The National Company Law Appellate Tribunal (NCLAT) on Wednesday reinstated Cyrus Pallonji Mistry to the position of Executive Chairman of Tata Sons and Director of the Tata Group of companies for the remainder of his tenure. Mistry, who was at one time the favourite protégé of Tata Sons Chairman Emeritus Ratan Tata, was unceremoniously sacked both as Executive Chairman and Director in 2016.

The NCLAT held Mistry’s sacking and the subsequent appointment of N Chandrasekaran to the top post at Tata Sons illegal, prejudicial, and oppressive. It set aside a July 2017 order by the Mumbai bench of the National Company Law Tribunal (NCLT), which had upheld Mistry’s removal from his positions at Tata Sons and other Group companies.

The NCLAT was constituted under Section 410 of The Companies Act, 2013 to hear appeals against the orders of the NCLT(s). It is also the appellate tribunal for orders passed by the NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code (IBC), 2016, and for orders passed by the Insolvency and Bankruptcy Board of India (IBBI) under Sections 202 and 211 of the IBC.

The order of the appellate tribunal, passed by NCLAT Chairman Justice (retd) S J Mukhopadhaya, a former judge of the Supreme Court, included directions on several major questions of corporate governance.

Minority shareholders

The appellate tribunal directed Tata Sons to consult all its minority shareholders before making any appointments in the future to the posts of Executive Chairman, Independent Director, and Director on the boards of Group companies.

The NCLAT direction will empower the minority shareholders, and will force Independent Directors to take their objections more seriously. The Code for Independent Directors, which is part of The Companies Act, 2013, says that one of their functions is to “safeguard the interests of all stakeholders, particularly the minority shareholders”.

The directive will give a boost to the Shapoorji Pallonji Group, which is owned by Mistry’s family and which, although a minority shareholder (18%), is still the biggest outside shareholder in Tata Sons, the holding company of the Tata Group.

Use of Article 75

The NCLAT has barred Tata Sons from taking any action against Mistry, Shapoorji Pallonji, Cyrus Investments, and other minority shareholders under Article 75 of the Articles of Association of the Tata Group. This provision grants Tata Sons the right to transfer the ‘ordinary shares’ of any shareholder, including those of the Mistrys’, bypassing a special resolution in the presence of nominated directors of Tata Trusts.

In doing so, the NCLAT has ensured that any decision taken by the Tata Group does not take the Mistrys or other minority shareholders by surprise, which was one of the main allegations made by Mistry and his team.

Making public company, private

The NCLAT has held that Tata’s decision to convert from a public limited company to a private company was “prejudicial and oppressive to the minority members and depositors” and, therefore, illegal.

Tata Sons, which had functioned as a private concern until 1975, had to turn into a public company following the insertion of Section 43A(1A) in The Companies Act, 1956. This provision forced certain companies to turn public based on their turnover, irrespective of their paid-up share capital.

The NCLAT order built on the issues of oppression and mismanagement, and observed that the company’s affairs were still being conducted in similar ways — a “winding-up order” against Tata Sons would, therefore, be justified.

What had the NCLT said?

In 2017, the NCLT had observed that just because the board of Tata Sons had held a board meeting at short notice or included the item agenda (that removed Mistry from his post at the top) at the last minute, it could not be termed as a fraud.

“Of course, removal of Cyrus would have become heart-burn not only to Mr Cyrus but to others holding the shareholding of the petitioners, but it cannot ipso facto become a grievance,” the NCLT had held.

The tribunal had also upheld Tata’s decision to go private because it had not “altered any of the Articles of Association so as to bring any new entrenchment to the articles already in existence”. This action, the NCLT had said, could not be said to have been prejudicial to the Mistrys.

What next for the Tatas?

Tata Sons will likely move the Supreme Court as soon as it opens after the winter vacation. In the interim, they will have to call Mistry for any/all board meetings of companies where he was a Director before his ouster. The company is likely to keep in abeyance major decisions until contentions such as those on the use of Article 75 of its Articles of Association, are decided by the Supreme Court.

Will Mistry return to Bombay House?

Although the NCLAT passed an order restoring Mistry to the top position at Tata Sons, the execution of the order has been suspended for four weeks. This will allow the Tata Group to challenge the NCLAT decision before the Supreme Court.

However, barring the direction to reinstate Mistry, the NCLAT has not stayed the execution of any of its other directions. This means Mistry will be immediately restored to his position as Director on the boards of at least three Tata Group companies, including Tata Steel and Tata Chemicals.

He will, therefore, have to be invited to the board meetings of these companies, thus ensuring his return to Tata’s Bombay House headquarters, albeit as only a Director.

Source: The Indian Express

Relevant for GS Prelims & Mains Paper II; Polity & Governance