Five arguments by Harish Salve against reinstatement of Cyrus Mistry as Tata Sons Chairperson

The Supreme Court of India on Tuesday commenced final hearing in the dispute between Tata Group’s holding company, Tata Sons Limited and Shapoorji Pallonji Group's Cyrus Mistry .

. Both Tata Sons and Mistry have challenged a December 18, 2019 order of National Company Law Appellate Tribunal (NCLAT), which had ordered the reinstatement of Cyrus Mistry as the Chairperson of Tata Sons Limited.

. The Supreme Court had on January 10, 2020, stayed the NCLAT order. The NCLAT, in its December 2019 judgment, had held that the proceedings of the Board meeting of Tata Sons held on October 24, 2016, removing Cyrus Mistry as Chairperson was illegal.

It had also directed that Ratan Tata should not take any decision in advance which requires a majority decision of the Board of Directors of Tata Sons or a majority in the Annual General Meeting.

.NCLAT expunges disparaging remarks against Cyrus Mistry from NCLT order, reinstates him as Executive Chairman of Tata Sons. Supreme Court had, however, stayed that order on January 10.

. Senior Advocate Harish Salve advanced arguments on Tuesday on behalf of Tata Sons. He argued through the day.

. Below are the five main submissions made by him till now.

. NCLAT order gives minority shareholder control of Tata companies

. Salve pointed out that the Pallonji group owns only 18 percent stake in Tata Sons while Tata Trusts holds 68 percent stake.

It was his argument that under “normal corporate democracy”, a shareholder with an 18 percent stake would not be able to even get a single director on the Board of the company while the one with 68 percent stake will be able to pack the Board with his persons.

. Further, Mistry was not appointed as Executive Chairman under any right of the minority shareholder, it was pointed out.

But by reinstating Mistry, the NCLAT has gone against majority wish by giving minority stakeholder the reins of the company, he submitted.

. “What NCLAT has done now is vest the control of the company with minority. Minority with 18 per cent holding has been effectively given power to rule over all the Tata Companies,” he said. . NCLAT has vested control of all Tata companies with minority shareholder. Harish Salve . NCLAT interference under Section 242 of the Companies Act against established law

. Section 241 of the Companies Act, 2013 empowers any member of the company to make an application before the tribunal alleging oppression and mismanagement of the company by the management.

Section 242 states that, in such a case, if the Tribunal is of the opinion that the facts would justify that it was “just and equitable” that the company should be wound up, but such an order could prejudice the members of the company, then the tribunal can resort to a slew of measures laid down under the said Section.

. This includes removal of Managing Director or any other director and appointment of new directors.

The NCLAT held that Tata Sons’ affairs have been or are being conducted in a manner ‘prejudicial’ and ‘oppressive’ to members including Cyrus Mistry and it was also ‘prejudicial’ to the interests of Tata Sons and its group companies. However, since winding up would prejudice the members of the company, the NCLAT found it fit to pass orders including reinstatement of Cyrus Mistry.

. It was Salve's case that the ground for interference by tribunal citing “just and equitable” reasons is narrow in scope.

“The test is whether there is lack of probity in the running of company and standards for applying the principle (of just and equitable grounds) are very high,” he submitted.

. For NCLAT to invoke powers under Section 242, there should be lack of probity in running the company. Harish Salve . Being out voted in a board meeting or personal lives of directors cannot be reasons to invoke "just and equitable" ground for winding up, he said.

. “Is it your submission that the tribunal has to see whether oppression is of such degree and accompanied by lack of probity to such an extent that the tribunal has to either wind up the company or pass such orders to remedy the situation,” asked CJI SA Bobde.

“Yes, Your Lordship,” Salve responded.

. Bad business decision is not mismanagement

. With reference to Section 241, Salve also submitted that bad business decisions, while they may cause loss to the company, cannot be classified as ‘mismanagement’ under Section 241.

Therefore, sales of Rs 1 lakh car taking a downturn, or issues faced by company due to problems in the distribution of mobile spectrum by the government cannot be reasons which establish lack of probity.

. Bad business decision is not 'mismanagement'. Harish Salve. . "Are you saying that a decision that was taken that did not work (for the company) cannot be the basis for oppression or mismanagement?" CJI Bobde asked.

“Correct, it might at the most be a bad decision but not mismanagement,” Salve replied.

. No allegation of mismanagement of TATA Sons

. On a related note, Salve also submitted that a member of Tata Sons cannot make allegation of mismanagement based on the functioning of other downstream Tata companies.

. “Section 241 refers to filing of complaint against 'the company' which in this case is Tata Sons. So, a complaint under 241 cannot be based on a litany of allegations against downstream companies like Tata Motors, Corus, Tata Steel etc”

. Functioning of other downstream Tata companies cannot be a ground to raise complaint under Section 241 against Tata Sons. Harish Salve. . It was, therefore, his case that a member of Tata Sons cannot complain about other Tata companies.

“There has never been a single allegation of mismanagement of Tata Sons. The company has been run amazingly. During the tenure of Mr. Ratan Tata between 1991 and 2012, the market cap of Tata went up 500 times. When there is a growth story of 500 percent, there will be some winner projects and some losers,” he argued.

. NCLAT has no “absolute” power to appoint Director under Section 242(2)(k)

. Section 242 provides for various steps which the tribunal can resort to in order to remedy the situation faced by a company. Among those are the powers to remove directors under section 242(2)(h) and appoint directors which is provided under section 242(2) (k).

. The NCLAT, in exercise of that power, had removed N Chandrasekaran from the post of Executive Chairperson. Chandrasekaran was the person whom the Board had appointed as Executive Chairperson after Mistry’s exit in 2016. The NCLAT reversed this and reinstated Mistry to the post.

. Salve argued that the NCLAT does not have such absolute powers under Section 242(2)(k) to appoint Directors.

“The power under Section 242(2)(k) is nuanced and for specific purposes,” he said.

. The hearing will continue on Wednesday.

Five arguments by Harish Salve against reinstatement of Cyrus Mistry as Tata Sons Chairperson

Murali Krishnan

Related Stories