operations is thrown into stark relief from the fateful Tata Sons board meeting of October 24, 2016 when Mistry was informed that Ratan Tata would be joining it. The agenda was hijacked and Mistry was brought down in a palace coup where all the directors ganged up, barring Farida Khambata who abstained.

Amit Chandra, Nohria, Venu Srinivasan, Ajay Piramal, Ranendra 'Ronen' Sen, and Vijay Singh were all party to this swoop down on Mistry.

Farida Khambata was the sole voice of dissent, along with Mistry himself, when she asked whether the decisions taken by the board could be announced immediately since Mistry had said categorically that he should have been given advance notice of his removal. Ratan Tata trashed this by saying that a press announcement on the same day would be released.

A M Singhvi, counsel for the company, captured the proceedings of the October 24 meeting by saying that Ratan Tata was determined to remove Mistry even prior to the meeting and had asked him to step down.

The judgment also provides clarity on the private versus public company concept for Tata Sons. It says Sub Section 3 of Section 23 shall apply to a change of name under Sub Section 2 as it applies to a change of name under Section 21 - a private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central government and in accordance with the provisions of this Act, again become a private company.

“In the absence of any such approval by the Tribunal under Section 14, we hold that Tata Sons Ltd cannot be treated or converted as a private company on the basis of definition under Section 2 (68) of the Companies Act 2013,” the NCLAT ruled.

It goes on to say that curiously, Tata Sons remained silent for 13 years and never took any step for conversion in terms of Section 43A (4) of the Companies Act, 1956. Even after the enactment of the Companies Act, 2013, which came into force on April 1, 2014, it had not taken any step under Section 14 for more than three years. Till date, no application has been filed before the Tribunal under Section 14 (2) for its conversion from a public company to a private company.