Earlier this week, the National Company Law Tribunal (“NCLAT”) issued its ruling in Cyrus Investments Pvt Ltd v. Tata Sons Ltd on whether the Mistry group’s action for oppression and mismanagement in respect of Tata Sons is maintainable. Although the NCLAT ruled that the Mistry group’s petition did not meet the requirements of maintainability under section 244 of the Companies Act, 2013 (the “Act”), it nevertheless exercised the power to grant a waiver. This allows the action to proceed on its merits before the National Company Law Tribunal (“NCLT”). The ruling is an important one as it clarifies the threshold issues pertaining to the maintainability of an action for oppression and mismanagement, and the invocation of the waiver provision.
Readers may recall that late last year the Mistry group preferred a petition under sections 241, 242 and 242 of the Act against the Tata group, being the controlling shareholders of Tata Sons Limited, the holding company that oversees the broader Tata stable of companies. On 6 March 2017, the NCLT held that the Mistry group’s petition was not maintainable as it did not hold the minimum 10% shares required under section 244. The principal reason was that while the Mistry group held 18.37 percent of the equity shares in Tata Sons, that represented only 2.1 percent of the total share capital (including preference shares). Since the 10% requirement must be satisfied with reference to the the total “issued share capital of the company”, the Mistry group failed to demonstrate the locus standi to be able to initiate the action.
However, the Mistry group filed a separate petition before the NCLT seeking its indulgence in waiving the numerical threshold requirement (of 10% of the total issued share capital), which is a power available to the NCLT in the proviso to section 244 of the Act. On 17 April 2017, the NCLT rejected the Mistry Group’s waiver application, due to which the entire petition for oppression and mismanagement stood dismissed. It is against these orders that the Mistry group sought relief on appeal before the NCLAT.
The NCLAT bifurcated its consideration of the matter into two distinct but related questions. First, whether the petition preferred by the Mistry group is maintainable under sections 241, 242 and 244 of the Act. If not, secondly, whether the Mistry group has made out a case for a waiver under the proviso to section 244. The NCLAT considered each of these in turn.
As to the first issue, i.e., the threshold for maintainability of an action for oppression and mismanagement, the NCLAT adopted a technical approach focusing largely on the literal interpretation of the relevant statutory provisions, and concluded that the Mistry group had failed to satisfy the requirements. On this count, the NCLAT’s conclusion is in consonance with the NCLT’s decision.
The Mistry group’s argument invoked references to “class of members” in section 241 of the Act to indicate that the 10% threshold support requirement for an oppression and mismanagement action deals with a class as opposed to the total share capital. If this approach were adopted, the Mistry Group would succeed as it had over 18% of the class of equity shares. However, the NCLAT categorically rejected this contention, and observed:
61. It is also obvious on a bare reading of Sections 241 and 244 of the 2013 Act, that while clause (a) and (b) of subsection (1) of Section 241 deal with the subject matter of the grievances which can be raised in a petition, Section 244(1) deals with locus/eligibility of the member who can raise such grievances. The subject matter of the complaint bears no connection with the eligibility of the member applying to the Tribunal except that a member seeking to make a grievance of the subject matter contained in Section 241 is required to first satisfy the eligibility of Section 244 of the 2013 Act.
…
63. No doubt, the parliament while re-enacting Section 398(2) of the Companies Act, 1956 as Section 241(1)(b) has added the expression “…any class of members” at the end of Section 241(1)(b) but this only enlarges the subject matter of the complaint which may be brought before Tribunal and does not alter the locus/eligibility of a member who can bring such compliant. The latter continues to be governed by Section 244(1), a provision identical to the erstwhile Section 399(1).
[Emphasis in original]
Similarly, the NCLAT observed that wherever the Parliament thought it fit to refer to a “class” of shareholders, it has done so expressly. Such a reference is conspicuous by its absence in the maintainability provision of section 244(1). Applying the principles of statutory interpretation, the NCLAT found that where the legislative intention is clear, it would not be prudent to add or imply anything that would be inconsistent with such intent.
For these reasons, the NCLAT held that the expression “issued share capital” in section 244(1) must be taken to include both equity and preference shares while determining whether the threshold of 10% holding has been satisfied. Based on this interpretation, since the Mistry Group held only 2.17% of the total issued share capital of Tata Sons, it failed on the maintainability issue.
The NCLAT’s negative conclusion on the maintainability question required it to proceed to decide on the waiver question. Here, the Mistry group made submissions on various substantive issues pertaining corporate governance of Tata Sons as well as other listed companies within the group with a view to highlighting the importance of the matters raised by the petition that thereby supports a waiver from the tribunal. Here, the NCLAT elucidated at some length the parameters to be applied when considering a waiver application. The NCLAT was categorical in that it cannot deliberate on the merits of an oppression and mismanagement petition while deciding the threshold question of waiver. It noted:
145. For the aforesaid reasons we hold that the Tribunal while deciding an application for ‘waiver’ under proviso to sub-section (1) of Section 244 to enable the members to apply under Section 241 cannot decide the following issues: –
(i) Merit[s] of the case
(ii) Issues dependent on merit based on claim and counter claim, such as:
a. Whether a prima facie case has been made or not
b. Whether the petition is barred by limitation,
c. Whether it is a case of arbitration,
d. Whether allegation relates to/pertains to another company (Third party).
e. Whether the allegations are in the nature of directorial complaint.
f. Whether the applicants’ conduct disentitled them from seeking relief.
g. Whether the proposed application under Section 241 is barred by acquiescence or waiver or estoppel.
At the same time, the NCLAT was clear in that a waiver order cannot be passed by the tribunal in a capricious or arbitrary manner and that it can be passed only by a speaking and reasoned order after providing notice to the relevant parties. Even though it is not required to consider the merits of the petition for oppression and mismanagement, it must take into account the relevant facts and evidence as pleaded in the application for waiver to ensure that the applicants have made out an exceptional case for waiver of the maintainability requirements under section 244. Here, the NCLAT set out a broader list of factors to be considered:
151. Normally, the following factors are required to be noticed by the Tribunal before forming its opinion as to whether the application merits ‘waiver’ of all or one or other requirement as specified in clauses (a) and (b) of sub-section (1) Section 244:-
(i) Whether the applicants are member(s) of the company in question? If the answer is in negative i.e. the applicant(s) are not member(s), the application is to be rejected outright. Otherwise, the Tribunal will look into the next factor.
(ii) Whether (proposed) application under Section 241 pertains to ‘oppression and mismanagement’? If the Tribunal on perusal of proposed application under Section 241 forms opinion that the application does not relate to ‘oppression and mismanagement’ of the company or its members and/or is frivolous, it will reject the application for ‘waiver’. Otherwise, the Tribunal will proceed to notice the other factors.
(iii) Whether similar allegation of ‘oppression and mismanagement’, was earlier made by any other member and stand decided and concluded?
(iv) Whether there is an exceptional circumstance made out to grant ‘waiver’, so as to enable members to file application under Section 241 etc.?
These factors are not exhaustive, and the NCLAT leaves the door open for consideration of other factors unrelated to the merits of the case. Applying these parameters to the facts of the present case, the NCLAT found that the applicants were members of Tata Sons. Moreover, apart from two shareholders of Tata Sons, none of the other 49 shareholders would have satisfied the 10% threshold in terms of the total issued share capital of the company, thereby limiting minority shareholder protection in the company. Moreover, the Mistry group was able to demonstrate that their interest in the overall value of Tata Sons was 1/6th, which was in the region of “one lakh crores”, a factor that played in the mind of the NCLAT while granting the waiver. Finally, the NCLAT also found that the allegations made in the petition filed by the Mistry group related to instances of oppression and mismanagement, although several of them related to group companies. Hence, the NCLAT overrode decision of NCLT and held that the Mistry group is entitled to the waiver. This effectively keeps the Mistry Group’s petition alive, and puts the ball back in the NCLT’s court to consider the matter on merits.
The NCLAT’s decision is important on several counts, not least because it deals with one of the fieriest corporate battles of recent times in India. On the first issue relating to maintainability, the NCLAT was bound by the specific provisions of the statute, which it largely interpreted. The NCLAT (like the NCLT earlier) supplied a literal, technical and narrow interpretation to the maintainability issue, specifically regarding the scope of the expression “issued share capital of the company” in section 244(1)(a) of the Act. To that extent, the issue seems relatively straightforward.
It is on the issue of waiver that the NCLAT’s ruling becomes more significant. Unlike the maintainability question, the NCLAT had a freehand when it comes to determining the principles on which waiver should be granted because the statutory provisions are silent in this regard. Here, the NCLAT’s ruling is quite clear: the tribunal is to steer clear of the merits of the case and should instead take into account other special considerations demonstrated in the waiver application. While the NCLAT seeks to set out some of the parameters clearly, it stops short of treating them as exhaustive, thereby leaving some room for ambiguity.