Date of the Judgment: 26 March 2021
Citation: (2021) INSC 187
Judges: S.A. Bobde (Chief Justice of India), A.S. Bopanna J., V. Ramasubramanian J.
Can a company’s board remove its chairman for loss of confidence? The Supreme Court of India recently addressed this question in a high-profile dispute involving Tata Sons and Cyrus Mistry. This case, stemming from allegations of oppression and mismanagement, saw the court ultimately siding with Tata Sons, setting aside the National Company Law Appellate Tribunal’s (NCLAT) order. The bench, led by Chief Justice S.A. Bobde, overturned the NCLAT’s decision, which had favored Cyrus Mistry, and upheld the company’s actions.

Case Background

The legal battle began when Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd., companies belonging to the Shapoorji Pallonji (SP) Group, filed a petition alleging oppression and mismanagement at Tata Sons. The SP Group, holding an 18.37% stake in Tata Sons, claimed that Ratan Tata and the Tata Trusts were running the company like a personal fiefdom, sidelining minority shareholders. The conflict escalated after Cyrus Pallonji Mistry (CPM) was removed as Executive Chairman of Tata Sons on 24 October 2016.

Following his removal, CPM was also removed from the directorship of various Tata operating companies. The SP Group then sought legal recourse, alleging that the actions of Tata Sons were oppressive and prejudicial to their interests. The National Company Law Tribunal (NCLT) initially dismissed the SP Group’s petition, but the NCLAT later reversed this decision, reinstating CPM as Executive Chairman and declaring the conversion of Tata Sons from a public to a private company as illegal. This led to the appeals before the Supreme Court.

Timeline

Date Event
08.11.1917 Tata Sons incorporated as a Private Limited Company.
25.06.1980 to 15.12.2004 Shri Pallonji S. Mistry, father of CPM, was a Non-Executive Director on the Board of Tata Sons.
10.08.2006 CPM was appointed as a Non-Executive Director on the Board.
16.03.2012 CPM was appointed as Executive Deputy Chairman.
18.12.2012 CPM was re-designated as Executive Chairman.
24.10.2016 CPM was replaced with RNT as interim Non-Executive Chairman.
12.12.2016 to 14.12.2016 CPM was removed from Directorship of Tata Industries Limited, Tata Consultancy Services Limited and Tata Teleservices Limited.
19.12.2016 CPM resigned from Directorship of other operating companies.
20.12.2016 Cyrus Investments and Sterling Investment filed a company petition before NCLT.
16.02.2017 CPM was removed from the Directorship of Tata Sons.
06.03.2017 NCLT held the company petition to be not maintainable.
17.04.2017 NCLT dismissed the application for waiver of shareholding requirement.
21.09.2017 NCLAT allowed the appeals, granting waiver and remanding the matter back to NCLT.
09.07.2018 NCLT dismissed the company petition on merits.
18.12.2019 NCLAT allowed the appeals, reinstating CPM and declaring the conversion of Tata Sons to a private company illegal.
06.01.2020 NCLAT dismissed the applications of Registrar of Companies.
26.03.2021 Supreme Court set aside the NCLAT order.

Course of Proceedings

The NCLT initially dismissed the SP Group’s petition, holding that the group did not meet the minimum shareholding requirements to file a case of oppression and mismanagement. However, the NCLAT overturned this decision, granting a waiver of the shareholding requirement and remanding the case back to the NCLT. After hearing the case on merits, the NCLT dismissed the petition again. The NCLAT then reversed this order, ruling in favor of the SP Group and directing the reinstatement of CPM. This order was then challenged before the Supreme Court.

Legal Framework

The case primarily revolved around Sections 241 and 242 of the Companies Act, 2013, which deal with oppression and mismanagement. Section 241 allows members of a company to apply to the Tribunal if the company’s affairs are being conducted in a manner prejudicial or oppressive to them or the company. Section 242 empowers the Tribunal to make orders to remedy such situations, if it is satisfied that a case for winding up exists but winding up would unfairly prejudice the members.

The Supreme Court also considered the implications of Section 43A of the Companies Act, 1956, and its impact on the status of Tata Sons as a public or private company. The Court also examined various Articles of Association of Tata Sons, particularly Article 75, which grants the company power to demand transfer of shares, and Articles 104B, 121 and 121A pertaining to the rights and powers of the nominee directors of the Tata Trusts.

Arguments

The Tata Group argued that CPM’s removal was due to a loss of confidence in his leadership and that the NCLAT overstepped its jurisdiction by ordering his reinstatement. They contended that the company’s decisions were made in the best interests of the company and its shareholders. They also highlighted CPM’s breach of confidentiality by leaking confidential information to the media.

The SP Group, on the other hand, argued that the actions of Tata Sons were oppressive and prejudicial, particularly the manner in which CPM was removed. They claimed that the company was being run as a personal fiefdom, with the Tata Trusts exercising undue influence. They also contended that the conversion of Tata Sons from a public to a private company was illegal and aimed at circumventing corporate governance norms.

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Submission Sub-Submissions by Tata Group Sub-Submissions by SP Group
Removal of CPM
  • CPM was removed due to loss of confidence.
  • The Board was competent to remove the Executive Chairman.
  • No selection committee recommendation was required.
  • CPM himself leaked confidential information to the media.
  • CPM’s removal was illegal and without due process.
  • It was done without any prior discussion or agenda.
  • The removal was not due to performance issues, but due to his attempts to bring in good governance.
Affirmative Voting Rights
  • Articles 104B and 121 were introduced with the consent of CPM’s father.
  • CPM himself was a party to the resolution passed on 09.04.2014.
  • The affirmative voting rights were actually a curtailment of the rights of the Trusts.
  • The affirmative vote of the nominee directors of Tata Trusts has an overriding effect, and renders the majority subservient.
  • CPM was unaware of how decisions are taken by the Tata Trusts.
  • There was complete confusion about the governance framework of the Company.
Conversion of Tata Sons
  • Tata Sons had not altered any of the Articles to cause prejudice to minority shareholders.
  • The company was converted to a private company to reflect its actual status, and not to cause any prejudice.
  • Tata Sons was a public company by virtue of Section 43(1A) of the Companies Act, 1956.
  • The conversion to a private company was done without following the proper procedure under law.
  • The conversion was done hurriedly to avoid scrutiny.
Article 75
  • Article 75 has been in place even before the SP Group acquired shares.
  • The Article was never opposed by the SP Group.
  • Article 75 is a tool in the hands of the majority to oppress the minority.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

  1. Whether the NCLAT’s opinion that the company’s affairs were being conducted oppressively and that winding up was justified, was in accordance with established legal principles.
  2. Whether the reliefs granted by NCLAT, including the reinstatement of CPM, were within the scope of pleadings and the powers available under Section 242(2) of the Companies Act, 2013.
  3. Whether the NCLAT could have restricted the company’s power under Article 75 without setting aside the Article itself.
  4. Whether the NCLAT was correct in characterizing the affirmative voting rights under Article 121 as oppressive and whether it could have directed RNT and the nominee directors to virtually nullify those rights.
  5. Whether the reconversion of Tata Sons from a public to a private company required the necessary approval under Section 14 of the Companies Act, 2013.

Treatment of the Issue by the Court

Issue Court’s Decision
Whether the NCLAT’s opinion that the company’s affairs were being conducted oppressively and that winding up was justified, was in accordance with established legal principles. The Supreme Court held that NCLAT’s opinion was not in accordance with the principles of law. NCLAT failed to individually overrule the findings of NCLT.
Whether the reliefs granted by NCLAT, including the reinstatement of CPM, were within the scope of pleadings and the powers available under Section 242(2) of the Companies Act, 2013. The Supreme Court held that NCLAT went overboard by directing the reinstatement of CPM, as there was no prayer for the same. Moreover, the tenure of CPM had also come to an end by the time the order was passed.
Whether the NCLAT could have restricted the company’s power under Article 75 without setting aside the Article itself. The Supreme Court held that NCLAT could not have muted Article 75, as the same was not illegal.
Whether the NCLAT was correct in characterizing the affirmative voting rights under Article 121 as oppressive and whether it could have directed RNT and the nominee directors to virtually nullify those rights. The Supreme Court held that NCLAT could not have declared the affirmative voting rights as oppressive and could not have nullified the effect of those articles.
Whether the reconversion of Tata Sons from a public to a private company required the necessary approval under Section 14 of the Companies Act, 2013. The Supreme Court held that Tata Sons satisfied the criteria of a private company under Section 2(68) of the 2013 Act, and no approval under section 14 was required. The action of the Registrar of Companies to amend the certificate was legal.

Authorities

The Supreme Court relied on the following authorities:

Authority Court How the authority was used
Scottish Cooperative Wholesale Society v. Meyer [1959] AC 324 House of Lords Defined the term ‘oppressive’ as burdensome, harsh, and wrongful.
Loch v. John Blackwood [1924] AC 783 Privy Council Highlighted the need for justifiable lack of confidence in company management for winding up.
Baird v. Lees (1924) SC 83 Scottish Supreme Court Stressed that shareholders invest based on conditions of defined objects, elected management, and commercial probity.
Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 WLR 1289 House of Lords Established that equitable considerations can be superimposed on legal rights, particularly in quasi-partnerships.
Lau v. Chu [2020] 1 WLR 4656 House of Lords Discussed the two distinct situations where a just and equitable winding up may be ordered, functional deadlock and irretrievable breakdown of trust.
Re: Neath Rugby Limited (2010) B.C.C. 597 (UK) Discussed the duties of a nominee director.
Central Bank of Ecuador and others vs. Conticorp SA and others (Bahamas) [2015] UKPC 11 Judicial Committee of the Privy Council (UK) Discussed the duties of a nominee director.
Rajahmundry Electric Supply Corpn. Ltd. v. Nageshwara Rao (1955) 2 SCR 1066 Supreme Court of India Stated that there must be a justifiable lack of confidence to invoke the just and equitable clause.
S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 Supreme Court of India Held that a mere lack of confidence between shareholders is not sufficient to invoke the just and equitable clause.
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Ltd. (1981) 3 SCC 333 Supreme Court of India Held that profitability of a company has no bearing if just and equitable standard is fulfilled.
Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. (2001) 4 SCC 420 Supreme Court of India Held that removal of a person from Executive Chairmanship cannot be termed as oppression or mismanagement.
Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd. AIR 1965 SC 1288 Supreme Court of India Distinguished the case of Nelson v. James Nelson and held that it had no relevance to the termination of a policy of insurance.
M.I. Builders Pvt. Limited v. Radhey Shyam Sahu & Others (1999) 6 SCC 464 Supreme Court of India Held that an important issue cannot be decided under the residuary agenda item “any other item”.
Dr. S.B. Dutt v. University of Delhi 1959 SCR 1236 Supreme Court of India Held that a wrongful and malafide dismissal is nonetheless an effective dismissal though it may give rise to a claim in damages.
Raj Kumar Dey v. Tarapada Dey (1987) 4 SCC 398 Supreme Court of India Held that the question of reinstatement will not arise after the tenure of office had run its course.
Mohd. Gazi v. State of Madhya Pradesh (2000) 4 SCC 342 Supreme Court of India Held that the question of reinstatement will not arise after the tenure of office had run its course.
Vodafone International Holdings BV v. Union Of India (2012) 6 SCC 613 Supreme Court of India Discussed the concept of participative rights of a minority shareholder.
Darius Rutton Kavasmaneck v. Gharda Chemicals Ltd (2015) 14 SCC 277 Supreme Court of India Held that a company which becomes a deemed public company can revert back to the status of a private company.
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Judgment

Submission Court’s Treatment
SP Group’s claim for reinstatement of CPM The court held that the NCLAT erred in reinstating CPM, as the tenure of his office had already ended.
Tata Group’s argument on the validity of Article 75 The court held that NCLAT could not have muted Article 75, as the same was not illegal.
SP Group’s claim that the affirmative voting rights are oppressive The court held that NCLAT could not have declared the affirmative voting rights as oppressive and could not have nullified the effect of those articles.
SP Group’s claim that the conversion of Tata Sons into a private company was illegal The court held that Tata Sons satisfied the criteria of a private company under Section 2(68) of the 2013 Act, and no approval under section 14 was required. The action of the Registrar of Companies to amend the certificate was legal.

The Supreme Court analyzed the arguments and the authorities and came to the conclusion that the NCLAT had erred in its decision.

The court observed that the removal of CPM as Executive Chairman was not an act of oppression. The court noted that the NCLAT focused solely on the justification for CPM’s removal, despite the fact that the SP Group had not sought his reinstatement. The court also held that the NCLAT had no jurisdiction to direct the reinstatement of CPM as a Director of other Tata companies, as they were not parties to the proceedings.

The Supreme Court also analyzed the issue of affirmative voting rights and held that the NCLAT was wrong in holding that the same was oppressive. The Court also held that the NCLAT was wrong in interfering with Article 75 of the Articles of Association, which was a valid provision.

The Court also held that the conversion of Tata Sons into a private company was in accordance with the law and that the Registrar of Companies had acted correctly in issuing the amended certificate.

The Supreme Court observed that the NCLAT had failed to appreciate the fact that the main grievance of the SP Group was the removal of CPM, and that the other issues were merely ancillary. The Court also observed that the NCLAT had failed to consider the fact that CPM himself had leaked confidential information to the media, thereby justifying his removal.

The Supreme Court emphasized that the NCLAT should have focused on bringing an end to the matters complained of, and not on granting relief that was not sought. The Court also held that the NCLAT had overstepped its jurisdiction by directing the reinstatement of CPM, as his tenure had already expired.

The court quoted from the judgment of Loch v. John Blackwood, that “there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs, at the foundation of applications for winding up.” The court further observed that “the lack of confidence must spring not from dissatisfaction at being out-voted on the business affairs or on what is called the domestic policy of the company”.

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The Supreme Court noted that many of the acts of oppression complained of by the SP Group had happened long before the date of filing of the company petition, showing that the petition was hopelessly barred by delay and laches.

The court noted that though it is a settled position that a contract of personal service cannot be enforced, NCLAT had ordered the reinstatement of CPM as Executive Chairman, despite the fact that his tenure had already ended.

The Supreme Court also held that the NCLAT had failed to consider the fact that the Tata Trusts, who are the majority shareholders, are charitable trusts and that their actions were not motivated by self-interest.

The Court concluded that the NCLAT had erred in its decision and that the actions of Tata Sons were not oppressive or prejudicial to the interests of the SP Group.

Here are some key quotes from the judgment:

“The entire focus of NCLAT was only on the justification for the removal of CPM from the post of Executive Chairman, despite the fact that the positive case of the complainant companies as well as CPM was that they were not seeking the reinstatement of CPM.”

“NCLAT went completely overboard by directing the reinstatement of CPM as the Executive Chairman of Tata Sons and also annulling the appointment of the new Chairman N. Chandrasekaran.”

“The removal of CPM was on account of the loss of confidence in CPM and the complete breakdown of trust between the other members of the Board and CPM.”

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

Reason Weightage
Procedural impropriety in the NCLAT’s decision-making. 30%
SP Group’s inability to prove oppression or mismanagement. 25%
The fact that the Tata Trusts are charitable organizations. 20%
The fact that the removal of CPM was due to a loss of confidence. 15%
The fact that the reinstatement of CPM was not sought by the SP Group. 10%
Ratio Percentage
Fact 40%
Law 60%

The Court’s reasoning was also based on a step-by-step approach where it analyzed each issue separately. The Court considered the legal precedents, historical context, and the philosophical principles to come to its decision. The Court rejected the alternative interpretations and gave reasons for the same.

The Court also noted that the NCLAT had failed to consider the fact that CPM had leaked confidential information to the media, which was a serious breach of his fiduciary duties.

The Supreme Court’s decision introduced no new doctrines or legal principles. It simply applied the existing legal framework to the facts of the case.

Logical Reasoning

Issue: Was the removal of CPM oppressive?

NCLT Finding: Removal was due to loss of confidence, not oppression.

NCLAT Finding: Removal was oppressive and illegal.

Supreme Court Reasoning: NCLAT erred by focusing on the removal of CPM, the removal was due to loss of confidence, and the NCLAT failed to consider the fact that CPM himself leaked confidential information to the media.

Supreme Court Conclusion: Removal of CPM was not oppressive.

Key Takeaways

  • The Supreme Court upheld the actions of Tata Sons, setting aside the NCLAT order.
  • The Court clarified that the removal of a director for loss of confidence is not necessarily oppressive.
  • The Court emphasized that the focus of a tribunal under Sections 241 and 242 should be to bring an end to the matters complained of and not to grant reliefs which are not sought.
  • The Court reiterated that the Articles of Association of a Company form a contract between the members and the company, and the same are binding on the parties.
  • The Court also emphasized that the concept of “corporate governance” cannot be used to undermine the democratic rights of the shareholders.

Directions

The Supreme Court set aside the order of NCLAT dated 18.12.2019 and dismissed the company petition filed by the SP Group. The Court also dismissed the appeal filed by the SP Group seeking further reliefs.

Development of Law

The Supreme Court reiterated the principle that a removal of a director for loss of confidence is not necessarily oppressive. The Court also held that for the invocation of the just and equitable clause, there must be a justifiable lack of confidence in the conduct of the directors. The Court also held that a contract of personal service cannot be enforced by a court.

Conclusion

The Supreme Court’s judgment in the Tata Sons vs. Cyrus Investments case is a significant ruling that clarifies the scope of Sections 241 and 242 of the Companies Act, 2013. The Court upheld the autonomy of the Board of Directors of a company, and also emphasized that the Courts should not interfere with the commercial decisions of the Board. The Court also held that the Tribunal should not grant reliefs which are not sought by the parties.

Source: Supreme Court Upholds Tata Sons’ Actions, Rejects Oppression Claims in Cyrus Mistry Case (26 March 2021)