Dissecting the Precedent Setting NCLT verdict in Tata-Mistry Case

The National Company Law Tribunal on July 9, 2018, put rest to an almost 2 year long tussle between Mr. Cyrus Mistry and Tata Sons by dismissing the petition alleging mismanagement in Tata Sons Limited (“Company”). The root of the dispute was the ouster of Mr. Mistry as the executive chairman of Tata Sons but the allegations made by the Mistry group during the proceedings of the dispute varied from flouting of funds, funding terrorism, mismanagement, prejudicial amendment of articles, etc. The NCLT has, in its 368 page long judgment, dissected every allegation made by the Mistry Group, set precedents, ruled and commented on the same. The judgment reiterates principles of law and previous precedents set in cases of prejudicial mismanagement. The key highlights of the judgment are summarized below:

Mismanagement Vs Decision Making:

The scope and boundaries of Section 241 and 242 of Companies Act, 2013 (Section 397 and 298 of the erstwhile act) have been debated upon at length time and again. The Mistry Group in the current case did not only allege that the ouster of Mr. Cyrus Mistry led to oppression and mismanagement but also stated that the affairs of the Comapny and the decisions taken by the board were overall prejudicial to the Company and led to mismanagement. The well-established legal position is that where mismanagement is alleged, it has to be proved that the affairs of the company have been conducted in such a manner so that they establish a ground for winding up of the company. The adjudicator then, considering that winding up would prejudice the interest of the shareholders, decide upon the merits of the case and protect the interest on the minority shareholders by passing suitable order and restraining the powers of the company. The NCLT in the current judgment however dismissed the allegation of mismanagement and stated that all arguments of the Mistry Group lack merit. A number of allegations made by the Mistry Group were against the decisions made with relation to the business of Tata Motors, however, Tata Motors were not a party to the case.

The principles set forth in the landmark case of S.P.Jain vs Kalinga Tubes were reiterated and the court highlighted the difference between an unfair decision taken by the company which prejudices the interest of the shareholders and a decision taken by the company which may or may not prove to be futile. It is a well-established principle of law that the court can only decide upon whether or not the decision taken by the company is bonafide and not whether the same is prudent. Further, the NCLT also dismissed these allegations made by the Mistry Group stating that most of these decisions taken by Tata Sons were implemented when Mr.Mistry himself was a part of the board.

Ouster of an Employee construed as Mismanagement:

The NCLT further commented upon whether the ouster of Mr. Cyrus Mistry can be construed to be a cause for oppression. The court was clear that the ouster of an employee of the Company who receives remuneration from the Company is a decision of the board and such an ouster can 

lead to an employee dispute but not oppression. The Mistry Group further stated that since a selection committee was set up for the appointment of the chairman the same should have been set up for the removal as well. However, considering that the decision of the committee would also not be binding on the board of directors, the allegation does not hold ground. The NCLT in its judgment stated that the “executive chairman holds position in the company only at the pleasure of non-executive management”. These observations made by the NCLT surely blur the lines between the roles of the executive and the non-executive management. The judgment also states that the Mistry Group should have approached civil courts in the matter of the ouster and not the NCLT.

Democracy of the Board and Corporate Governance:

The Mistry Group has also raised questions on whether the principles of corporate governance were followed by the board of the Company in their decision making. The conflict that arises in such a scenario is that between corporate governance and the democracy or the power of the board to make decisions. The involvement of the Tata Trusts in the decisions of the Company has been disputed by the Mistry Group. The NCLT Order however upheld the majority rule and given that the Tata Trust hold 2/3^rd of shares of the Company stated that the rights of the majority cannot be curtailed by the minority. The court has time and again in a number of judgments held that the powers entrusted upon the minority cannot be used as a weapon against the majority but it is a right that has been given to them as against prejudicial oppression by the majority. The mere right of the majority to take decisions on the board does not defeat the principles of corporate governance.

Nominee Director:

The Mistry Group also raised questions on the involvement of Mr. Ratan Tata, the Nominee Director appointed on behalf of Tata Trusts. It was alleged that Mr. Rata Tata at many instances decided on behalf of the Tata Trusts without consulting with the Tata Trust and hence over stepped his capacity as a nominee director. The NCLT order however justifies the decisions taken by Mr. Ratan Tata stating that if the majority shareholders nominate a person on the board and such a person takes decisions on behalf of the majority shareholder, it shall be presumed that the same is a well informed decision. Further, in principle, it has been observed time and again that the nominee director shall have the eyes and mind of the principal shareholder.

Way Forward:

The Mistry Group has already issued statements stating that they will appeal against the order of the NCLT in the National Company Law Appellate Tribunal. However, the jurisdiction under Section 241 and 242 is an extra ordinary jurisdiction given to the NCLT. Hence, where the facts and merits of the case are to be considered, NCLT has pronounced its final judgment and the same is binding on both the parties. The NCLAT will be only deciding upon the questions of law. It will be interesting to see whether NCLAT will take a different view or uphold the observation of the NCLT.