Tata Sons v. Cyrus Mistry: Supreme Court Reserves Judgemnt

Mr. Divan argued on two main broad aspects. First, on arbitrary removal of Cyrus Mistry on meeting dated 24 October 2016 and second, how the principles of corporate governance are compromised by the Tata Group specifically those which relate to probity and good faith in corporate dealings.

Mr. Divan presented the following series of events which points out the arbitrary removal of Mr. Mistry which was primarily influenced by external interference of Mr. Ratan Tata in the capacity of a shareholder:

• 13 December 2012: Mr. Ratan Tata attended the last board meeting.
• 28 June 2016: The Nomination Remuneration Committee (NRC) including 50 independent directors lauded the performance of Cyrus Mistry as Executive Chairman.
• 21 July 2016: Mr. Mistry wrote a letter to Mr. Tata mentioning practical difficulties in Articles of Association.
• 28 July 2016: Mr. Tata informed Mr. Mistry that while he disagrees to his complaint, Mistry must comply with principles of shareholders and AoA.
• 8 August 2016: Mr. Tata sent 2 letters in his capacity as shareholder influencing the board meetings. Mr. Subedar informed the board about the same and discussed the minutes so received.
• 24 October 2016: Mr. Ratan Tata as Chairman Emeritus attended the meeting for the first time after 2012. The meeting was convened with Mr. Mistry, Directors, Nominees of Tata Sons, Independent Directors and 2 personal nominees namely Mr. Piramal and Mr. Shrinivasa who were nominated on Mr. Tata's personal nomination and voted for his removal.

It was Mr. Divan's argument that it was agreed in the meeting that Mr. Mistry must be removed from the post of Executive Chairman as the trust lost confidence in him due to some reason. "While there were different agendas for the meeting to be convened, the voting was done on agendas over which no prior information was given to anyone. Article 105A and Article 118 requires that before the removal of a Chairperson, removal has to be considered by a selection committee and a notice of removal as to be furnished. These conditions were not fulfilled in this case. This is violation of AoA." he argued.

He further went ahead on how the principles of corporate governance were compromised by Tata Sons due to the breach of statutory provision of Companies Act, 2013. He argued that there has been a complete breach of provisions including Sec. 166 which provides that every director has a duty to act as per his independent judgment and in welfare for the company affairs and of Sec. 118(10) as no mandatory notice or period in board minutes was given under Companies Act, 2013. "The affairs of minutes in Board meetings is not a blood-sport. This is not an ambush. Companies Act rejects such illegal actions. This is not decency or fair play especially when there is good faith and fiduciary relationship between parties." He submitted.

At this stage, CJI SA Bobde asked Mr. Divan whether its true that Mr. Mistry knew about his removal from the post of Executive Chairman.

Divan: This is the most basic thing. When you talk about probity and integrity, we are talking about years of relationship. The essence is you are fair with people you are dealing with. Look at the decency, you may have a difference but you cannot expel a person like this. This is a court of conscience would not accept this conduct at all. And therefore, this is wrongful, burdensome and highly illegal.

Mr. Divan summarized his arguments by mooting the point of arbitrary removal and non compliance of Article 105 of AoA which regulates conduct of managing directors or joint managing directors. "The only way of doing it (removal) was by conducting a general meeting. Article provides that the same process of removal must be followed as that of appointment. you cannot do this Where 4 months prior the committee praised and applauded him for his contribution." He argued.

According to Mr. Divan, the General Body is the highest body. On 1 August 2012, a resolution was passed by General Body appointing Mr. Mistry as Executive Chairman. He suggested that if one wants to go against the appointment of chairperson, the appropriate way is to approach the General Body which is supported by requirement of Article 105. He also suggested that no prior information or notice was accorded to Mr. Mistry on his removal which goes against the statutory requirement of both AoA and Companies Act, 2013.

Mr. Divan while referring on the importance of a prior notice of removal and non compliance of secretarial standards relied on the Delhi HC judgment in the case of New India Assurance Co. Ltd. V. Union of India & Ors. (2009) wherein the court was of the view that a minimum 7 days of prior notice has to be furnished in cases of removal and if there is any requirement of prior notice under AoA, such prescribed period should be followed.

He also relied on the principles of secretarial standards evolved in Parmeshwari Prasad Gupta v. Union of India (1973) and M.I. Builders Pvt. Ltd. V. Radhey Shyam Sahu & Ors. (1999). "What we have here is ambush, a situation where a main principle of corporate law is not followed. In corporate law, standards are prescribed on the basis of statutes. A minimum requirement of prior notice was not followed. The court will have to way the pros and cons." he argued.

After the conclusion of Mr. Divan's arguments, Adv. Janak Dwarkadas argued on behalf of Mr. Mistry. He argued on the following 6 broad propositions:

1. Lack of financial probity is not the only ground on which just and equitable winding up of company can take place.
2. The proprietary right of a member includes the right to be governed in accordance of AoA and Companies Act, 2014.
3. What is the true legal scope and meaning of Articles 104B, 121, 121A and 121(b).
4. Role and duties of nominated directors.
5. NRC committee at its meeting expressed the need of clarity of functioning of the Board in reference to Tata Trust as well as its role vis-à-vis group companies.
6. Finding of fact by NCLAT on Mistry's attempt to place a governance structure before the meeting of the Board to be held on 24 October 2016 which was the cause for his removal.

The main thrust of Mr. Dwarkadas's argument was on how the probity would include both legal and proprietary rights and would include fair dealing in the conduct of majority shareholders. In arguing so, he relied upon the judgment of Lord Clyde decided by Scottish Supreme Court in Baird v. Lees (1924) which discussed the scope of just and equitable clause. He relied at page 102 of the judgment:

"A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company."

Mr. Salve began his argument on behalf of Tata Sons by referring to the arguments made on behalf of Cyrus Mistry as "A fiction based on false allegations". His initial argument was based on the fact that there was not good faith or long lasting relationship between the two parties. In fact, the false narrative created by the opposite counsels was based on wrong facts. "In June 1965, Mr. Mistry, grandfather of Mr. Cyrus Mistry purchased shares in Tata Group with an objective of benefitting from it. SPG Mistry also made various investments in other major corporate houses in India. In fact, Tata Group was upset by the transactions. The whole argument of having a long, reliable and good faith relationship is false." Salve argued.

He further argued that Mistry never interfered in the operations and that he has only participated in public policy decisions of the Company. "This is humbug." He remarked. He then referred to Article 118 of the AoA which provides for selection of new Chairman. "Article 118 refers to a point which was completely ignored by Mr. Divan that the board may appoint any person on the basis of recommendation subject to Article 121 which requires affirmative voting of all directors." He mooted on the importance of affirmative vote and that there was no such need of selection committee in removal.

CJI: You mean to say that affirmative vote was taken to remove Mr. mistry?

Salve: Yes. It is a standard that if he has to be removed then somebody else will be appointed in his place.

CJI: There is one point where none of the parties have clarified which is that how many times the NCLT has allowed the amendments via amendment application and how many times the same was allowed via affidavits or replies.

At this stage the counsels agreed to assist the bench on the point of NCLT amendments. The Court granted liberty to the parties to assist the bench by way of submitting Written Submissions and Notes within a week.

Read the Order Here