Title of the case
Tata Consultancy Services Ltd. (appellants) v. Cyrus Investment Pvt. Ltd and Ors. (respondents).
Name of Court
Final Verdict by Supreme Court.
Year of the case
2016-2021.
Name of the judge/s who delivered the judgement
3-Judge Bench comprised of Justice S.A Bobade, Justice A.S Bopanna, and Justice V. Ramasubramanian.
Facts of the case
The removal of Mr. Cyrus Pallonji Mistry, from his position as the Executive Chairman of Tata Sons Private Limited, triggered a corporate dispute, accompanied by his removal from the position of director roles in other prominent companies within the Tata Group. As minority shareholders holding 18% of the paid-up share capital of Tata Sons, the Shapoorji Pallonji Group, represented by Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, found themselves at odds with the unfolding events.
These companies, which are a part of Shapoorji Pallonji group, initially owned 48 preference shares and 40 equity shares respectively of Tata Sons. Mr. Mistry, who was removed from his position, held a controlling interest in these companies. His removal in 2016 resulted from growing concerns regarding his leadership and management style.
According to Mr Mistry, he was deliberately ousted as this would enable Tata Sons to reassert their authority in the company. This assertion is contingent on the fact that he had always been very open about the low standards of corporate governance maintained within the company. Further smearing Mr Mistry’s image was a planned move to curtail the Shapoorji Pallonji group’s influence within the company and its prominent subsidiaries. This was done covertly, with the overall aim of weakening the position and the rights of the minority shareholders within the company.
On March 16, 2012, Mr Cyrus Mistry was appointed as the Executive Deputy Chairman of Tata Sons for five years, pending shareholder approval. Following the shareholders’ endorsement in a general meeting, Mr Mistry’s appointment was confirmed. Subsequently, on December 29, 2012, he was repositioned to serve as the Executive Chairman of the company from 2012 to 2016, while Mr. Ratan Tata remained the Chair Emeritus of Tata Sons.
Initially, things went well between the two, with Mr Ratan Tata strongly supporting the candidature of Mr Mistry for the position of chairman. However, their relationship soured over time due to differences in management styles. Mr. Mistry was accused of being too autocratic in his approach which eventually led to his removal in the year 2016. Mr Ratan Tata was subsequently appointed as interim Non-Executive Chairman of Tata Sons.
Subjected to scrutiny were specific provisions of the company’s AOA, such as Art. 75 which was the power of the company to transfer ordinary shares by way of passing a special resolution without prior notice. Mistry raised concerns regarding the ethical implications of the Tata Trusts’ influence on the Board, suggesting potential lapses in corporate governance. Various transactions and business dealings, including those involving Air Asia India (P) Ltd. (a deal worth twenty-two crores), and the acquisition of Corus Steel (Corus) at an alleged outsize payment, were also highly criticized by Mistry.
Mistry’s confidential communication to the directors of the company, regarding their inability to exercise their fiduciary duties, and other emails highlighting ethical concerns, became public knowledge after being leaked to the media, sparking considerable sensation.
Following these events, Tata Sons issued a clarificatory press statement, emphasizing a drop in returns during Mr. Mistry’s tenure. This statement aimed to shed light on the company’s performance under his leadership.
Shortly thereafter, from December 12 to December 14, 2016, shareholders voted to remove Mr. Mistry as a director.
On December 19, 2016, Mr. Mistry preemptively resigned as director from the board of Indian Hotels Company Limited, Tata Chemicals Limited, and Tata Power Company Limited. Tata Motors, and Tata Steel Limited, anticipating resolutions for his removal.
The corporate dispute further unfolded as tensions between the two escalated, eventually reaching the courtrooms. Cyrus Mistry’s conflict with Tata Sons became public when he approached the National Company Law Tribunal (NCLT) on December 20, 2016, following his removal as Executive Chairman, for reasons stated above.
His petition, filed under Section 241 (the provision encourages filing of the applications to the Tribunal by the members of the company to obtain relief for matters pertaining to oppression and mismanagement) and Section 242 (the provision talks about the Suo-motu powers of the Tribunal in matters related to oppression and mismanagement in a company) of the Companies Act, accused majority shareholders, including Rata Tata, Noshir Soonawala (former Vice Chairman at Tata Sons and trustee of the Sir Dorabjee Tata Trust and Sir Ratan Tata Trust), and others, of engaging in practices detrimental to the company, its stakeholders and the public. Mistry questioned the circumstances of his removal, contesting the decision’s arbitrariness.
Subsequently, on January 17, 2017, Mr. Chandrasekaran was appointed as Chief Executive Officer and Managing Director of TCS and Chairman of Tata Sons, marking a transition in leadership.
Finally, on February 6, 2017, Mr. Mistry was officially removed as a director from the board of Tata Sons, marking a significant event in the ongoing dispute between Cyrus Mistry and the Tata Group.
Issues
I. Was Mr. Mistry's removal as Executive Chairman and later as director of the company unfair or harmful to the company's interests?
II. Are the Articles of Association of Tata Sons actually repressive because they let the Tata Trusts, especially Sir Ratan Tata Trust and Sir Dorabjee Tata Trust, keep control over the company, and were they misused by Mr. Ratan Tata?
III. Was Mr. Ratan Tata's constant interference in the company's affairs harmful to the company's interests?
IV. Was the manufacturing of the Tata Nano, which ended up being a failed project carried out by Tata Motors because Mr. Ratan Tata pushed for it, bad for the company?
V. Did Tata Steel’s acquisition of Corus Group in 2006 harm the company or the interests of the petitioners?
VI. Were the business deals made with Siva Group Companies by Mr. Tata damaging to Tata Sons and its business operations?
VII. Did the activities in Air Asia India (P) Ltd constitute harmful behavior against the company's interests and the public?
VIII. Was the company's move to change its status from public to private under Section 14, without updating relevant articles in the Articles of Association, oppressive or harmful to the petitioner's interests?
IX. Did the removal of Cyrus Mistry comply with the terms of his employment contract, and were any contractual obligations breached during this process?
Law Applicable
Provisions of company law applicable in the case
Prominence of Companies Act 2013 is evident. The case was contested under this legal framework. This was the primary law which applied to the case.
I. Powers and duties of the board of directors were under scrutiny under sections 149, 152 and 169 - The board of directors have the authority to appoint and remove directors under the above given sections.
II. Another provision that was applicable was protection of minorities shareholders from the operation and mismanagement of the company which is given under sections 241 and 242 of the Companies Act 2013.
III. Internal and important documents such as the articles of association (AOA) directed specific procedures for the removal and appointment of directors which in turn influence the Board’s decisions.
IV. Corporate governance standards were one of the important provisions which was applicable in the case. These standards and duties of directors ensured that the Board acts in the best interest of the company were also applicable.
Contract law applicability
I. A prominently applicable law was the provisions of contract law. These provisions were very implicit because the primary focus was on company law.
II. The employment contract of Cyrus Mistry included terms of appointment which involved a contractual agreement specifying his role duties and the conditions under which he could be removed. The arguments by Cyrus Mistry also posited the claim that his removal was not following the terms agreed upon in his contract which hinted to a breach of contractual obligations. (Breach of contract).
III. Allegations by Cyrus Mistry against TCS were a breach of fiduciary duties by the directors. Directors bound by principals of contract law inherit fiduciary duties towards the company which include acting with due care and loyalty towards employees, directors, chairman’s and other certified members. Cyrus Mistry alleged that these duties were compromised by other directors and all notable members employed by Tata Sons.
IV. The contention of Cyrus Mistry that his removal was unfair and not in good faith is on the contractual principles of good faith. Even though these terms are implied and the case does not directly invoke these principles, they were relevant here
Case Analysis
One of the most significant cases of corporate law in India is the case of Tata Consultancy Services v. Cyrus Investment Pvt. Ltd and Ors. It developed into a notable Supreme Court Judgement as a significant case. This legal battle originated from the malicious removal of Cyrus Mistry as the Executive Chairman of Tata Sons.
The removal led to a swarm of allegations which included allegations such as oppression and mismanagement by the company, non-protection of minority shareholders, removal against contractual agreement, and failed business decisions against Tata Sons as a company and Ratan Tata as its main member.
NCLT was the first body approached which rejected the claims but later on had to dig deeper into the investigation about it by the National Company Law Appellate Tribunal (NCLAT). Finally, in the end, the Supreme Court upheld the NCLT’s order and reinstated the board’s authority. It also clarified the rights and duties of the shareholders involved. Below is a detailed analysis with important headings.
a. Order of NCLT
The NCLT dismissed the petitions that were filed by Cyrus Investments Pvt. Ltd. Sterling Investment Corporation challenged the removal of Cyrus Mistry as an Executive Chairman of Tata Sons. The NCLT ruled that the removal of Cyrus Mistry was well within the scope of the Board’s authority and it did not require the approval of shareholders. NCLT also did not find any evidence hinting at oppression and mismanagement towards the minority shareholders. All in all, the NCLT dismissed the claims and allegations as it found that those were taken in the best interest of the company.
b. Order of NCLAT
NCLT’s decision was overturned by the National Company Law Appellate Tribunal. It ruled in the favour of Cyrus Mistry stating that Mistry’s removal was illegal. NCLAT reinstated Cyrus Mistry as the Executive Chairman of Tata Sons and as a director on the Boards of various Tata Group conglomerates. The NCLAT also found evidence of oppression and mismanagement and contended that the actions of the Board members were directly oppressive. NCLAT further highlighted a lack of proper procedure and justification.
c. Order of Supreme Court
In the legal battle, the Supreme Court reversed the decision of the NCLAT and further upheld the decision of NCLT. It ruled that the removal of Cyrus Mistry from his position was lawful and very much in compliance with the rights of the Board. It was also not ultra-vires of the Company’s AOA. SC also found no evidence linking to oppression and mismanagement as contended by Mistry. It stated that the decisions of the Board were taken keeping in mind the best interests of the company and reinstated that the Board of Directors have the authority to do so.
d. Who was affected by the decision?
Not only was Cyrus Mistry and his company affected but also Tata Sons was affected by the decision of the Supreme Court. Following the Supreme Court’s decision, Cyrus Mistry had to permanently exit from the position of Executive Chairman and Director on Boards of Tata Group Companies. The SC also validated the decisions taken by Tata Sons and highlighted the governance and decision-making power they held, maintaining the Board’s authority. The claims of the minority shareholders i.e. Cyrus Investments and Sterling Investment Corporation, were dismissed. This impacted their will and ability to influence company decisions.
e. Was the decision of the Board and Supreme Court right?
The Supreme Court found the decisions of the Board right and ruled that the removal of Cyrus Mistry was a genuine and legitimate business decision made in the company's best interests. The court also noted that the Board adhered to principles of Corporate Governance and had acted within its scope, following the articles of association and statutory requirements. There was no evidence of mala fide intention or oppression and/or mismanagement. It stated that the non-will of any shareholder does not equate to oppression or mismanagement especially when the actions are lawful and well within the ambit of the Board’s power.
Conclusion
The 3-judge bench of the Supreme Court has refused to interfere in the terms and conditions of the exit of the Shapoorji Pallonji group from Tata Sons. The Supreme Court’s judgment is undoubtedly a crucial precedent in Indian Company Law.
The Supreme Court ruled in favour of the Tata Group and dismissed an appellate court order that allowed Cyrus Mistry to be reinstated as the Group Chairman.The top court said that all the laws were in favour of the Tata Group. “We cannot adjudicate on the question of compensation and they can take the route under Article 75. Order of NCLAT is set aside. The appeal by the TATA group was upheld. The appeal by SP group was also dismissed.
Appeal by Cyrus Investments was dismissed,” said Chief Justice of India SA Bobde during the order. The judgement was pronounced by CJI Bobde, Justice AS Bopanna and Justice V Subramanian. The top court further said, “We leave it to Tata Sons, Mistry to take the legal route to resolve the issue of shares. Value of Tata Sons shares depends on equity.”Cyrus Mistry, whose family holds a majority stake in Tata Sons, was appointed as Chairman in 2012 and was ousted in 2016. Ratan Tata had asked Mistry to step down from his post as the board had lost faith in him. However, Mistry’s refusal to leave resulted in a very public spat between Tata and Mistry.
Frequently Asked Questions
Q1) What is the importance of a case analysis?
A) A lawyer's ability to comprehend the law, recognize legal problems, and make wise decisions is enhanced by case analysis. This skill is the foundation for creating strong legal arguments based on established precedents and legal ideas.
Q2) What is the National Company Law Tribunal (NCLT)?
A) The National Company Law Tribunal (NCLT) is a quasi-judicial body which was established under Section 408 of the Companies Act of 2013. The NCLT adjudicates issues relating to Indian companies.
Q3) What is the National Company Law Appellate Tribunal (NCLAT)?
A) The National Company Law Appellate Tribunal (NCLAT) is responsible for hearing appeals from the orders of National Company Law Tribunal(s) (NCLT). This tribunal is established under Section 410 of the Companies Act of 2013.
Q4) What is a legal precedent?
A) A legal precedent is a principle or rule established in a legal case that becomes authoritative for a subordinate court or other tribunal when deciding subsequent cases with similar legal issues or facts. Essentially, it means that decisions made by higher courts serve as guidance for future cases.
This Article is written by Tanaya Moholkar, a final year law student at Yashwantrao Chavan Law College, Pune.
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