The unresolved mystery behind Sec. 241 and 244 in the Tata – Mistry case

March 03,2017
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Suhas Tuljapurkar (Managing Partner, Legasis)
Apurv Sardeshmukh (Partner)

BACKGROUND:

The recent ouster of  Mr. Cyrus Mistry as the Chairman of the Tata Group and the subsequent oppression and mismanagement petition filed by the Mistry group against the Tatas has brought into focus Sections 241, 242 and 244 of the Companies Act, 2013(‘Act’).

Subsequent to the ouster of Mr. Mistry who was serving as the chairman of the Tata Group, the  Companies controlled by the Cyrus Mistrys Family (‘Mistry Companies’) filed a petition under sections 241, section 242 and 244 of the Companies Act,2013 before the  National Company Law Tribunal (‘NCLT’) alleging oppression and mismanagement by the board of Tata Sons.

This petition filed by the Mistry Companies has raised several important issues relating to section 241 and 242, This article aims to discuss the applicability and the issues realtion to Section 241,242 and 244 of the Act.

Provisions under the Companies Act 2013

Section 241 of the Act provides that any member of a company can make an application for seeking relief to the NCLT in case of oppression and mismanagement. Section 244 prescribes the shareholder qualifications required to make an application under section 241. Section 244 provides that in the case of a company having a share capital, at least one hundred members or members constituting one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or  have paid all calls and other sums due on his or their shares, can make an application to the NCLT alleging oppression and mismanagement. Further, in case of a company not having a share capital,  at least one-fifth of the total number of its members are required to make an application under section 241 of the Act.

Interestingly Section 244 further gives NCLT the power to waive all or any of the requirements specified in section 244 so as to enable the members to make an application under section 241.

Section 242 gives the power to the Tribunal to make an order  to regulate the conduct of affairs of the company in future, the purchase of shares, restriction on the transfer of the share, termination, setting aside or modification of any agreement, setting aside of any transfer, delivery of goods, payment, execution or other act relating to property, removal of managing director, manager, or any of the directors of the company, recovery of undue gains made by any managing director, manager or director during the period of his appointment as suchand imposition of costs as may be deemed fit.

Analysis of key issues under section 241 and section 244

It is clear from a plain reading of the sections that Section 241 and 244 of the Companies Act, 2013 need to be looked at together to determine the eligibility for filling an oppression and mismanagement petition. 

Section 244 of the Act prescribes the qualification in terms of shareholding and membership for filing an application under section 241 of the Act. Hence, for an application to be maintainable under Section 241, the criteria prescribed under section 244 will have to be met or a waiver will have to be granted to the applicant with respect to the criteria by the NCLT.

The pertinent questions that arise with respect to an application filed under section 241 are whether the application is maintainable and at what stage should the issue with respect to maintainability be raised. The Madras High Court in Saraoj Goenka v Nariman Point Building Services and Trading P.Ltd[1] held that whether maintainability is to be treated as preliminary issue or not, is a question of fact in each case and maintainability would be a preliminary issue only when a pure question of law is involved.

In Satish Chand Sanwalkar v Tinplate dealers Association Private Limited[2], the Court observed that “Complicated questions of law and facts cannot be decided at the preliminary stage and the Court needs to go through pleadings and hearings before deciding maintainability in such a scenario.” 

The basic principle is very clear under section 244. In order to maintain an application under section 241 of the Act, the petitioner should hold either 10% or more shares of the issued capital or should constitute 1/5th or more of the members of the Company or the application shall be filed by at least one hundred members of the Company. The point of discussion in this aspect is as to what is meant by the term ‘issued share capital’ under section 244. In the current Mistry v Tata dispute, a key point on which the maintainability of the suit may depend is the percentage of shares of Tata Sons’ which the two Mistry companies hold. The Mistry petition relies on the fact that the two companies that are party to the suit together hold 18.7% of equity shares in Tata Sons. The Tatas disagree. Tata Sons have argued that the issued share capital includes issued equity capital and issued preference capital; and according to this calculation, the two Mistry companies hold less than 3% of the issued share capital.

An important judgement in this respect is the judgment of the Bombay High Court, in Northern Projects Ltd. vs. Blue Coast Hotels and Resorts Ltd.[3]  The Bombay High Court in this case held that the expression ‘issued share capital’ has a wide connotation, and has deliberately been used by the legislature with a view to include both equity and preference share capital issued by the company. If the logic held in the Northern Projects case has to be followed, then the Mistry Companies do not satisfy the thresholds specified in section 244. However, the Northern Projects ruling was under the erstwhile Companies Act, 1956.It has been argued that the Companies Act, 2013 is a new law and the jurisprudence of the Companies Act, 1956 is not applicable while interpreting its provisions. There exists a view that there is a departure in the legislative intent of Companies Act, 1956 which only addressed public interest or interest of the company while assessing a claim of oppression and mismanagement.  The 2013 Act expands the scope to any class of shareholders, debenture holders and creditors and so the threshold of 10 % should be looked at from that aspect. .

The NCLT will pronounce its final order on maintainability in the Mistry Vs. Tata case on March 6,2017. If the NCLT follows the precedent set by the Northern Projects case and rules that the Mistry Companies were below the 10% threshold, then the NCLT will further have to determine if it would grant a waiver to the Mistry Companies as stated in the proviso of section 244 in relation of meeting the eligibility requirements specified in section 244 (a) and (b) for filing an application under section 241. The proviso gives the NCLT the power to waive all or any of the requirements specified in section 244 so as to enable the members to make an application under section 241. The purpose of this proviso is to ensure that shareholders/members not meeting the criteria specified under section 244 (a) and section 244 (b) still have the opportunity to represent before the NCLT as to why their application should be heard and the NCLT , if they deem fit, can pass an order against the Company.

Conclusion:

There is a point of view that provisions under the Companies Act, 2013 aim to protect the minority against the brute force of the majority. In view of this, NCLT may witness an increase in the applications filed under section 241. Interpretation and application of section 241 and section 244 of the Act thus becomes critical for the future of the oppression and mismanagement applications.



[1] (1997) 90 Comp Cases 205

[2] (1998) 93 Comp Cases 70

[3] (2007) 5 CompLJ 170 CLB

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