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Why Cyrus Mistry’s NCLT petition was rejected

LiveMint logoLiveMint 23-04-2017 Jayshree P. Upadhyay

Mumbai: Investment firms controlled by ousted Tata Sons Ltd chairman Cyrus Mistry failed to make a case of mismanagement and oppression of minority shareholders in its court battle with the Tata Group, the National Company Law Tribunal (NCLT) ruled.

Rejecting the Mistry firms’ petition that sought a waiver of rules on minimum shareholding to permit admission of its petition, NCLT said such waiver can be granted only in cases of fraud, misappropriation of company assets, breach of trust by directors, fraudulent payout from the company funds and breach of Articles of Association.

ALSO READ: Cyrus Mistry’s main NCLT petition against Tata Sons dismissed

The text of the order, which was passed on 17 April, was made available on 22 April.

The Mistry family holds 18.34% of common equity in Tata Sons Ltd, but when preference shares are taken into account, the holding falls to 2.17%. In March, the NCLT had ruled the petition was not maintainable, citing the Companies Act requirement of at least 10% holding to file such a petition. The NCLT on 17 April rejected Mistry’s petition seeking a waiver from this rule, along with the main petition on mismanagement.

The 48-page order said waiver from conditions mentioned in the Companies Act can be granted only in compelling, exceptional cases and the petition plea did not make such a case. The plea also failed to mention whether Mistry firms’ economic interest was hurt by the action of Tata Sons, the order stated.

ALSO READ: Ratan Tata praises judicial professionalism after Cyrus Mistry plea rejection

Calling the petition a “proxy litigation” on behalf of Cyrus Mistry, NCLT presiding member B.S.V. Prasad said the firms had not raised the allegations earlier. The petition was filed by Mistry family firms Cyrus Investments Pvt. Ltd and Sterling Investments Pvt. Ltd.

According to Prasad, most allegations mentioned in the main petition pertain to the period when Mistry was chairman of Tata Sons. He was ousted in a board room coup on 24 October.

“In the situation where the minority shareholders continue in the management, in fact as head of the management, can today raise an allegation that every decision is thrust upon me as fait accompli?” said the order.

Mistry firms had alleged the group’s chairman-emeritus Ratan Tata worked as a shadow or ghost director in Tata Sons. Mistry’s inaction in managing group companies was due to the lack of a free hand, they said.

The Mistry firms are now expected to move the National Company Appellate Tribunal (NCLAT) against the decision.

The firms had earlier approached the appellate tribunal against NCLT’s 6 March order, which held that Mistry plea was not maintainable. NCLAT is yet to hear the matter.

According to Tejesh Chitlangi, partner at IC Legal, the legal fight would not be easy for Mistry firms. “The tribunal has dealt with almost all the parts of petition and ruled that principally, it is not a fit case to be adjudged by it under provisions of Companies Act,” he said.

The tribunal also considered the Mistry firms’ arguments that Tata Sons were in violation of articles of association as Mistry was removed from the board of Tata Sons without consultation of the selection committee. Interestingly, the tribunal said the committee recommendation was just a “formality”.

“Though it is true that the removal has to be done on the recommendation of the selection committee, since the selection committee is comprised of majority members of Sir Dorabji Tata Trust and Ratan Tata Trust, selection committee recommendation is mere formality,” said the order.

“Not consulting the selection committee for removal of Cyrus Mistry is a procedural violation for which a monetary penalty is appropriate and not a winding-up petition,” said Chitlangi.

On Mistry’s removal as director from the Tata group companies, the bench said the allegation cannot be raised because the companies from which he has been removed are not party to the proceedings.

While ruling on alleged mismanagement in Tata group companies, the NCLT said they can’t be considered as acts of oppression at Tata Sons.

The Mistry firms in their main petition filed on 21 December had alleged irregularities in group companies including Tata Steel Ltd, Tata Motors Ltd, Tata Power Co. Ltd and Tata Teleservices Ltd.

“...These companies or their directors are not party to the main petition and does not directly relate to the affairs of Tata Sons and hence do not fall within the four corners of Section 241”, said the tribunal.

The tribunal called decisions pertaining to Tata Motors’ Nano project and Tata Steel’s buyout of Corus Plc. as business decisions. “Business decisions are business decisions, if they are seen with different glasses, it will give different perceptions, if minority is given a free ride over majority to take these kinds of allegations as acts of oppression against minority, then no company can take any decision,” said the tribunal. 

“The tribunal has adopted a hyper-technical approach while dealing with the merits of a waiver application. In doing so, the NCLT has brushed aside the serious allegations of mismanagement and oppression, which should have been ideally considered while hearing the main petition,” said Ramesh Vaidyanathan, founder, Advaya Legal.

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