IndiaCorpLaw

NCLT Rules on Maintainability in the Tata-Mistry Case

Background

The action on
the legal front in the Tata-Mistry episode has been playing out in the National
Company Law Tribunal (NCLT) over the last few weeks. This is on account of an action
for oppression and mismanagement initiated by two Mistry companies (the Mistry
Group) that are shareholders of Tata Sons against the company as well as its
directors and officers. The action was brought under sections 241, 242 and 244
of the Companies Act, 2013 (the 2013 Act). The maintainability of the petition
was, however, contested by the respondents (i.e., principally the Tata Group).
The Tata Group argued that the action was not maintainable in view of section
244 of the 2013 Act, the relevant parts of which are extracted below:

244. (1) The following
members of a company shall have the right to apply under section 241, namely:—

(a)   in the case of a company having a share
capital, not less than one hundred members of the company or not less than
one-tenth of the total number of its members, whichever is less, or any member
or members holding not less than one-tenth of the issued share capital of the
company, subject to the condition that the applicant or applicants has or have
paid all calls and other sums due on his or their shares;

Provided that
the Tribunal may, on an application made to it in this behalf, waive all or any
of the requirements specified in clause (a) or clause (b) so as to enable the
members to apply under section 241.

Facts and Issues

The facts of
the case and the issue at hand are rather straightforward. The Mistry Group
held 2.17% of the total issued share capital of Tata Sons Limited, which
represented 18.37% of the equity shares of the company. Moreover, the Mistry Group
comprised two members out of a total of 51 members in the company. The nub of
the issue is whether the 10% requirement stipulated in section 244 ought to be
satisfied by taking into account the entire issued share capital of the company,
including equity and preference shares (in which case the Mistry Group falls
below the threshold) or whether it should take into account only the equity
share capital of the company (in which case the Mistry Group satisfies the
requirement).

Despite the
relative simplicity of the facts and the legal issue at hand, a number of legal
arguments were put forth on both sides that led to an extensive debate that
required the NCLT to engage in a careful interpretation of the relevant provisions
of the 2013 Act.

The Tata Group
argued that a literal interpretation of the relevant provisions indicate that a
petition for an oppression action must be supported by shareholders holding at
least 10% of the total issued share capital of the company. Moreover, they
argued that the relevant provisions of the 2013 Act are in pari materia with that of the Companies Act, 1956 (the 1956 Act)
wherein the courts had clearly stipulated that the threshold must be satisfied
by taking into account both equity and preference shares and not merely equity
shares. They relied upon Northern Projects
Limited v. Blue Coast Hotels and Resorts Limited
.[1] This largely adopted a
textual interpretation of section 399 of the 1956 Act. The Mistry Group,
however, argued that there were considerable differences between the 1956 Act
and the 2013 Act and that the NCLT was required to engage in the purposive interpretation
of the legislation. They also raised a number of other arguments, which are
addressed below.

NCLT’s Ruling

After
considering the arguments placed by both sides, NCLT ruled that the 10%
requirement must be satisfied with reference to the total issued capital of the
company and not merely the equity share capital. Accordingly, the action
brought by the Mistry Group was held to be not maintainable. The following are
some of the key reasons enunciated by the NCLT:

1.      Lack of
material differences between the 1956 Act and the 2013 Act

At the outset,
the NCLT engaged in a detailed comparison of the text of the two statutes, and
found that there were no significant differences. Hence, cases (such as  Northern
Projects
) decided under the 1956 Act would hold good under the 2013 Act as
well.

2.      Reference
in section 241 to “class” of shareholders

The Mistry
Group placed considerable emphasis on the fact that the expression “class” of
shareholders has been used in section 241(1)(b) of the 2013 Act, which was
absent in the 1956 Act. For example, one of the aspects of mismanagement in
accordance with that provision relates to the likelihood “that the affairs of the
company will be conducted in a manner prejudicial to its interests or its
members or any class of members”. However, the NCLT held that the
reference to “class” of members in section 241(1)(b) cannot dilute the right to
complain, which is conferred in section 244, noting that “class concept has not
been introduced in section 244 of the new Act thereby the phrase ‘class of
members’ added to mismanagement clause will not have any bearing, not even
remotely relatable to the qualification mentioned u/s 244 of the new Act.”

3.      Whether redeemable
preference shares are debt

The Mistry
Group argued that under the relevant accounting standards, redeemable
preference shares have been treated as debt, and hence they must be excluded
from the purview of “issued share capital” under section 244. This effectively aids
in their contention that only equity shares must be considered for purpose of determining
the 10% threshold. The NCLT rejected this argument on the ground that the
accounting standards cannot be used to “obfuscate the mandate of the statute”,
since the 2013 Act contains detailed definitions of the various aspects that
cannot be ignored. Moreover, accounting standards are primarily related to
accounting policies, valuation norms and disclosure requirements.

4.      Ambit of
the Waiver Clause

The Mistry
Group argued that the existence of the waiver clause in the form of the proviso
takes away the mandatory nature of the threshold (maintainability) question,
and makes the legal provisions directory. However, this too was rejected by the
NCLT upon an interpretation of the relevant terms used in the legal provisions.

5.      Interpretation
of the Legislation

Finally, the
NCLT held that where the statutory provisions are “clear and clean language
understandable, no interpretation is required”. Hence, it decided to rely upon
a literal interpretation of the statute, which it found to be unambiguous, and
did not entertain the invitation by the Mistry Group to engage in purposive
interpretation. For this reason, it also refused to indulge in a discussion
surrounding several judicial precedents put forward by the Mistry Group, and
instead relied upon the sole precedent of Northern
Projects
, which it found applicable to the facts and law in the case.

Analysis

Although the
dispute before the NLCT has attracted a great deal of attention due to the high
profile nature of the episode, the legal issues involved on the maintainability
question are relatively straightforward. To that extent, the conclusion arrived
at by the NCLT is not surprising.

The more
important development will likely occur at the next stage, i.e., when the NCLT
considers the request of the Mistry Group to waive the requirement of meeting
the threshold of 10% of the issued share capital of the company. What would be
more interesting are the criteria that the NCLT would adopt while considering
the waiver request. Here, the NCLT may have a comparatively clean slate given
the absence of such a waiver provision in the 1956 Act (although that legislation
did allow the Central Government to authorize shareholders to bring an action even
though they did not satisfy the maintainability threshold). No matter which way
the waiver issue is decided, that and the maintainability issue already decided
are almost certain to be subject matters of appeal and further debate.



[1] (2009) 148 Company Cases 279.