#TataMistry: Day 1, all about ‘maintainability’

Yesterday’s arguments at the National Company Law Tribunal (NCLT) were all about maintainability, and they will (hopefully) conclude today..If the petition is held maintainable, the case will move on to merits and if not, the case will move on to waiver..The suit filed by Cyrus Mistry’s investment entities against Tata Sons for oppression and mismanagement bounced back to the NCLT after having visited the National Company Law Appellate Tribunal (NCLAT) in the first week of February..The appeal filed by Mistry against the previous three orders was dismissed by the NCLAT, which ordered the NCLT to decide the issue of maintainability (and waiver) first, before moving on to merits..While there was some amount of time spent on deciding the ‘procedure’ of arguments, maintainability remained the highlight of the day. The arguments, which extended to nearly five hours, focused on the interpretation of Sections 241 and 244 of the Companies Act, 2013 (Act). The entire issue of maintainability largely vests on which interpretation BSV Prakash Kumar will choose, Abhishek Manu Singhvi’s or Aryama Sundaram’s..Arguments of Tata Sons.Opening the arguments, Singhvi said that Section 244 of the Act is the controlling section, providing for the right to apply, and that Section 241 acts as a ‘subsidiary Section’. This point was reiterated by Sudipto Sarkar, SN Mookherjee and Ravi Kadam..Sarkar said that Section 241 provides for the ‘cause of action’ whereas Section 244 provided the ‘eligibility’ for that cause of action, and that the former cannot occur without the latter. Kadam took the view that the argument tendered by Sundaram earlier that these equity shareholders constitute a ‘class of members’ is invalid, since it should be an entire class that is aggrieved and not just 10% of that particular class..Singhvi also argued that the 10% filtering bar that exists, is at two levels: not only to filter the ‘mischief mongers’ but also the legitimately oppressed shareholders who do not hold the requisite 10%. With a shareholding of just 2.17%, Singhvi argued that Mistry’s investment entities do not have any ‘substantial interest’ as claimed by them..He further elaborated on the term ‘issued share capital’ by bringing the attention of the Bench to various provisions of Act, including the definitions, to point out that the term share capital is to be understood to mean the entire aggregated invisible stock, and not a ‘self-serving’ part of it..To fortify his argument, he presented the case of Northern Projects Ltd. Vs. Blue Coast Hotels and Resorts Ltd. which dealt with similar facts, wherein it was held by the Bombay High Court that the term share capital will, in fact, include both equity and preference share capital..Arguments of Mistry.Aryama Sundaram argued the exact opposite interpretation of a mutually agreed fact, that while Section 244 acts as the qualifier and Section 241 provides for the cause of action, a person cannot qualify unless he has a cause of action..He brought the attention of the court to the case of J.P. Srivastava & Sons vs. M/S Gwalior Sugar Ltd. wherein it was held by the Supreme Court,.“If the Court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form.”.Responding to Singhvi’s point on the absence of ‘substantial interest’, Sundaram argued that the real value of the company lies with the equity shareholders and not the preference shareholders. In this context, he also highlighted Indian Accounting Standard-32, which treats preference shares differently i.e. in the form of a debt that cannot be regarded as share capital unless they are compulsorily convertible..He continued to emphasise on the introduction of the phrase “prejudicial to the interest of members” in the Act, which was missing in the Companies Act, 1956. A point which is to be read along with the whole scheme of the Act, and the changing landscape which it purports to establish: that of increased standards of corporate governance..BSV Prakash Kumar has been handed the onerous task of setting a precedent for similar future suits that will follow. As argued by Sundaram, he must remain uninfluenced by the decisions taken on the subject till now since this is now an ‘open field’.