Supreme Court Sets Aside NCLAT Order Through Which It Had Reinstated Cyrus Mistry As Chairperson

The Supreme Court on Friday, has quashed down the NCLAT order which had directed Cyrus Mistry to be reinstated as ousted chairman of company and allowed the appeal filed by Tata Sons Ltd. the bench comprised of Chief Justice of India, S.A Bobde, Justice A.S Bopanna and Justice V. Ramasubramanian.

BACKGROUND

• On October 24th, 2016, Cyrus Mistry was removed by the majority of board of directors from the post of Chairperson of the company. A meeting was then held on February 6th, 2017 in which the shareholders had voted to remove Mistry from the Board of the company.
• Following the event, Shapoorji Pallonji firms, who are shareholders in the Company, filed petition before NCLT for mismanagement and oppression of minority shareholders in company which were dismissed in July 2018.
• Subsequently, an appeal was filed before NCLAT which reinstated Mistry as chairperson of Company in its 2019 judgement holding the removal as illegal.
• Appeal was filed before the Supreme Court against the order of NCLAT.

FURTHER DETAILS

• On behalf of Tata sons it was argued that NCLAT does have absolute power to appoint and remove directors under section 242 of Companies Act. “The power under section 242(2)(k) is nuanced and for specific purpose”.
• As far mismanagement was alleged, it was argued by Senior Advocate Harish Salve that bad business decisions may cause loss to the company but they cannot be referred as mismanagement as far as section 241 is concerned.
• Mr. Salve further submitted that NCLAT was interfering with company’s affair. NCLAT’s just and equitable reasons were narrow in scope. He argued “The test is whether there is lack of probity in the running of company and standards for applying the principle of just and equitable grounds are very high” .
• On behalf of Shapoorji Pallonji firm it was argued that Tata sons cannot claim absolute right over the company as it owns several companies with public shareholders. It has to “board run”.
• It was also argued that Mistry’s removal was a breach of sections 166, 118(10) and 149 of companies law which lays down for directors to exercise independent judgement, secretarial rules to be followed and that the board has to manage company and not majority shareholders respectively.

COURT’S DECISION

• The Supreme Court decided the matter in favour of Tata Sons Ltd. while concluding the case, the court in its 282 page judgement has stated that- “all the questions of law are liable to be answered in favour of the appellants-Tata group and the appeals filed by the Tata Group are liable to be allowed and the appeal filed by S.P. Group is liable to be dismissed”.
• Regarding the application seeking relief of directing Tata Sons and others to cause a separation of ownership interests of the S.P. Group through capital reduction by extinguishing shares held by S.P. group in lieu of fair compensation, the court decided not to rule on the matter due to the fact that “valuation of shares depends on the value of stake of Tata Sons in listed equities, unlisted equities, immovable assets etc. and also perhaps the funds raised by SP Group on the security pledge of the shares.” Thus, the court asked the parties choose the legal options available or take the route of article 75.

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