On April 17, 2017, the newly formed National Companies Law Tribunal (Tribunal), Mumbai, issued an order rejecting the petition filed by companies controlled by Shapoorji Pallonji group, holding 18.37% of equity capital of Tata Sons Ltd. (collectively, Petitioners) claiming oppression and mismanagement under Sections 241, 242 and 244 of the Companies Act, 2013 (Act) against Tata Sons Ltd. (Tata Sons), Mr. Ratan Tata and others (collectively, Respondents).
The Petitioners had alleged, inter alia, the following actions of the Respondent(s) amounted to oppression and mismanagement:
- Articles of association of Tata Sons empowered Ratan Tata Trust and Sir Dorabji Tata Trust to control the affairs of Tata Sons and were oppressive in nature.
- Purchase of Corus Group Plc by Tata Steel Limited (Tata Sons holds 31.35% shareholding in this company) in 2007 was almost 33% above the original buy price and the Respondents misused their position to make this investment.
- Continuation of the Nano Car Project despite substantial losses caused to the company.
- Removal of Mr. Cyrus Mistry as director of Tata Sons and its other group companies was illegal and in contravention of law, principals of governance, fairness, transparency and probity.
- Actions of Tata Sons had undermined the position and status of its independent directors.
- Forcing of the joint venture deal with Air Asia in 2012 on Mr. Cyrus Mistry by Mr. Ratan Tata.
Summary of the relevant provisions of the Act
Section 241 of the Act provides that any member(s) can initiate an action if she is of an opinion that affairs of the company are being conducted in a manner which is prejudicial to members’ interest or company’s interest or to public interest. Section 242 deals with the powers of the Tribunal to provide appropriate relief once the allegation of oppression and mismanagement has been proven. Section 244 lays down the minimum criteria that need to be satisfied in order to file a petition under Section 241. It provides that a petition under Section 241 may be filed by “not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one tenth of the issued share capital of the company”. The proviso to Section 244 empowers the Tribunal to waive the minimum criteria under exceptional circumstances.
In an earlier order, the Tribunal had held that the Petitioners did not satisfy the minimum criteria laid down in Section 244. The Petitioners then filed an application before the Tribunal to waive the minimum qualification criteria and allow the petition. The major issue that needed to be decided by the Tribunal in this case was whether it was a fit case for the Tribunal to waive the minimum qualification criteria laid down under Section 244.
Order of the Tribunal
The Tribunal held that in order to be successful in a claim under Section 241, the Petitioners needed to establish the existence of a valid cause of action, a prima facie case and tender sufficient proof to prove the allegations. Based on the representations made by the Petitioners and the Respondents, the Tribunal held that the Petitioners had not made out a valid cause of action in respect of the allegations made against the Respondent. Since the Petitioners had failed to establish a valid cause of action in respect of the allegations made against the Respondents, the Tribunal held that this was not a fit case to grant a waiver under Section 244.
Points of note
The following are some of the important findings of the Tribunal which lays down principles for making claims of oppression and mismanagement by minority shareholders of a public company in India:
- Maintainability of claims of oppression and mismanagement: The Tribunal divided the process of initiating and carrying out an action of oppression and mismanagement into following steps: (a) showing existence of a valid cause of action; (b) establishing a prima facie case; and (c) qualifying ‘proof’ test. The Tribunal held that all three conditions need to be qualified for obtaining a relief under Section 242 of the Act.
Further, the Tribunal interpreted the language in Section 241 and held that the acts which are being complained of must either have been done or being done. Therefore, being a preventive remedy, actions which were committed in past, whose current implications have “become unproductive (stale claims)” are out of the purview of the jurisdiction of the Tribunal while dealing with claims of oppression and mismanagement.
- Personal interest of the complainant as a shareholder must be involved: In order to succeed under Section 241, the petitioner must establish that the alleged wrongful conduct must impact the personal interests of the petitioner and not, for example, the petitioner’s interests as a member of the “body corporate” or collectively that of shareholders. The oppression remedy will not be available simply because the petitioner asserts a reasonable expectation that it holds in common with every other shareholder. Instead, the petitioner must demonstrate that the alleged wrongful conduct has been oppressive, unfairly prejudiced or unfairly disregarded his/her/its personal interests.
- Complaint should be in the capacity of a shareholder: Relief under Section 241 is available to remedy the grievances of the shareholders of a company and an allegation of removal of director by inappropriate means cannot be construed as a matter falling under the purview of this provision.
- Should affect the economic interest of the complainant: The Tribunal will waive the minimum criteria under Section 244 of the Act only in cases where the economic interest of the petitioner is severely affected or where the petitioner will be without a remedy if the waiver is not granted and in cases where the respondent has taken intervening actions to bring the shareholding of the petitioner below the qualification criteria in order to deprive the petitioner from filing a claim under Section 241.
- Conduct of the complainant and motive behind the complaint: The conduct of the petitioner becomes relevant in deciding cases of this nature. In the circumstances such as in the present matter, Mr. Cyrus Mistry was on the board of Tata Sons when certain alleged oppressive actions were undertaken by Mr. Ratan Tata and the former did not oppose such actions at the time they were committed. That being the case, the Tribunal cannot grant relief under Section 242.
- Commercial decisions may not amount to oppression: While exercising its powers under Section 241 and 242 of the Act, the Tribunal will not take cognizance of such actions which are undertaken as a commercial / business decision, in the garb of it being an oppressive act over the members of the company. It held that only when the actions are unconscionable, unjust and laced with fraud, becoming an oppressive act on the complaining party, will it interfere in such decisions.