Maintainability of Petition Seeking Relief in Cases of Oppression and Mismanagement vis a vis Tata- Mistry Dispute

July 12,2017
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Sanjay R. Buch (Partner, Crawford Bayley & Co.)
Ms. Ananya Gupta (Associate)

Background

India is presently witnessing a major corporate battle which began when Cyrus Mistry, who was appointed as the Chairman of Tata Sons Ltd., was ousted from its Board and the Boards of several Tata Group Companies. The matter assumes importance since the Tata Group is a business conglomerate whose contribution to the Indian economy cannot be undermined. Cyrus Mistry and his family are promoters of the illustrious Shaporji Pallonji group of companies (Mistry Group)[1]. Cyrus Mistry was the Managing Director of Shaporji Pallonji and Company, before he succeeded Mr. Ratan Tata as the Chairman of Tata Sons Ltd in the year 2012.

The Tata Group and the Mistry group have filed a multitude of legal cases before various judicial authorities[2]. Petition alleging oppression and mismanagement against Tata Sons Ltd., has been filed by Cyrus Investments Private Limited and Sterling Investments Limited which belong to the Shaporji Pallonji Group. Both these companies hold approximately 18.4% of the equity share capital of Tata Sons Ltd.

The focus of this article is to analyse the provisions in the Companies Act, 2013 pertaining to oppression and management in light of the ongoing feud.

Analysis of Legal Provisions

Chapter XVI of the Companies Act, 2013 (“Act”) sets forth rights and remedies in relation to prevention of oppression and mismanagement.

Section 241 of the Act, which corresponds to Section 397 of Companies Act, 1956 (“Old Act”) provides the circumstances in which any member of a company or the Central Government can apply to the National Company Law Tribunal (“NCLT/Tribunal”) for relief in cases of oppression and mismanagement.

According to Section 241(1) of the Act, any member who complains of oppression and mismanagement may apply to the NCLT, provided such member has a right to apply under Section 244. The grounds set out in the said section for a member making an application to NCLT are

1. The affairs of the company have been or is being conducted-

  • In a manner prejudicial to public interest; or
  • In a manner prejudicial or oppressive to the member making such application or to any other member of the company.
  • In a manner prejudicial to the interest of the company.    

2.  Material change has taken place in the management of the company[3] and by reason of that change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company or its members or a class of its members. Such a material change may occur due to alteration in the Board of Directors, or manager, or in the ownership of shares or if the company has no share capital, in its membership, or in any other manner whatsoever.

Under Section 397 of the Old Act, a member could only complain about ongoing/continuing instances of oppression mismanagement. However, Section 241 of the Act permits a member to approach NCLT for seeking relief for past cases of oppression and mismanagement as well. Also, under Section 397 of the Old Act, a member could apply to the Tribunal if the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up and winding up of the company would unfairly prejudice such member or members. Under Section 241 of the Act, the petitioners are not required to make out a case for winding up of the company on just and equitable grounds.

Section 241(2) of the Act enables the Central Government to approach NCLT for relief if it forms an opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest.

Section 244 of the Act, which corresponds to Section 399 of the Old Act, sets out the criteria for making an application under Section 241 of the Act. According to Section 244(1)(a) of the Act, in case of a company having share capital, the following members can apply to NCLT-

(a) Not less than 100 members of the Company or not less than one tenth of the total number of members, whichever is less; or

(b) 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 the applicants has or have paid all calls or sums due on his or their shares.

According to Section 244(1)(b), if a company doesn’t have share capital, minimum one fifth of the total number of members can apply to the NCLT.

According to the proviso to Section 244(1), the NCLT has a discretion to waive all or any of the requirements specified in Section 244(1)(a) and (b) in order to enable the members to apply under Section 241. The said proviso is extracted herein under for ease of reference-

“Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.”

Section 399(4) of the Old Act gave power to the Central Government to waive the requirements pertaining to the number of members permitted to file an application to seek relief in case of oppression and mismanagement. The said provision is reproduced herein under-

“The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Tribunal under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the case may be, of sub-section (1) are not fulfilled.”

A comparison of the aforementioned provisions indicates the following-

  1. Under the Old Act, the Central Government had the power to waive the threshold requirement for filing an application alleging oppression and mismanagement. This power has now been given to the Tribunal to decide the same. 
  2. The Central Government could waive the threshold limit only if it formed an opinion that it was just and equitable to do so.  However, proviso to Section 244(1) of the Act gives the Tribunal discretion to waive the requirements contained in Section 244(1) on any ground. It is well settled that such use of discretion should be exercised with caution and should be reasonable.

Further, explanation to Section 244(1) of the Act, clarifies that for the purpose of Section 244(1), where any share or shares are held by two persons jointly, they shall be counted as one member. Also, Section 244(2) states that where any members of the company are entitled to make an application under Section 244(1), any one or more of them having obtained the consent in writing of the rest, may make an application on behalf and for the benefit of all of them.

[4]Maintainability of the petition filed by the Mistry Group Companies[5][6][7]

Even though Cyrus Investments Private Limited and Sterling Investments Ltd, own ~18.4% of the equity share capital of Tata Sons Ltd, they hold only 2.17% of the total issued share capital (i.e equity share capital + preference share capital).

Therefore, the most contentious issue in this entire episode is the maintainability of the petition alleging oppression and mismanagement under Sections 241 and 244 of the Act.

Counsels for Tata Sons Ltd have urged that the term ‘issued share capital’ used in Section 244 of the Act includes equity share capital as well as preference share capital. The Counsels relied on the Supreme Court judgements in the case of JP. Srivastava v Gwalior Sugars[8] and Northern Projects v Blue Coast Hotels and Resorts Ltd[9] to support their contention.

Counsels for the petitioners contended that Section 244 of the Act should be given a purposive interpretation i.e. one which takes into account the objective of the statute. The Act aims to protect the minority against the brute force of the majority. The case law in northern projects and Gwalior projects was to further a remedy and not to negate a relief. Further, the Counsels for the petitioners pointed out that the petitioners will be remediless if it is held that their petition is not maintainable. Also, the petitioners have filed an application for waiver of the 10% threshold contained in Section 244(1) of the Act. The Counsels for the petitioners claimed that the 10% of issued share capital should be read as 10% of shares of a particular class and not in totality. The Counsels for Tata Sons Ltd. have argued that such an interpretation will result in redrafting of the legislation, which is impermissible.

Conclusion

It is manifest that the objective of Section 244 of the Act is to ensure that a company is not subjected to frivolous litigation. Section 244(1) permits only those members who have sufficient interest in the company to file a petition under Section 241 of the Act. However, certain situations may arise wherein a minority shareholder who does not have sufficient interest in the Company makes genuine allegations of oppression and mismanagement against the company. Proviso to Section 244(1) of the Act ensures that such genuine cases are not unheard merely because of a threshold requirement with respect to shareholding. Lord Denning in a decision has stated the following[10]-

“It is one of the elementary principles of natural justice, no matter, whether it is a judicial proceeding or an administrative enquiry, that everything should be done fairly, and that any party or objector should be given a fair opportunity of being heard.”

The parties to the dispute have already presented their case and made certain compelling arguments. The NCLT will pass an order on the maintainability of this petition on 6th March, 2017. Whether the Tribunal waives off the requirement regarding the percentage of shareholding in favour of the petitioners or whether the Tribunal decides to dismiss the petition will set a strong precedent for the oppression and mismanagement cases which are filed or will be filed under the Act. 

The article has been co- authored by Ms Ananya Gupta  (Associate, Crawford Bayley & Co.)


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