TaxTMI 
TaxTMI 
2021 (3) TMI 1181
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....for short) and the nominees of Tata Trust from taking any decision in advance; (v) restraining the Company, its Board of Directors and Shareholders from exercising the power under Article 75 of the Articles of Association against the minority members except in exceptional circumstances and in the interest of the Company; and (vi) declaring as illegal, the decision of the Registrar of Companies for changing the status of Tata Sons Limited from being a public company into a private company. 1.2 RNT has come up with two independent appeals in Civil Appeal Nos.1920 of 2020 against the same Order of the NCLAT, on similar grounds. 1.3 The trustees of two Trusts namely Sir Ratan Tata Trust and Sir Dorabji Tata Trust have come up with two independent appeals in Civil Appeal Nos.444445 of 2020, challenging the impugned order of the Appellate Tribunal. A few companies of the Tata Group, which were referred to in the course of arguments, as the operating companies or downstream companies, such as the Tata Consultancy Services Limited, the Tata Teleservices Limited and Tata Industries Limited have come up with separate appeals in Civil Appeal Nos.440441 of 2020, 442443 of 2020 and 44....
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....come up with these 2 appeals in C.A.Nos. 263 and 264 of 2020. 1.6 Thus we have on hand, 15 Civil Appeals, 14 of which are on one side, assailing the Order of NCLAT in entirety. The remaining appeal is filed by the opposite group, seeking more reliefs than what had been granted by the Tribunal. 1.7 For the purpose of easy appreciation, we shall refer to the appellants in the set of 14 Civil Appeals as “the Tata Group” or “the Appellants”. We shall refer to the other group as “SP Group” (Shapoorji Pallonji Group) or “the respondents”. Similarly we shall refer to Tata Sons Limited (or Tata Sons Private Limited) merely as ‘Tata Sons’, as there is a controversy regarding the usage of the word “Private” before the word “Limited”. 2. Background of the Litigation 2.1 On 08.11.1917, Tata Sons was incorporated as a Private Limited Company under the Companies Act, 1913. 2.2 Two companies by name Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, forming part of the SP Group respectively acquired 48 preference shares and 40 equity shares of the paidup share capital of Tata Sons, from an existing member by name Mrs. Rodabeh ....
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.... 2.10 But these two companies, hereinafter referred to as ‘the complainantcompanies’, together had only around 2% of the total issued share capital of Tata Sons. This is far below the deminimus qualification prescribed under Section 244(1)(a) to invoke sections 241 and 242. Therefore, the complainant companies filed a miscellaneous application under the proviso to Subsection (1) of Section 244 seeking waiver of the requirement of Section 244(1)(a), which requires atleast one hundred members of the company having a share capital or onetenth of the total number of fixed members or any member or members holding not less than onetenth of the issued share capital of the company alone to be entitled to be the applicant/applicants. 2.11 Along with the application for waiver of the requirement of Section 244(1)(a), the complainant companies also moved an application for stay of an Extraordinary General Meeting (“EGM” for short) of Tata Sons, in which a proposal for removing CPM as a Director of Tata Sons had been moved. The NCLT refused stay, as a consequence of which the EGM proceeded as scheduled and CPM was removed from the Directorship of Tata Sons, by a Resolution ....
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....oncerned shareholders whose right will be affected. (iv) The decision of the Registrar of Companies changing the Company (‘Tata Sons Limited’) from ‘Public Company’ to ‘Private Company’ is declared illegal and set aside. The Company (‘Tata Sons Limited’) shall be recorded as ‘Public Company’. The ‘Registrar of Companies’ will make correction in its record showing the Company (‘Tata Sons Limited’) as ‘Public Company’.” 2.16 After NCLAT disposed of the appeals by its order dated 18122019, the Registrar of Companies moved 2 interlocutory applications seeking the deletion of certain remarks made by NCLAT against them. These applications were dismissed by NCLAT by order dated 06012020. Therefore, as against the final Order of NCLAT dated 18122019, (i) Tata Sons Private Limited (ii) RNT (iii) the Trustees of the two Tata Trusts and (iv) three operating companies of Tata Group have come up with 2 Civil Appeals each (totalling to 12 appeals) and the complainant companies have come up with one Civil Appeal. In addition, Tata Sons have also come up with 2 more appeals against the order dated 06012020 passed by NCLAT on the applications of ....
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.... by Mehli Mistry receiving favours due to the personal relationship that RNT had with him; and (xiii) fraudulent transactions in the deal with Air Asia which led to financing of terrorism. 3.3 On the foundation of the above, the complainantcompanies contended before NCLT: (i) that the directors of Tata Sons are not carrying out their fiduciary responsibilities for and on behalf of the shareholders, but have become mere puppets controlled by RNT and the Trustees of the two Trusts; (ii) that the powers contained in the Articles of Association are being exercised in a malafide manner prejudicial to the interest of the petitioners and to public interest; (iii) that various operating decisions are taken either for emotional reasons or for pampering the ego of RNT; (iv) that attempts are made to shield persons responsible for fraudulent transactions at Air Asia; (v) that attempts are made to ensure that no legal action is initiated against Siva who owes Rs. 694 crores; (vi) that Ratan Tata enabled his associates to unjustly enrich themselves at the cost of Tata Sons; and (vii) that the present directors of Tata Sons are not promoting the interests of shareholders of Tata Sons and th....
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....ould be referred by the Hon’ble Tribunal to the Serious Fraud Investigation Office of the Ministry of Corporate Affairs, Government of India; (M) strike of Articles numbered 86, 104(B), 118, 121 and 121A in their entirety and in so far as Article 124 of the Articles of Association of Respondent No. 1 is concerned, the following portion of the said Article, which is offending and/or repugnant, should be deleted: “… Any committee empowered to decide on matters which otherwise the Board is authorised to decide shall have as its member at least one director appointment pursuant to Article 104B. The Provisions relating to quorum and the manner in which matters will be decided contained in Articles 115 and 121 respectively shall apply mutatis mutandis to the proceedings of the committee. “from the Articles of Association of Respondent No. 1; and substitute these articles with such articles as the nature and circumstances of this case may require; (N) direct the Respondents (excluding Respondent Nos. 4, 10 &11) to bring back into Respondent No. 1, the funds used by Respondent No. 1 for acquiring shares of Tata Motors; (O) restrain Respondent No. 1 from initiating any new lin....
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....ies moved a contempt application. The said application was disposed of by NCLT by an order dated 18.01.2017, permitting the complainantcompanies and CPM to file an additional affidavit limiting to the proposal for the removal of Cyrus Pallonji Mistry from the Board. 4.6 Accordingly, an additional affidavit was filed on 21.01.2017. However, the NCLT, by an order dated 31.01.2017 rejected the prayer of S.P. Group for stay of EGM scheduled to be held on 06.02.2017. 4.7 S.P. Group filed an appeal against the order refusing the stay of EGM. The appeal was disposed of on 03.02.2017, merely permitting the S.P. Group to file a petition for amendment, in the event of CPM being removed in the EGM. In the EGM held on 06.02.2017, CPM was removed. 4.8 Therefore, the complainantcompanies filed an amendment application dated 10.02.2017 seeking addition of two more prayers namely: (i) to direct the respondents to reinstate the representative of the complainantcompanies on the Board of Tata Sons; and (ii) to direct the amendment of Articles of Association of Tata Sons to provide for proportional representation of shareholders on the Board of Directors of Tata Sons. 4.9 But the petition ....
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....rivate Limited Company. 4. Memo dated 12.01.2018 By this memo, certain reliefs originally sought, were given up, certain reliefs originally prayed for, were not pressed and one particular relief was sought to be restricted. The prayer in the Memo was as follows: a. Prayer M, which sought the striking of Articles 86, 104(B), 118, 121 and 121A, and striking of a portion of Article 124, is restricted as under: i. The necessity of an affirmative vote of the majority of directors nominated by the Trusts, which are majority of shareholders, be deleted; ii. The Petitioners be entitled to proportionate representation on Board of Directors of Respondent No.1; iii. The Petitioners be entitled to representation on all committees formed by the Board of Directors of Respondent No.1; and iv The Articles of Association be amended accordingly. b. Prayers A, B and C were not pressed. c. Prayers F, Q and R, being infructuous were not pressed 5. Response of Tata Sons to the allegations made in the Company Petition 5.1 Tata Sons filed a reply to the company petition contending interalia : (i) that CPM, who was removed from the post of Executive Chairman, after having lost the confi....
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....Sons resolved on 24.10.2016 to replace CPM as Executive Chairman, the Board agreed to his continuance as a Director of Tata Sons; (xiv) that however CPM addressed a vitriolic mail on 25.10.2016 to the Directors making false allegations; (xv) that though the mail was marked confidential, it was simultaneously leaked to the press; (xvi) that CPM also breached his fiduciary and contractual duties by disclosing confidential information and documents pertaining to Tata Sons to third parties; (xvii) that CPM made representations to the shareholders of all operating companies, with unsubstantiated and false allegations, thereby attempting to make the operating companies vulnerable to make confidential data available for public inspection; (xviii) that the shareholders of Tata Industries Limited, Tata Consultancy Services and Tata Teleservices Limited passed Resolutions respectively on 12.12.2016, 13.12.2016 and 14.12.2016 to remove CPM from Directorship; (xix) that, therefore, CPM resigned from the Directorship of the other companies also on 19.12.2016, when he faced the prospect of being removed in the impending meetings; (xx) that the actions and conduct of CPM after 24.10.2016 compelle....
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....tures; and (vii) a huge loss due to purchase of shares of Tata Motors, the reply filed by Tata Sons contained an elaborate and graphic rebuttal. We shall take note of them later, while dealing with the question whether or not the allegations constitute the ingredients of sections 241 and 242 of the Act. 6. The approach of NCLT 6.1 The NCLT, in its order dated 9.7.2018, went into each of the allegations of oppression, mismanagement and prejudice and recorded categorical findings. In brief, these findings, allegation-wise, were as follows: On the allegations revolving around Siva and Sterling group of companies (i) Tata Teleservices shares were acquired in the year 2006 with the approval of the Board and hence almost after 10 years, it cannot be raised as an issue. It is also a fact that the very complainant companies had acquired same TTSL shares two months before, for Rs. 15 per share. (ii) The loan taken from Kalimati Investments was already paid back by Siva Group of Companies and the company was relieved of its undertaking by Siva himself who provided personal guarantee for the loan taken from Standard Chartered Bank. (iii) As to the allegation that Siva made a big prof....
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....ot take active part in the Air Asia incorporation and as though CPM did not preside over the meeting on 15.09.2016 for further funding it. In addition, they have made a scurrilous statement, without a shred of paper, that RNT funded one Terrorist through hawala with diversion of Air Asia India funds. On the Transactions with Mehli Mistry, including the sale of the flat (Bhakthawar) and a land (Alibaug) (i) There is nothing to indicate that RNT got enriched at the cost of the company. Forbes Golak was not made a Party and the transaction happened somewhere in the year 2002, but the allegation is raised in the year 2016. (ii) As to these allegations relating to Mehli deriving hugebenefits, the only document that the Petitioners and CPM filed and relied on, is an email Mr. Mehli addressed to Mr. Padmanabhan of TPC among others. (iii) In respect of the 1993 contract for dredging at Trombay, it was awarded by Tata Power to MpCL for 9 years after choosing them from amongst three vendors. Thereafter it was renewed 5 times for various tenures from October 2002 to September, 2014 after obtaining requisite approvals. When these approvals were given, CPM was a Director of Tata Power. H....
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....r as Article 75 is concerned, it was in existence throughout and hence the question whether persons who acquired shares of such a company consciously despite the presence of Article 75, can turn around later and project them as oppressive, looms large. (ii) The fact that the nominee Directors stepped out of the meeting of the Board held on 29.06.2016 to take instructions from RNT on the issue of acquisition of Welspun by Tata power, cannot be projected as an incident where Article 121 was abused, since the issue of acquisition of Welspun should have come up before the Board of Tata Sons even prior to Tata Power taking a decision, in view of Article 121A(h). Since Tata Power had already signed the papers for the acquisition of Welspun on 12.06.2016 itself, CPM really made the Directors of Tata Sons as fait accompli. Therefore, it was the action of CPM that was prejudicial to the interests of Tata Sons and not the other way around. (iii) None of the Articles have ever been opposed either by the complainant companies or by CPM at any point of time in the past. And Article 75 has been in place even before the complainant companies acquired shares. Allegation of Breach of fiducia....
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....ard of Directors and Majority of Shareholders, i.e., Tata Trusts lost confidence in Mr. Cyrus as Chairman, not because by contemplating that Mr. Cyrus would cause discomfort to Mr. Tata, Mr. Soonawala and other answering Respondents over purported legacy issues. Board of Directors are competent to remove Executive Chairman; no selection committee recommendation is required before removing him as Executive Chairman. b) Removal of Mr. Cyrus Mistry from the position of Director is because he admittedly sent the company information to Income Tax Authorities; leaked the company information to Media and openly come out against the Board and the Trusts, which hardly augurs well for smooth functioning of the company, and we have not found any merit to believe that his removal as director falls within the ambit of section 241 of Companies Act 2013. c) We have not found any merit to hold that proportional representation on Board proportionate to the shareholding of the petitioners is possible so long as Articles do not have such mandate as envisaged under section 163 of Companies Act, 2013. d) We have not found any merit in purported legacy issues, such as Siva issue, TTSL issue, Na....
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.... recorded by NCLAT are presented, to a great extent, in the language of NCLAT itself, as follows: (i) The word ‘unfairly prejudicial’ has not been used in Section 241. The Indian Law (Sections 241 & 242 of the Companies Act, 2013) does not recognize the term ‘legitimate expectation’ to hold any act prejudicial or oppressive. (paragraphs 101 and 102 of the impugned order) (ii) In the general meeting of the shareholders of ‘Tata Sons Limited’ or the Board of Directors, the majority decision is fully dependent upon the affirmative votes of nominated Directors of ‘Tata Trusts’. The affirmative vote of the Directors nominated by ‘Tata Trusts’ has an overriding effect and renders the majority decision subservient to it. (paragraph 115 of the impugned order) (iii) The Tribunal/Appellate Tribunal has no jurisdiction to hold any of the Articles as illegal or arbitrary, the terms and conditions being agreed upon by the shareholders. However, if any action is taken even in accordance with law which is ‘prejudicial’ or ‘oppressive’ to any member or members or ‘prejudicial’ to the Company or ‘prejudicial’ to the public interest, the Tribunal can notice ....
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.... Ratan Tata Trust at any time expressed displeasure about the performance of CPM. (paragraph 134 of the impugned order) (x) From the opening sentence of ‘Press Statement’ dated 10th November, 2016, issued by Tata Sons it is clear that sudden and hasty removal of CPM as Executive Chairman of ‘Tata Sons Limited’ raised concerns in the industrial group. (paragraph 137 of the impugned order) (xi) The allegations as made in the ‘Press Statement’ dated 10th November, 2016 appears to be an afterthought as the aforesaid matter was not discussed in any of the meetings of the Board of Directors. The allegations in the ‘Press Statement’ as not supported by record cannot be accepted. (paragraph 139 of the impugned order) (xii) Correspondence between CPM, RNT, Mr. Nitin Nohria and Mr. N.A. Soonawala show that all the time CPM had been pointing out that some of the ‘Tata Companies’ were suffering losses and if appropriate steps were not taken, it may aggravate in future. In spite of such communications no decision for the revival or restructuring of Tata Companies was taken. (paragraph 140 of the impugned order) (xiii) If there was a failure and loss caused to one or ....
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....e members of the ‘Nomination and Remuneration Committee’ which just four months’ prior to his removal on 28th June, 2016 praised the performance of CPM as Executive Chairman. These two Directors also voted against CPM just four months thereafter which has not been explained by Mr. Ranendra Sen and Mr. Vijay Singh. Further, what is accepted is that prior to the meeting held on 24th October, 2016 between 2.00 p.m. to 3.00 p.m., in the forenoon, the ‘Tata Trusts’ in a separate meeting decided to remove CPM. Even before decision of ‘Tata Trusts’, RNT in presence of Mr. Nitin Nohria called CPM and asked him to resign. (paragraph 152 of the impugned order) (xxi) In view of what transpired, it is not open to the Respondents to state or allege that loss in different ‘Tata Companies’ was due to mismanagement of CPM. If that be so, why the nominated Directors who have affirmative voting right over the majority decision of the Board or in the Annual General Meeting of the shareholders allowed the ‘Tata Companies’ to function in a manner which caused loss, as accepted in the press release dated 10th November, 2016. The consecutive chain of events coming to fore from the....
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....ny with the approval of the Central Government and in accordance with the Act. (para 167) The Companies Act, 2013 repealed part of the 1956 Act. The new Act defines a “Private Company” and a “Public Company” under Clauses (68) and (71) of Section 2. (para 169 to 172). Under the 2013 Act, there is no provision similar to Section 43A(1A), for automatic conversion of a company. Since there is no automatic conversion, Tata Sons, having become a public company long ago was required to alter its articles of Association by following the procedure prescribed by Section 14(1)(b) read with Section 14(2) and 14(3), for converting the company as a private company. (paras 173 to 175). The General Circular No.15 of 2013 dated 13.09.2013 and Notification dated 12.09.2013 issued by the central Government cannot override Section 14 of the Act (para 177) and hence the action taken by Tata Sons hurriedly to get the word “public” struck off in the certificate of incorporation, after the order of NCLT is absolutely illegal. (xxvii) The aforesaid action on the part of the company and its Board of Directors to take action to hurriedly change the Company (‘Tata sons Limited’) from ‘Pub....
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....narrated above, would justify a winding up order on the ground that it was just and equitable that the Company should be wound up and thereby, it is a fit case to pass order under Section 242 of the Companies Act, 2013. (xxx) The Resolution dated 24th October, 2016 passed by the Board of Directors of Company removing Mr. Cyrus Pallonji Mistry (11th Respondent) as the Executive Chairman of the Company (‘Tata Sons’) is illegal; all consequential decisions taken by ‘Tata Companies’ for removal of Mr. Cyrus Pallonji Mistry (11th Respondent) as Director of such Companies are also illegal. (paragraph 184 of the impugned order) (xxxi) For better protection of interest of all stake holders as also safeguarding the interest of minority group, in future at the time of appointment of the Executive Chairman, Independent Director and Directors, the ‘Tata Group’ which is the majority group should consult the minority group i.e., ‘Shapoorji Pallonji Group’ and any person on whom both the parties have trust, be appointed as Executive Chairman or Director as the case may be which will be in the interest of the Company and create healthy atmosphere removing the mistrust between t....
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.... favours to Siva and Sterling (iv) loan by Kalimati to Siva (v) sale of flat to Mehli Mistry (vi) the unjust enrichment of the companies controlled by Mehli Mistry (vii) the Aviation industry misadventures (viii) losses due to purchase of the shares of Tata Motors etc., were not individually dealt with by NCLAT, though NCLT had addressed each one of these issues and recorded findings in favour of Tata Sons. Therefore, there is no escape from the conclusion that NCLAT did not expressly overturn the findings of facts recorded by NCLT, on these allegations. We are constrained to take note of this, even at the outset, in view of a contention raised by Shri Shyam Divan, learned Senior Counsel for the SP group, that in an appeal under Section 423 of the Companies Act, 2013, this court will not normally interfere with a finding of fact reached by NCLAT, unless it is found to be wholly perverse. 9. Contentions on behalf of Tata Sons, group companies and Trustees 9.1 Assailing the judgment of NCLAT, Shri Harish Salve and Dr. Abhishek Manu Singhvi, learned Senior counsel for Tata Sons contended as follows: (i) The entire focus of NCLAT was only on the justification for the removal of CPM....
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....letely amiss; (viii) NCLAT failed to appreciate in the right perspective, the effectsof the Amendment Act 53 of 2000 on a ‘deemed to be a public company’ under Section 43A and the provisions of the 2013 Act, while dealing with the question whether Tata Sons would be a private Company or a public Company. NCLAT, without any justification, made uncharitable remarks against the Registrar of Companies for issuing an amended certificate of incorporation after the judgment of NCLT, though RoC was not a party. When RoC sought the expunction of those remarks by filing an application, NCLAT entertained the same, only for the purpose of improving upon the reasons already provided, showing thereby the mindset with which NCLAT approached the case; (ix) NCLAT committed a serious error in whittling down Article 75 of the Articles of Association, though the said Article was not found to be illegal; (x) Curiously NCLAT did not find any actual misuse of the Articles of Association, which envisaged a crucial role for the nominee Directors of the two Trusts. CPM himself had proposed a Governance framework which recognised preconsultation with the Trusts. Therefore, the findings of NCLAT a....
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.... attend, (c) when RNT questioned certain operational and business decisions of Tata Motors, (d) when the Trustees overruled the views of the Tata Group legal counsel in the DoCoMo disputes and (e) when the Trustees interfered in business decisions such as Welspun acquisition and rights issue of Tata Motors; (iv) Tata sons was a public company in form and conduct, as they accepted public deposits even after 13.12.2000 till September2002 and hence the conversion of the company into a private company by a hand written order of the ROC, effected at night just before NCLAT was to hear the appeals, was completely shocking. The conversion of the company into a private company was aimed at avoiding a higher standard of scrutiny statutorily required for public companies. The conversion also adversely affected the ability of Tata Sons to raise funds, thereby increasing borrowing costs. Due to this conversion, Tata Sons became obliged to refund money to insurance companies which held substantial investments in the instruments issued by the company. Therefore the conversion of the company into a private company lacked probity and prejudiced the proprietary rights of minority shareholders; ....
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....ity is much broader and wider than integrity. (vii) There was a long good faith relationship between the Tata group and SP group, developed over several decades and this has to be viewed in the context of a specific statutory framework that existed from 1964 upto 2000. (viii) In matters of this nature, the Court is obliged, in its equitable jurisdiction, to take note of the status of the company in question, which is at the top (apex) of the pyramid, with several stakeholders including the minority shareholders of the company itself, the employees and shareholders of the operating companies controlled by the company etc. (ix) NCLAT has recorded detailed findings on facts and there is no perversity in those findings. Therefore there is actually no scope for interference by this court. (x) The reliefs sought in the company petition, are consistent with the provisions of the Companies Act, 2013 including Section 163 (proportionate representation) and subSections (1), (5), (7) and (8) of Section 242 of the Act. 10.3 Mr. Janak Dwarakadas, learned counsel appearing on behalf of CPM, the original composer of this musical ensemble, raised the following contentions: (i) Lack of....
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....s acts of mismanagement so as to justify winding up on just and equitable grounds. For holding the majority guilty (a) there must be a sequential chain of events leading up to the date of filing the petition; (b) the conduct must be burdensome, harsh and wrongful qua the minority; and (c) there must be an element of lack of probity depriving the proprietary rights of the SP group as shareholders. (iv) This is not a case of quasipartnership (v) Impugned judgment is replete with erroneous findings of fact that influenced the conclusions drawn and reliefs granted (vi) Impugned judgment misattributes the replacement of CPM to RNT and grants reliefs that were not prayed for. (vii) Though the TrustNominee Director introduced the resolution for CPM’s removal, it was ultimately the majority of the Board that voted in favor of the resolution. (viii) Impugned judgment goes against the fundamentals of corporate democracy by taking away basic rights of shareholders (ix) By directing that all future appointments to directorial positions in Tata Sons can be made only through mutual “consultation” with the SP Group and that only a person “on whom both the groups have trust....
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.... to grant reinstatement as CPM’s tenure of office came to an end on 16.06.2017. 13. Contentions of others 13.1 Shri Tushar Mehta, learned Solicitor General, appearing on behalf of the Registrar of Companies, made submissions to the limited extent of justifying the action of the RoC in issuing an amended certificate of incorporation. According to him, the Articles of Association of Tata Sons contained provisions which come within the parameters of the definition of a ‘private company’ under section 2(68) of the Act. The amendment merely recognized a preexisting reality and the RoC followed the extant provisions of the Act. But unfortunately, the NCLAT passed remarks, though it claimed it did not, without even hearing the RoC beforehand. 13.2 Shri Zal Andhyarjuna, learned counsel appearing for Shri Noshir A. Soonawala, submitted that Soonawala has never been accused of wrongdoing in his 44 years of association with the Tata Group and even during CPM’s tenure as Director. He has not attended a single meeting of the Board of Directors of Tata Sons since his retirement. He was requested to act as advisor to Tata Sons which received unanimous approval of the Board in 2010. C....
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....sts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee Directors virtually nullifying the effect of these Articles ? (v) whether the reconversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT ? 15. Legislative History of Oppression, Mismanagement and Unfair Prejudice 15.1 Before we take up the questions of law formulated above for consideration, we think it would be useful to look at the legislative history of oppression, mismanagement and prejudice/ unfair prejudice, both in England and India, as colonial vintage continues to haunt us (fortunately or unfortunately), both in legislative drafting and in judicial decision making even till date. In England 15.2 The history of legislative action to regulate incorporated companie....
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....k Companies Act 1856. The Joint Stock companies Act, 1856 made it possible for any 7 individuals, subscribing to shares individually, to form a limited liability company. This was subsequently consolidated with a number of other statutes in the Companies Act 1862, which was described by Francis Palmer as the Magna Carta of Cooperative enterprises. 15.7 The Companies Act, 1862 consolidated the laws relating to the incorporation, regulation and winding up of trading companies and other associations. Though this Act did not provide for any remedies to the minority shareholders in respect of oppression and mismanagement, Section 79 empowered the Court to wind up a company whenever the Court was of the opinion that it is just and equitable to wind up the company. This Act also contained a provision conferring a limited right upon a dissentient member, whenever a sale or transfer of the business or property of the company took place in the course of winding up proceedings. 15.8 However, when fraudulent practices in relation to the formation and management of companies came to the fore, an investigation was ordered by a Committee chaired by Lord Davey. The Committee submitted a report....
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....ate duty. This difficulty is not in law peculiar to private companies since there is no legal impediment to a public company having in its articles a provision subjecting transfer of shares to the approval of the directors though Stock Exchanges do not accept it where leave to deal is required. This restriction is valued as a means of keeping a family business under the control of the family and we see no sufficient reason for its removal, particularly if our suggestion in paragraph 6o is adopted. 59. Excessive remuneration of directors. Another abuse which has been found to occur is that the directors absorb an undue proportion of the profits of the company in remuneration for their services so that little or nothing is left for distribution among the shareholders by way of dividend. This may happen where, for example, two persons trading in partnership form their business into a limited company and one partner dies, leaving his shares to his widow who takes no active part in the business. At present the only remedy open to the minority shareholder is to commence an action to restrain the company from paying the remuneration on the ground that such payment is a fraud on the....
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....ows: “210. Alternative remedy to winding up in cases of oppression (1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in a case falling within subsection (3) of section one hundred and sixty-nine of this Act, the Board of Trade, may make an application to the court by petition for an order under this section. (2) If on any such petition the court is of opinion- (a) that the company's affairs are being conducted asaforesaid; and (b) that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a windingup order on the ground that it was just and equitable that the company should be wound up; the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital....
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....ame, with an amendment, Section 459 of the Companies Act, 1985. Sections 459 to 461 of the Companies Act, 1985 were included in Part XVII, under the caption “Protection of Company’s Members against Unfair Prejudice”. Sections 459 to 461 read as follows: 459. Order on application of company member. (1) A member of a company may apply to the court by petitionfor an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of some part of the members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. (2) The provisions of this Part apply to a person who is not amember of a company but to whom shares in the company have been transferred or transmitted by operation of law, as those provisions apply to a member of the company; and references to a member or members are to be construed accordingly. 460 Order on application of Secretary of State (1) If in the case of any company- (a) the Secretary of State has received a report under section437, or exercised h....
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....'s memorandum or articles shall, within 14 days from the making of the order or such longer period as the court may allow, be delivered by the company to the registrar of companies for registration ; and if a company makes default in complying with this subsection, the company and every officer of it who is in default is liable to a fine and, for continued contravention, to a daily default fine. (6) Section 663 (windingup rules) applies in relation to apetition under this Part as in relation to a windingup petition. The words in bold letters in the above extract in section 459, were later substituted by the words “unfairly prejudicial to the interests of its members generally or of some part of its members” by a 1989 amendment which came into effect in 1991. 15.14 The Companies Act, 1985 was repealed by the Companies Act, 2006, which had the dubious distinction of being the longest Act in British parliamentary history, with 1300 sections and 16 schedules. (until it was overtaken by the Corporation Tax Act, 2009). Part 30 of the Act contains 3 provisions in sections 994 to 996 (apart from others), grouped under the heading “Protection of Members against Unfair Prejudice....
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....udicial, he may apply to the court by petition for an order under this Part. (3) The Secretary of State may do this in addition to, orinstead of, presenting a petition for the winding up of the company. (4) In this section, and so far as applicable for the purposesof this section in the other provisions of this Part, “company” means any body corporate that is liable to be wound up under the Insolvency Act 1986 (c. 45) or the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)). 996 Powers of the court under this Part (1) If the court is satisfied that a petition under this Part iswell founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. (2) Without prejudice to the generality of subsection (1), thecourt’s order may- (a) regulate the conduct of the company’s affairs in thefuture; (b) require the company- (i) to refrain from doing orcontinuing an act complained of, or (ii) to do an act that the petitioner has complained it has omitted to do; (c) authorise civil proceedings to be brought in the nameand on behalf of the company by such person or persons and on such terms as the court m....
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....mpany alone was granted such a privilege). 15.18 Thereafter, a fullfledged enactment known as The Indian Companies’ Act, 1866 was passed with a view to consolidate and amend the laws relating to the incorporation, regulation and winding up of trading companies and other associations. Even this Act, did not provide for any remedy in the case of oppression and mismanagement, though provisions were made for winding up including voluntary winding up. 15.19 The above Act No. X of 1866 was repealed by The Indian Companies Act No. VI of 1882. This Act also did not contain provisions for an individual or group of shareholders/members to seek redressal against oppression, mismanagement or any unfair prejudicial treatment. 15.20 Then came The Indian Companies Act, 1913 (Act No.VII of 1913) which repealed the 1882 Act and the amendments made thereof. Interestingly, this 1913 Act also repealed one particular provision in the Indian Arbitration Act, 1899. Though in the original enactment of 1913, there was no provision relating to oppression and mismanagement, the Amendment Act 52 of 1951 inserted Section 153C to The Indian Companies Act, 1913. This Section 153C reads as follows : ....
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.... a view to bringing to an end the matters complained of, make such order in relation thereto as it thinks fit. (5) Without prejudice to the generality of the powers vested in a court under subsection (4), any order made under that subsection may provide for (a) the regulation of the conduct of the company’s affairs in future; (b) the purchase of the shares or interests of any members of the company by other members thereof or by the company; (c) in the case of a purchase of shares or interest by the company being a company having a share capital, for the reduction accordingly of the company’s capital or otherwise; (d) the termination of any agreement, howsoever, arrived at, between the company and its manager, managing agent, managing director or any of its other directors; (e) the termination or revision of any agreement entered into between the company and any person other than any of the persons referred to in clause(d), provided that no such agreement shall be termination or revised except after due notice to the party concerned and in the case of revision of any such agreement, after obtaining the consent of the party concerned thereto; (f) the setting ....
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....erson be added to the application. (10) In any case in which the court makes an order terminating any agreement between the company and its manager, managing agent or managing director or any of its other directors, as the case may be, the court may, if it appears to it that the manager, managing agent, managing director or other director, as the case may be, has misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of any misfeasance or breach of trust in relation to the company, compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sums to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just, and the provisions of sections 235 and 236 of this Act shall apply as they apply to a company in the course of being wound up. Explanation. For the purposes of this section, any material change after the 21st day of July, 1951, in the control of a company, or in the case of a company having a managing agent in the composition ....
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....company are being conducted in a manner prejudicial to the interests of the company; or (b) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of Directors, or of its managing agent or secretaries and treasurers, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company; may apply to the Court for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under subsection (1), the Court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or con....
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....d. This eventually became the Companies Act 2013. Among the many changes brought about by this Companies Act 2013, those relating to protection of minority shareholders is what is relevant for our purpose. In fact, paragraph 5(ix) of the Statement of Objects and Reasons for the Companies Act, 2013 deals with the issue of protection of minority shareholders. It reads as follows: “5. (ix) Protection for Minority Shareholders: (a) Exit option to shareholders in case of dissent to change in object for which public issue was made. (b) Specific disclosure regarding effect of merger on creditors, key managerial personnel, promoters and nonpromoter shareholders is being provided. The Tribunal is being empowered to provide for exit offer to dissenting shareholders in case of compromise or arrangement. (c) The Board may have a director representing small shareholders who may be elected in such manner as may be prescribed by rules.” 15.23 Chapter XVI of the 2013 Act containing Sections 241 to 246 deals exclusively with “Prevention of Oppression and Mismanagement.” Sections 241 and 242 are of relevance for our purpose and hence it is extracted as follows: “241. Applicati....
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....esaid, the consequent reduction of its share capital; (d) restrictions on the transfer or allotment of the shares of the company; (e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case; (f) the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e): Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned; (g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; (h) removal of the managing director, manager or any of the directors of the company; (i) recovery of undue gain....
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.... may extend to twentyfive lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twentyfive thousand rupees but which may extend to one lakh rupees, or with both.” 15.24 Thus the English legislative history of the provisions relating to oppression, mismanagement and prejudice, show 3 milestones, namely (i) the introduction in the year 1862, of the ‘just and equitable clause’ for winding up and the conferment of a limited right on the dissentient member, whenever a transfer or sale took place in the course of winding up proceedings, (ii) the provision of an alternative remedy to winding up, in case of oppression of minority, in the year 1948 and (iii) the shift from oppression to the ‘unfair prejudice’ quotient in 1980/1985. The journey, in other words, was from “winding up on just and equitable cause” to “oppression” to “unfair prejudice”. 15.25 But in so far as India is concerned, what was incorporated in section 210 of the English Companies Act, 1948, inspired the insertion of section 153C of the Indian Companies Act, 1913....
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....bed in the 1913 Act, but under the 1956 Act prejudice to public interest was included both under the provision relating to oppression and also under the provision relating to mismanagement. Prejudice to the interest of the company was included only in the provision relating to mismanagement. But under the 2013 Act conduct prejudicial to any member or prejudicial to public interest or prejudicial to the interest of the company are all added along with oppression; (iii) Under the 1913 Act, the Court should be satisfied that windingup under the just and equitable clause will not only unfairly prejudice but “also materially prejudice” the interests of the company or any part of its members. But in the 1956 Act and 2013 Act, the words “and materially” do not follow the word “unfairly”. Moreover, under the 1956 Act and 2013 Act all that is required to be seen is whether the winding up will unfairly prejudice “such member or members” indicating thereby that the focus was on complaining/affected members. 15.28 Having thus seen the shift in the Indian legislative policy under Act 52 of 1951 (amending the 1913 Act) and then under the 1956 Act as amended by Act 53 of 1963 a....
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....o pass such orders “with a view to bringing to an end the matters complained of”. This sentence is found in Section 153C(4) of the 1913 Act. It is found in Section 397(2) as well as 398(2) of the 1956 Act and it is also found in Section 242 (1) of the 2013 Act. This is also the common thread that runs through the statutory prescriptions contained in the English Acts of 1948, 1985 and 2006. Therefore, at the stage of granting relief in an application under these provisions, the final question that the Court should ask itself is as to whether the order to be passed will bring to an end the matters complained of. Having thus seen the development of law, let us now take up the questions of law one after another. 16. Question No. 1 16.1 The first question of law arising for consideration is whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of NCLT on....
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....indicated in paragraph 6.1 above. 16.6 None of the above findings, except the one relating to the removal of CPM was specifically and individually overturned by NCLAT. In addition NCLAT focused on the conversion of Tata Sons from a public company to a private company. 16.7 For easy appreciation, we present in the following table, the allegations made in the complaint, the findings recorded by NCLT with an indication whether NCLAT dealt with the same or not: Allegation Findings of NCLT Whether NCLAT dealt with it specifically Siva Group Co. – 1. Non-payment of due amount by Siva Group (Sterling) as per arbitral award in TTSL-NTT DoCoMo deal (para 218-234) 2. Acquisition of shares in TTSL by Siva and Temasek 3. Info leak pertaining to initiation of action against Siva 4. Acquisition of Dishnet DSL (DDSL) from Siva Group 1. On 03.10.2013, Siva wrote a letter to CPM seeking an exit from TTSL in lieu of the financial strain it was facing. On 08.10.2013, RNT wrote to CPM requesting him to meet Siva to discuss the predicament, in lieu of latter’s previous contributions in the history of TTSL. However, this was three years before the Docomo issue, which cropped up in 2016.....
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....n out of it. In fact, it was commercial decision of TTSL. This issue was brought to the notice of CPM way back in October, 2013, but he never complained earlier. (Para 235) Neither TTSL nor Kalimati nor Tata Capital were arrayed as party to the proceeding. No specific finding. Air Asia India Ltd. &Vistara:- Diversion of funds through a Global terrorist. Air Asia not made a party. At the time when resolution for Joint Venture was placed on 06.12.2012, CPM was active in discussions and was a consenting party to the same. The said Joint Venture was incorporated on 28.03.2013 and CPM did not raise any issue till his removal in 2016. (Para 242- 244) CPM contends that the deal was struck with Mr. Hamid Reza Malakotipour who was classified as a Global terrorist by the United Nations. However, the allegation of indirectly financing terrorism through the involvement of such third parties, is serious and demeaning. (Para 241) After claiming that he has no say in the AirAsia transactions, CPM claims to have protected the interest of the company by limiting its exposure and ensuring no fallback liability. These two claims conflict with each other. (Para 242) With respect to the Joint Ve....
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....ny and has not been in management since 2012 – Not a case falling under 241. (Para 252) No specific finding. Corus acquisition The allegation that Tata Steel acquired Corus at an inflated price is without basis. (Para 301) The price quoted by Tata Steel was GBP 608 Pence per share, while their competitors’ final bid was GBP 603 Pence per share. (Para 301) Acquisition of Corus was a collective decision by Tata Steel. CPM (Director at Tata Steel) approved every resolution of Tata Steel, for entering into auction and for confirming the final acquisition share price. Acquisition was undertaken following due governance process under the supervision of the Board, without any dissent of shareholders of Tata Steel. (Para 300) To salvage the company from the losses incurred from the Corus acquisition, TSL entered into a merger with ThyssenKrupp. There is no material to prove that RNT had any role in preventing the same. (Para 303) Moreover, CPM never raised this issue before the board when he was chairman. (Para 305) TSL has not been made a party. No specific finding Tata Motors – Nano Project:- It is well established that RNT was not in the management of either Tata Motors....
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....f they really wished, could have had the Board of Directors entirely with their nominees. But they allowed the Articles of Association only to have the minimum requirement and hence the same cannot be termed as oppressive of the minority. (Para 419) No specific finding. 16.8 NCLAT, being an Appellate Tribunal, conferred with the power under subSection (4) of Section 421 to confirm, modify or set aside the order of NCLT, can be taken to be a final court of fact. An appeal from the Order of the NCLAT to this Court under Section 423 is only on a question of law. Considering the nature of the jurisdiction conferred upon NCLAT, it is clear that the findings of the NCLT, not specifically modified or set aside by NCLAT should be taken to have reached finality, unless the parties aggrieved by such noninterference by NCLAT have approached this Court, raising this as an issue. Though SP group has also filed an appeal in C.A. No. 1802 of 2020, the grievance aired therein, as seen from para 3 of the memorandum of appeal, is limited to the failure of NCLAT to grant certain reliefs. The failure of NCLAT to specifically overturn the findings of fact recorded by NCLT, is not assailed in the ....
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.... of CPM from the Directorship of Tata Industries Limited, Tata Consultancy Services Limited and Tata Teleservices Limited, all of which happened during the period from December 12 to December 14, 2016. Seeing clearly the course of destiny (which was actually set in motion by none other than himself), CPM resigned from other operating companies of Tatas such as The Indian Hotels Company Limited, Tata Steel Limited, Tata Motors Limited, Tata Chemicals Limited and Tata Power Limited, on 19.12.2016, on the eve of the Extraordinary General Meetings of those companies, convened for considering resolutions for his removal. On the very next day namely, 20.12.2016 the complainant companies, of which CPM is the pivot, filed a petition C.P.No.82 of 2016 before NCLT, Mumbai, under Sections 241 and 242 read with Section 244 of the Companies Act, 2013. 16.13 Around this time, as if by coincidence, the Principal Officer of Tata Sons received a letter dated 29.11.2016 from the Deputy Commissioner of Income Tax (Exemptions) seeking certain information under Section 133(6) of the Income Tax Act, 1961 in the case of Tata Education Trust. Tata Sons, through a reply dated 09.12.2016 furnished necessar....
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....xchanged correspondence/legal notice with Tata Sons and also passed on information along with certain files, to the Income Tax authorities claiming to be a very “law abiding citizen”. 16.17 Since the EGM of Tata sons was scheduled to be held on 06.02.2017, for considering the resolution for CPM’s removal from the Directorship, the Companies (S.P. Group) which filed the complaint before the NCLT moved an interim application before NCLT for a stay of the EGM. NCLT declined stay and the appeal against the refusal to grant stay was also dismissed by NCLAT. Therefore, the EGM proceeded as scheduled on 06.02.2017 and CPM was removed from the Directorship of Tata Sons. In his place Mr. N. Chandrasekharan, was appointed as Executive Chairman. 16.18 In the Company Petition as it was originally filed on 20.12.2016, the complainant companies had sought a set of 21 reliefs, one of which was for a direction to the respondents (the company and its directors) not to remove CPM (who was cited as R11 in the original petition) from the directorship of Tata Sons. This was in prayer clause (F) of Paragraph 153 of the main company petition. This prayer was in direct contrast to the reliefs soug....
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....rs; (v) that CPM himself was inducted, again without reference to any statutory or contractual obligation, as a Director on the Board in August, 2006; and (vi) that within 6 years of such induction, CPM was identified as a successor to RNT and was appointed as Executive Deputy Chairman and elevated to the position of Executive Chairman. 16.23 It is an irony that the very same person who represents shareholders owning just 18.37% of the total paid up share capital and yet identified as the successor to the empire, has chosen to accuse the very same Board, of conduct, oppressive and unfairly prejudicial to the interests of the minorities. In support of such allegation, the complainant companies have pointed out certain business decisions taken during the period of more than 10 years immediately preceding the date of removal of CPM. That failed business decisions and the removal of a person from Directorship can never be projected as acts oppressive or prejudicial to the interests of the minorities, is too well settled. In fact it may be concede today by Tata sons that one important decision that the Board took on 16.03.2012 certainly turned out to be a wrong decision of a life time.....
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....formed themselves into a mutual admiration society to laud CPM’s performance and CPM acknowledging that the company was doing well when he was in the driver’s seat. 16.28 An important aspect to be noticed is that in a petition under Section 241, the Tribunal cannot ask the question whether the removal of a Director was legally valid and/or justified or not. The question to be asked is whether such a removal tantamount to a conduct oppressive or prejudicial to some members. Even in cases where the Tribunal finds that the removal of a Director was not in accordance with law or was not justified on facts, the Tribunal cannot grant a relief under Section 242 unless the removal was oppressive or prejudicial. 16.29 There may be cases where the removal of a Director might have been carried out perfectly in accordance with law and yet may be part of a larger design to oppress or prejudice the interests of some members. It is only in such cases that the Tribunal can grant a relief under Section 242. The Company Tribunal is not a labour Court or an administrative Tribunal to focus entirely on the manner of removal of a person from Directorship. Therefore, the accolades received by CPM ....
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....Committee shall comprise – (a) Three (3) persons nominated jointly by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust who may or may not be Directors of the Company, (b) one (1) person nominated by and from amongst the Board of Directors of the Company and (c) one (1) independent outside person selected by the Board for this purpose. The Chairman of the Committee will be selected by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust from amongst the nominees nominated by the Trusts. The quorum for a meeting of the Selection Committee shall be the presence of a majority of members nominated jointly by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust. Explanation: The words “nominated jointly’ used in this Article shall mean that the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust shall together decide the nominees. In the case of any difference, the decision of the majority of the Trustees in the aggregate of the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust shall prevail.” 16.34 The sentence in Article 118 reading “the same process shall be followed for the removal of incumbent Chairman” actually goes along with the last limb of the....
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....ing next held after the period of such notice, before considering any other matter or resolution.” 16.39 We do not know how Article 121B is sought to be invoked. It deals with a situation where a Director wants to bring up any matter or resolution before the Board. It has no relevance to the agenda that the Board wants to take up. Even according to the complainant companies, the Directors of a Company have a fiduciary relationship. It is a relationship in which one party places special trust, confidence and reliance on another. It is claimed by the appellants (Tata Group) that the removal of CPM was as a result of lack of confidence and trust in him. By his own subsequent conduct, CPM unfortunately enhanced the firepower of the management of Tata Sons, with regard to their claim relating to lack of confidence and trust. 16.40 The decision in Central Bank of India Ltd. vs. Hartford Fire Insurance Co. Ltd. AIR 1965 SC 1288 is relied upon by the S.P. Group to contend that the power of removal of a Director is subservient to the agreed duration of office. But the decision in Central Bank of India arose out of the termination of a fire insurance policy. It had nothing to do with the....
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....plications for winding up.” More importantly, “the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company”. But, “wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter.” 16.44 A passage from the opinion of Lord President of the Court of Session (Lord Clyde) in Baird v. Lees (1924) SC 83 Scottish Supreme Court, quoted in Loch (supra), reads as follows: “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 t....
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....involving mutual confidence – this element will often be found where a preexisting partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.” 16.47 But it must be remembered that the origin of just and equitable clause is to be traced to the Law of Partnership which has developed, according to the House of Lords, “the conceptions of probity, good faith and mutual confidence”. Having said that, Ebrahimi pointed out that the reference to quasi partnerships or “insubstance partnerships” is also confusing for the reason that though the parties may have been partners in their ‘Purvashrama’, they had become comembers of a company accepting new obligations in law. Therefore, “a company, however small, however domestic, is a company and not a partnership or even a quasi partnership”. 16.48 That, “for....
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....iable lack of confidence on the conduct of the directors, as held. A mere lack of confidence between the majority shareholders and minority shareholders would not be sufficient, as pointed out in S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 16.53 It was contended repeatedly that lack of probity in the conduct of the directors is a sufficient cause to invoke just and equitable clause. Drawing our attention to the landmark decision in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Ltd. and ors. (1981) 3 SCC 333, it was contended that even the profitability of the company has no bearing if just and equitable standard is fulfilled and that the test is not whether an act is lawful or not but whether it is oppressive or not. 16.54 But all these arguments lose sight of the nature of the company that Tata Sons is. As we have indicated elsewhere, Tata Sons is a principal investment holding Company, of which the majority shareholding is with philanthropic Trusts. The majority shareholders are not individuals or corporate entities having deep pockets into which the dividends find their way if the Company does well and declares dividends. The dividends that th....
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....and circumstances of the present case, till such time as a new Board of Directors of Respondent No. 1 is constituted; (B) In the alternative to prayer (A) above, appoint a retired Supreme Court Judge as the nonexecutive Chairman of the Board of Directors of Respondent No. 1 and appoint such number of new independent directors of professional competence, reputation and standing to the Board of Directors of Respondent No. 1 such that these newly appointed directors constitute the majority of the Board of Directors of Respondent No. 1; (C) restrain the socalled “Interim Chairman” i.e Respondent No. 2 from attending any meeting of the Board of Directors of Respondent No. 1, or subcommittee thereof and/or interfering in the affairs of Respondent No. 1; (D) restrain Respondent No. 14 from interfering in the affairs of Respondent No. 1; (E) direct Respondent No. 1 not to issue any securities which results in dilution of the present paidup equity capital held by the Petitioners in Respondent No. 1; (F) direct Respondent No. 1 and/or Respondent Nos. 2 to 10 and 12 to 22 not to remove Respondent No. 11 as a director from the Board of Respondent No.1; (G) restrain Respondent No. 1 a....
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....ay Respondent No. 1 the amount of unjust enrichment that has accrued to Respondent No. 2 on account of surrender of the subtenancy of the Bakhtawar flat, along with interest at such rate as this Hon’ble Tribunal may deem fit, from the date on which the Respondent No. 2 was unjustly enriched; (L) appoint a forensic auditor to reinvestigate the transactions executed by AirAsia India with entities in India and Singapore to ascertain whether any proceeds have been diverted to any secret bank account of Mr. Venkatraman and to submit a report to this Hon’ble Tribunal; such that this Hon’ble Tribunal can pass such further orders as may be necessary so as to recover from Mr. Venkatraman the loss that has been caused inter alia to the Petitioners; and such findings of the audit should be referred by the Hon’ble Tribunal to the Serious Fraud Investigation Office of the Ministry of Corporate Affairs, Government of India; (M) strike of Articles numbered 86, 104(B), 118, 121 and 121A in their entirety and in so far as Article 124 of the Articles of Association of Respondent No. 1 is concerned, the following portion of the said Article, which is offending and/or repugnant, should be de....
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....ent No.1 for conversion of Respondent No.1 into a private company. (M2): Strike off/Delete Article 75 as the same is a tool in the hands of the majority shareholders to oppress the minority; and; (M3): Pending the final hearing disposal of the Company Petition, the effect and operation of the resolution dated September 21, 2017 be stayed. (F1): Direct Respondent No.1 and/or Respondent No. 2 to 10 and 12 to 22 to reinstate a representative of the Petitioners on the Board of Respondent No.1 (G1): Direct that the Articles of Association of Respondent No.1 be amended to provide for proportionate representation of shareholders on the Board of Directors of Respondent No.1 Under Memo (12-01-2018) Prayer M, which sought the striking of Articles 86, 104(B), 118, 121 and 121A, and striking of a portion of Article 124, is restricted as under: i. The necessity of an affirmative vote of the majority of directors nominated by the Trusts, which are majority of shareholders, be deleted; ii. The Petitioners be entitled to proportionate representation on Board of Directors of Respondent No.1; iii. The Petitioners be entitled to representation on all committees formed by the Board of Dir....
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....majority of shareholders, be deleted; ii. The Petitioners be entitled to proportionate representation on Board of Directors of Respondent No.1; iii. The Petitioners be entitled to representation on all committees formed by the Board of Directors of Respondent No.1; ((Relief clause M restricted through memo dated 12012018) (10) Set aside the resolution passed on 31092017 for amendment of the Articles and declare the conversion of Tata Sons into a private company as illegal (Additional Relief sought to be included as clause M1 through Application for amendment) (11) To delete Article 75 (Additional Relief sought to be included as clause M2 through Application for amendment) (12) To reinstate a representative of the petitioners on the Board (Additional Relief sought to be included as clause F1 through Application for amendment) 17.5 Out of the aforesaid reliefs that came to stay till the end, NCLAT granted only certain reliefs, which in simple terms, were as follows: (i) Setting aside the removal of CPM and directing his reinstatement both as Executive Chairman of Tata Sons and as Director of other Tata Companies for the rest of the tenure. (ii) Restrainin....
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....While granting much more than what the complainant companies and CPM themselves thought as legally feasible, NCLAT failed to notice one important thing. The appointment of CPM as Executive Deputy Chairman of Tata Sons, was to be for a period of 5 years from 01.04.2012 to 31.03.2017, subject to the approval of the shareholders. In the Meeting of the shareholders held on 01.08.2012, the appointment of CPM as Executive Deputy Chairman was approved and the General Body left it to the Board to redesignate CPM as Chairman. Accordingly, the Board redesignated CPM as Executive Chairman, with effect from 29.12.2012, by a resolution passed on 18.12.2012. 17.11 The judgment of the NCLAT was passed on 18.12.2019, by which time, a period of nearly 7 years had passed from the date of CPM’s appointment as Executive Chairman. Therefore, we fail to understand : (i) as to how NCLAT could have granted a relief not apparently sought for (though wished for); and (ii) what NCLAT meant by reinstatement “for the rest of the tenure”. That the question of reinstatement will not arise after the tenure of office had run its course, is a settled position. In this regard, we may refer to the decisions ....
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.... is interesting to note that at the time of his appointment in December 2012, what CPM saw and acknowledged, was a “great learning experience he had under the direct guidance of RNT”, but at the time of departure in October 2016, what he saw was only a conduct for over 10 years, that was oppressive and prejudicial to the interests of the company and of the minority. NCLAT failed to take note of this, while granting reliefs neither sought for nor feasible in law. 17.15 NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law. By doing so, the NCLAT has forced upon the appellant an Executive Chairman, who now is unable to support his own reinstatement. 17.16 The NCLAT has found the dismissal to be illegal and not a nullity. In law, a dismissal even if found to be wrongful and malafide is an effective dismissal and may give rise to a claim in damages. In Dr. S.B. Dutt vs. University of Delhi 1959 SCR 1236 this Court held: “The award held that the appellant had been dismissed wrongfully and malafide. Now, it is not consequential to such a finding that the dismissal was of no effect....
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....rial Law seeking reinstatement by Labour or Industrial Tribunal; and (c) terminated in breach of a mandatory obligation imposed by statute by a statutory body. The Court observed: “17. On a consideration of the authorities mentioned above, it is, therefore, clear that a contract of personal service cannot ordinarily be specifically enforced and a court normally would not give a declaration that the contract subsists and the employee, even after having been removed from service can be deemed to be in service against the will and consent of the employer. This rule, however, is subject to three well recognised exceptions - (i) where a public servant is sought to be removed from service in contravention of the provisions of Article 311 of the Constitution of India; (ii) where a worker is sought to be reinstated on being dismissed under the Industrial Law; and (iii) where a statutory body acts in breach or violation of the mandatory provisions of the statute.” 17.20 The position in law that a contract of personal services cannot be enforced by Court is a long standing principle of law and cannot be displaced by the existence of any implied power, though none is shown in the pre....
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....ve given instead. Para 4 of the memo of grounds of appeal along with a portion of the Table there under reads as follows: “4. Having correctly arrived at these findings, it is submitted that the Ld. NCLAT ought to have granted the reliefs sought. For ease of reference, the reliefs granted by the Ld. NCLAT under the various heads of oppression as against certain key reliefs sought by the Appellants, which the Ld. NCLAT has not granted and which the appellants are aggrieved by, are summarized in the tabular form below: Reliefs granted by the Ld. NCLAT Reliefs that ought to have been granted by the Ld. NCLAT in light of the findings rendered and the reliefs sought for Ousting of nominee of the SP Group as Director of Tata Sons R-11 should be reinstated as Executive Chairman and Director, for the rest of his tenure of Tata Sons and as Director of three Tata Group Companies from whose board he was removed. R-11 has himself stated clearly that he had no intent to once again taken charge of Executive Chairman and Director of the Tata Group companies. Given the nature of Tata Sons being that of a two group company and the huge stake that the appellants have in Tata Sons, the....
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....s do not even apply to Courts dealing with constitutional matters (refer the Explanation under Section 141 CPC). 17.27 Such a concession was incorporated in all Statutes by which quasi judicial Tribunals are created, solely with a view to avoid delay in the dispensation of justice. But instead of eliminating delay, it has eliminated discipline in pleadings and procedure. 17.28 If it is a Civil Court, the Memo dated 12.1.2018 will be taken to have superseded whatever had been done till then. In such a case, there would have been complete lack of clarity whether the prayer included in Clause M2 survived despite the Memo restricting prayer made in the ClauseM. 17.29 Even if we take it that the memo dated 12012018 restricted the prayer in clause M alone and not clause M2, NCLAT could not have muted Article 75 by holding that it cannot be invoked except in exceptional circumstances. This is for the reason that after all, Article 75 just provides for an exit option to the unwilling partner. Even traditionally, the law in England and in India is to pave the way for a safe and honourable exit, when 2 persons in commercial relationship cannot coexist. 17.30 In this context, ....
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....uct” or “unfairly prejudicial conduct” or a mere “prejudicial conduct”, is to bring to an end the matters complained of by providing a solution. The object cannot be to provide a remedy worse than the disease. The object should be to put an end to the matters complained of and not to put an end to the company itself, forsaking the interests of other stakeholders. It is relevant to point out that once upon a time, the provisions for relief against oppression and mismanagement were construed as weapons in the armoury of the shareholders, which when brandished in terrorem, were more potent than when actually used to strike with. While such a position is certainly not desirable, they cannot today be taken to the other extreme where the tail can wag the dog. 17.35 The Tribunal should always keep in mind the purpose for which remedies are made available under these provisions, before granting relief or issuing directions. It is on the touchstone of the objective behind these provisions that the correctness of the four reliefs granted by the Tribunal should be tested. If so done, it will be clear that NCLAT could not have granted the reliefs of (i) reinstatement of CPM (ii) res....
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....esent conduct or past and present continuous conduct. NCLAT has stretched Section 241(1)(a) to cover the likelihood of a future bad conduct, which is impermissible in law. 18.5 That Articles of Association of a company constitute a contract among shareholders, is the bedrock of Company Law. In fact, Article 75 was not an invention of the recent origin in Tata Sons. It has been there for nearly a century in one form or the other. As we have pointed out elsewhere, the Company was incorporated in the year 1917 and S.P. Group acquired shares nearly after 50 years in the year 1965. Even at that time Article 75 was in existence in a different form. After 1965, Article 75 underwent several rounds of amendments, to which the S.P. Group, CPM’s father and CPM were parties. CPM himself was a party to an amendment made to Article 75 on 13.09.2000. The Article in its present form was made only on 13.09.2000 and the amendment was unanimously carried through in the presence of and with the consent of CPM. 18.6 A person who willingly became a shareholder and thereby subscribed to the Articles of Association and who was a willing and consenting party to the amendments carried out to those Artic....
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....relief granted by NCLAT itself is contrary to law, the prayer of the S.P. Group in their Appeal C.A. No.1802 of 2020 asking for more, is nothing but a request for aggravating the illegality. 19. Question 4 19.1 The fourth question of law to be considered is whether the characterisation by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to RNT and the Nominee directors virtually nullifying the effect of these Articles. 19.2 In the Company Petition as it was originally filed, the complainant companies sought a prayer in Paragraph 153(M) to strike down Articles 86, 104B, 118, 121 and 121A in entirety and to strike off one portion of Article 124. These Articles (other than Article 118, which is extracted elsewhere) read as follows: “86. Quorum at General Meetings No quorum at a general meeting of the holders of the Ordinary Shares of the Company shall be constituted unless the members who are personally pres....
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....ic Plan. (b) an annual business plan structured to form part of the strategic plan, that should include proposed investments, incurring of debts, debt to equity ratio, debt service coverage ratio, projected cash flow of the Company and any alterations to such annual business plan” (c) The incurring or renewal of any debt or other borrowing by the Company, which debt or borrowing causes the cumulative outstanding debt of the Company, to exceed twice its net worth or which debt/borrowing is incurred/renewed at a time when the cumulative outstanding debt of the Company has already exceeded twice its net worth, if not already approved as part of the annual business plan; (d) any proposed investment by the Company in securities, shares, stocks, bonds, debentures, financial instruments, of any sort or immovable property of a value exceeding Rs. 100 Crores if not already approved as part of the annual business plan; (e) Any increase in the authorized, subscribed, issued or paid up capital of the Company and any issue or allotment of shares by the Company (whether on a rights basis or otherwise) ; (f) Any sale or pledge, mortgage or other encumbrance or creation of any right or....
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....necessitated the affirmative voting right of the majority of the Directors nominated by the two Trusts. There was no prayer for restraining RNT and the nominee Directors of the Trusts from taking any decision in advance. 19.5 In fact, even the complainant companies are not happy about the relief so granted by NCLAT. In the Table given in Paragraph 4 of their Memorandum of Appeal in C.A.No.1802 of 2020, the complainant companies themselves seek a modification of the relief so granted. This Table found below Paragraph 4 of the Memorandum of Grounds of appeal in C.A.No.1802 of 2020 reads as follows: Reliefs granted by the Ld. NCLAT Reliefs that ought to have been granted by the Ld. NCLAT in light of the findings rendered and the reliefs sought for Abuse of Articles culminating in the removal of R-11 R-2 and nominee of the Tata Trusts should desist from taking decisions in advance of Board meetings and shareholder meetings of Tata Sons. i. The direction ought not to have been only against the nominee of Tata Trusts and R2 but against the Trustees of the majority shareholders who even though not on the Board of Tata Sons, were interfering with the decision making processes o....
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....for affirmative voting right. But as per the Table under Paragraph 4 of the Memo of their appeal in C.A.No.1802 of 2020, the complainant companies have now reconciled themselves to the unavoidability of affirmative voting rights but all that they want is that the applicability of affirmative voting right should be restricted to the matters covered by Article 121A. In addition, the complainant companies want a similar affirmative right to be conferred on the nominee Directors of the S.P. Group. 19.10 The swing that the S.P. Group has taken in their position relating to affirmative voting rights is quite funny. To begin with, they sought a prayer for striking off Article 121 in its entirety. Later they restricted their relief, by the Memo dated 12.01.2018, to the deletion of “the necessity of affirmative voting rights”. But now they are fine with the existence of affirmative voting rights for the majority in respect of matters covered by Article 121A, but want a similar right in favour of the nominee directors of the S.P. Group. 19.11 The frequent change of position that S.P. Group has taken and the relief that they now seek, raises a doubt whether it is actually a fight on pri....
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....Sons for sometime. The mandate of the Committee was to make recommendations on certain issues, one of which was “protecting the interests of stakeholders and investors, including small investors”. This committee’s report crystallised into Companies Bill, 2009, which later became Companies Bill, 2011 and then Companies Act, 2013. 19.14 It is true that the 2013 Act brought a lot of drastic changes. Some of the salient features of the 2013 Act are: (i) Every company is required to have at least one Director who has stayed in India for a total period of not less than 182 days in the previous calendar year. (ii) Every listed Public Company is required to have at least onethird of the total number of Directors as independent Directors. (iii) Some Public Companies are required to have at least two independent Directors. (iv) Every independent Director should give a declaration at the first Board meeting that he meets the criteria of independence. (v) Certain types of Public Companies are required to appoint at least one woman Director. (vi) Every listed company may appoint a small shareholders’ Director, to be elected by the small shareholders. (vii) The report of....
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.... the Articles of Association of the Company continue to contain the prescribed restrictions which make it a private company within the definition of the expression under Section 2(68). Therefore, the provisions discussed above do not apply to Tata Sons. Yet Tata Sons has a Board packed with many people who are ranked outsiders. If the idea was to run Tata Sons purely as a family business, RNT need not have stepped down from the Chairmanship. Today nobody wants to step down from any office, except if afflicted by brain stroke or sun stroke. As we have seen from the pleadings, the Tata Group was founded by Jamsetji Nusserwanji Tata (18391904). It was first established as a private trading firm in 1868 and was later incorporated as a private company on 8.11.1917 under Section 2(13) of the Companies Act, 1913. Later two Trusts were created, one in the year 1919 under the name Sir Ratan Tata Trust and another in 1952 under the name Sir Dorabji Tata Trust. It was only in 1965 that S.P. Group acquired 48 preference shares and 40 equity shares, from a member of Tata Sons named Mrs. Rodabeh Sawhney. Shri Pallonji Mistry, the father of CPM was inducted as a NonExecutive Director on 25.06....
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....areholders, section 166 enumerates the duties of directors and section 177 and 178 speak of some committees. Some of these provisions such as sections 151, 177 and 178 apply only to listed public companies. Yet, Tata Sons have complied with sections 177 and 178 by constituting necessary committees. 19.19 It was contended that a Director of a Company is to act in good faith in order to promote the objects of the Company for the benefit of all the stakeholders and that he is in a fiduciary capacity visavis the company. The affirmative voting rights, according to S.P.Group, disabled the nominee Directors from acting independently in the best interests of the company and its stakeholders and that once appointed, the loyalty of the nominee Directors should be to the Company and not solely to the Trusts which nominated him. It was further contended that under Articles 121, 121A and 122, Tata Sons was to be a Board managed Company and that the protective rights conferred under Article 121 were intended to take care of the interests of the Tata Trust, in case they became a minority. 19.20 According to the S.P. Group, the preconsultation/preclearance requirement disabled the Directo....
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....rs appointed in a General meeting under Section 152(2) may not be independent in practice, though they may be required to be so in theory. 19.24 A person nominated by a charitable Trust, to be a Director in a company in which the Trust holds shares, also holds a fiduciary relationship with the Trust and fiduciary duty towards the nameless, faceless beneficiaries of those Trusts. As we have pointed out elsewhere, the history of evolution of the corporate world shows that it has moved from the (i) familial to (ii) contractual and managerial to (iii) a regime of social accountability and responsibility. This is why Section 166(2) also talks about the duty of a Director to protect environment, in addition to his duties to (i) promote the objects of the company for the benefit of its members as a whole; and (ii) act in the best interests of the company, its employees, the shareholders and the community. It is common knowledge that some of the industries which take good care of its shareholders and employees also run polluting industries. Therefore there is always a conflict, a tug of war between competing interests and statutes cannot resolve these conflicts effectively. 19.25 Affirma....
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....ever, this is subject to the provisions of the Act. 19.29 Article 94 of the Articles of Association of Tata Sons is in tune with Section 47(1)(b), as it says that upon a poll, the voting rights of every member, whether present in person or by proxy shall be in proportion to his share of the paid up capital of the company. Therefore, a shareholder or a group of shareholders who constitute majority, can always seek to be in the driving seat by reserving affirmative voting rights. So long as these special rights are incorporated in the Articles of Association and so long as they are not in contravention of any of the provisions of the Act, the same cannot be attacked on these grounds. 19.30 Coming to the argument revolving around the duty of a Director, it is necessary that we balance the duty of a Director, under Section 166(2) to act in the best interests of the company, its employees, the shareholders, the community and the protection of environment, with the duties of a Director nominated by an Institution including a public charitable trust. They have fiduciary duty towards 2 companies, one of which is the shareholder which nominated them and the other, is the company to whose ....
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....cessarily be in conflict with the interest of the minority or best interest of the members of the company as a whole, unless there is siphoning of or diversion. Such a question does not arise when the majority shareholders happen to be charitable Trusts engaged in philanthropic activities. It is good to wish that the creation gets liberated from the creator, so long as the creator does not have any control or ability to manipulate. In the corporate world, democracy cannot be seen as an ugly expression, after using the very same democratic process for the appointment of directors. 19.35 Much ado was made about preconsultation and pre clearance by the Trustees, even before the Board took a call. But it was actually about nothing. Whenever an institution happens to be a shareholder and a notice of a meeting either of the Board or of the General body is issued, it is but normal for the institution to have an idea about the stand to be taken by them in the forthcoming meeting. 19.36 Objections were raised about RNT vetting the minutes of the meetings of the Board post facto and his participation as a shadow Director. But as we have pointed out elsewhere, CPM himself sought, while ....
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....ve crore rupees or more; (b) one thousand or more small shareholders, may have a director elected by such small shareholders in the manner as may be prescribed. Explanation. – For the purpose of this subsection “small shareholders” means a shareholder holding shares of nominal value of twenty thousand rupees or less in a public company to which this section applies. Section 151. Appointment of director elected by small shareholders. A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed. Explanation.-For the purposes of this section “small shareholders” means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed. 19.40 The important features to be noticed in the 1956 Act and the 2013 Act are : (i) that Section 252 of the 1956 Act was applicable to every public company but not to a public company which has become such by virtue of Section 43A, indicating thereby that it would not have had any application to Tata Sons; (ii) that in contrast, Section 151 of the 2013 Act applies only to listed companies; (iii) ....
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....tion on the Board, S.P. Group has come up with a very novel idea, namely the claim of existence of a quasipartnership between the Tata group and SP group. It is contended by S.P. Group that there existed a personal relationship between those in management of the S.P. Group and those in management of Tata Sons for over several decades and that the relationship was one of trust and mutual confidence. According to S.P. Group, they acted as the guardian of the Tata Group when the Tata Trust had no voting rights. Therefore, it is claimed that there is a right and a legitimate expectation to have a representation on the Board of Tata Sons. 19.46 But we do not think that there ever existed a relationship in the nature of quasi partnership. As we have pointed out elsewhere, the company was incorporated in the year 1917 and S.P. Group became a shareholder in 1965, namely after 50 years. A berth on the Board of Tata Sons was granted only in the year 1980 to CPM’s father. Therefore, there is nothing on record in the form of pleadings or proof, to show that there was either (i) a preexisting relationship before the incorporation of the company or (ii) a living in relationship picked up ....
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....same in their Articles, if they so choose. There is no statutory compulsion to incorporate such a provision. 19.50 Therefore, the fourth question of law is also to be answered in favour of the Tata group and the claim in the cross appeal relating to affirmative voting rights and proportionate representation are liable to be rejected. 20. Question No.5 20.1 The 5th question of law formulated for consideration is as to whether the reconversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by NCLAT ? 20.2 As we have pointed out elsewhere, Tata Sons was actually incorporated as a Private Limited Company, but was deemed to have become a Public Limited Company, with effect from 01.02.1975, by virtue of Section 43A (1A) of the Companies Act, 1956. However, by virtue of the proviso to Subsection (1A), the Articles of Association of the Company, continued to retain the provisions relating to the matters specifi....
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....ndment) Act 65 of 1960 with effect from 28.12.1960. This Section underwent two amendments, one under Act 41 of 1974 with effect from 01.02.1975 and another under Act 31 of 1988 with effect from 15.06.1988. Finally, by Act 53 of 2000, Section 43A was made inapplicable with effect from 13.12.2000. 20.10 Section 43A, as inserted by Act 65 of 1960, together with the amendments made under Act 41 of 1974, Act 31 of 1988 and Act 53 of 2000, is reproduced as follows: “43A. Private Company to become a public company in certain cases. (1) Save as otherwise provided in this section, where not less than twentyfive per cent of the paidup share capital of a private company having a share capital is held by one or more bodies corporate, the private company shall, (a) on and from the date on which the aforesaid percentage is first held by such body or bodies corporate, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), on and from the expiry of the period of three months from the date of such commencement unless within that period the aforesaid percentage is reduced below twentyfive per c....
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...., its articles of association may include provisions relating to the matters specified in clause (iii) of subsection (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven. (1B) Where not less than twentyfive per cent of the paidup share capital of a public company, having share capital, is held by a private company, the private company shall, (a) on and from the date on whichthe aforesaid percentage is first held by it after the commencement of the Companies (Amendment) Act, 1974, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1974 on and from the expiry of the period of three months from the date of such commencement, unless within that period the aforesaid percentage is reduced below twentyfive per cent of the paidup share capital of the public company, become, by virtue of this subsection, a public company, and thereupon all other provisions of this section shall apply thereto: Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified ....
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....any makes default in complying withsubsection (2), the company and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues. (6) & (7) omitted by Act 31 of 1988 (8) Every private company having a share capital shall, in addition to the certificate referred to in subsection (2) of section 161, file with the Registrar along with the annual return a second certificate signed by both the signatories of the return, stating either (a) that since the date of the annual general meeting with reference to which the last return was submitted, or in the case of a first return, since the date of the incorporation of the private company, no body or bodies corporate has or have held twentyfive per cent or more of its paid-up share capital, (b) … (c) that the private company, irrespective of its paidup share capital, did not have, during the relevant period, an average annual turnover of such amount as is referred to in subsection (1A) or more, (d) that the private company did not accept or renew deposits from the public.] (9) Every private company, having sh....
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....e capital; and (ii) that a private company which holds not less than 25% of the paid up share capital of a public company, shall become a public company. 20.12 By Act 31 of 1988, the benchmark of the average annual turnover that would determine the applicability of Section 43A was prescribed as not less than Rs. 1 crore. In addition, Act 31 of 1988 also made a private company which accepts deposits from the public, other than its members or directors, to be a public company. 20.13 Two important prescriptions, which continued without any change, from the date of insertion of Section 43A, namely 28.12.1960, till the coming into force of Act 53 of 2000 namely 13.12.2000, were Subsections (2) and (4) of Section 43A. Subsection (2) imposed an obligation upon a private company which became a public company by virtue of section 43A, to inform the Registrar. Upon receipt of such information, the Registrar was ordained to delete the word “private” in the name of the company upon the register and also to make necessary alterations in the Certificate of Incorporation and its Memorandum of Association. 20.14 Subsection (4) declared that the status of such a company as a public compan....
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....emorandum of Association.” 20.19 But Act 53 of 2000 did not stop with section 43A. It also amended section 3(1)(iii) by inserting an additional subclause, namely “(d)” along with subclauses (a), (b) and (c). Under this subclause (d) of clause (iii) of subsection (1) of section 3, the articles of association of a private company should also contain a prohibition on any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Section 3(1)(iii) after amendment under Act 53 of 2000 read as follows: “3 (1) In this Act, unless the context otherwise requires, the expressions "company", "existing company", "private company" and "public company", shall, subject to the provisions of subsection (2), have the meanings specified below: (iii) "private company" means a company which has aminimum paidup capital of one lakh rupees or such higher paidup capital as may be prescribed, and by is articles, (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty not including (i) persons who are in the employment of the company ; and (ii) persons who, having been formerly in....
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....result was that on and from 13122000 (the date of coming into force of Act 53 of 2000), section 3(1)(iii) contained 4 requirements for a private company, but section 27(3) referred only to 3 requirements. The incongruity can be stated thus. To fall within the definition of a private company, 4 stipulations contained in section 3(1)(iii) were to be satisfied. But under section 27(3), it is enough if the Articles of Association of a private company contained only 3 prescriptions. 20.23 Be that as it may, the consequence of the amendment to section 3(1)(iii), under Act 53 of 2000, was that a company which wanted to take the route of subsection (2A) of section 43A, after the coming into force of Act 53 of 2000 and reconvert itself into a private company, was required to satisfy the rigours of subclauses (a), (b) and (c) as well as (d) of clause (iii) of subsection(1) of section 3. In other words, the Articles of Association of such a company should contain all the 4 prescriptions namely (i) restriction on the right to transfer shares (ii) limitation on the number of members (iii) prohibition of any invitation to the public to subscribe for shares/debentures and (iv) prohibit....
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....rce of section 2(68) of the Companies Act, 2013, the old Act, namely the Companies Act, 1956 had not been repealed. The provisions for repeal are contained in Section 465 of The Companies Act, 2013. Section 465(1) repeals the 1956 Act, subject to certain stipulations mentioned in the provisos there under. Subsection (2) of Section 465 of the Companies Act, 2013 provides a list of matters which will stand saved despite the repeal of the 1956 Act. Subsection (3) of Section 465 makes it clear that the mention of particular matters in Subsection (2) shall not be held to prejudice the general application of Section 6 of the General Clauses Act, 1897. 20.28 The provisions of Section 465, in so far as they relate to the repeal of the 1956 Act are concerned, came into force on 30012019, vide S.O. 560 (E) dated 30012019. In other words, the provisions of the 1956 Act continued to be in force till repealed on 30012019. It means that the criteria for a “private company” under subclauses (a), (b), (c) and (d) of clause (iii) of subsection (1) of section 3 of the 1956 Act, did not stand repealed until 30012019. But the new definition of a “private company” under sec....
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....e of incorporation. NCLAT was surprised (quite surprisingly) that Tata Sons remained silent for more than 13 years from 2000 to 2013 without taking steps for reconversion in terms of Section 43A(4) of the 1956 Act. While on the one hand, NCLAT took note of the “lethargy” on the part of Tata Sons in taking action for reconversion, NCLAT, on the other hand also took adverse notice of the speed with which they swung into action after the dismissal of the complaint by NCLT. 20.34 But what NCLAT failed to see was that Tata sons did not become a public company by choice, but became one by operation of law. Therefore, we do not know how such a company should also be asked to follow the rigors of Section 14(1)(b) of the 2013 Act. As a matter of fact, Section 14(1) does not ipso facto deal with the issue of conversion of private company into a public company or vice versa. Primarily, Section 14(1) deals with the issue of alteration of Articles of Association of the company. Incidentally, Section 14(1) also deals with the alteration of Articles “having the effect of such conversion”. 20.35 By virtue of the proviso to subsection(1A) of Section 43A of the 1956 Act, Tata Sons contin....
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....on (2A), for which Section 465 of the 2013 Act did not stand as an impediment. Section 43A(2A) continued to be in force till 30012019 and hence the procedure adopted by Tata Sons and the RoC in July/August 2018 when section 43A(2A) was still available, was perfectly in order. 20.39 As rightly held by this court in Darius Rutton Kavasmaneck vs. Gharda Chemicals Ltd (2015) 14 SCC 277 [see the editor’s note in the SCC report regarding the conflict between sec.27(3) and sec.3(1)(iii)(d)], Parliament always recognised the possibility of a deemed public company again reverting back to the status of a private company. Though this court took note of the conflict between section 27(3) and section 3(1)(iii) (d), after the amendment by Act 53 of 2000, this court nevertheless held in Gharda Chemicals that by incorporating the requirement of subclause (d) of section 3(1)(iii) in the Articles of Association, a deemed public company can revert back to its status as a private company, in view of subsection (2A) of section 43A, by incorporating necessary provisions in the Articles. In simple terms, a company which becomes a deemed public company by operation of law, cannot be taken to have....
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....ny fits into the scheme under the new Act or not. We need not go to the circulars issued by the department or the RBI when statutory provisions show the path with clarity. The description of the company in the forms filed under Rule 10, reflected the true position that prevailed then and they would not act as estoppel when the company was entitled to take advantage of the law. That the ability of the company to raise funds has now gone and that the company will have to repay the investments made by insurance companies, are all matters which the shareholders and the Directors are to take care. The question before the court is whether the reconversion is in accordance with law or not. The question is not whether it is good for the company or not. 20.43 The real reason why SP group and CPM are aggrieved by the conversion is, that most of their arguments are traceable to provisions which apply only to public and listed public companies. If reconversion goes, they may perhaps stand on a better footing. But that would tantamount to putting the cart before the horse. One may be entitled to a collateral benefit arising out of a substantial argument. But one cannot seek to succeed on a c....