Mismanagement in the case of the ouster of Cyrus Mystery as chairman

ANALYSIS OF CORPORATE ASPECT OF OPERATION AND MISMANAGEMENT IN THE CASE OF OUSTER OF CYRUS MYSTRY AS CHAIRMAN

Author: Ayush Akar, NLUO

The fight between the only Chairman who is not a member of the Tata Family and the Tata and Sons management has acted as a reflection for all the people employed in a company. This nasty battle between the management and the CEO of the Company, which is one of the top five investors to the Indian market, has once again revealed that it is the holders or promoters who still have the upper hand in the companies and the workers who are pure puppets whose control is with the board. Cyrus Mistry joined the board of Shapoorji Pallonji Group, Tata and Sons’ largest investors group in 1991 as Director and in 1994 he was appointed as the group’s Managing Director. The Group holds some 18 percent of the shareholdings of Tata and Sons.[1]

The Tata-Mistry scandal was the most prominent case before the NCLT concerning oppression and poor management as described by Sections 397 and 398 of the former Corporations Act, 1956, and Sections 241-245 of the present Act.

NCLT ORDER

In 2016, Cyrus Mistry was removed from the chairmanship of Tata in 2016. Less than six months later, the party named TCS chief N Chandrasekaran as chairman following his dismissal, which set off a lawsuit. Two investment companies backed by the Mistry family, “Cyrus Investments Pvt Ltd and Sterling Investments Company Pvt Ltd”, moved NCLT Mumbai, claiming exploitation of minority shareholders and Tata Sons poor governance.[2] They had also questioned the removal of Mistry and there was the oppression of minority shareholder’s rights by converting into private. They also claimed that Tata Trust chairman Ratan Tata and trustee N Soonawala intervened with the company corporations’ day-to-day affairs, they served as proxy directors, and all of the above led the company huge loss of income. The Bombay bench of NCLT ruled in favour of Tata Sons. It sets aside the two Mistry family investment firms’ complaints on the issue of sustainability, claiming that they did not meet the requirement of a 10% stake in a company to lodge a case of suspected exploitation of minority shareholders under the present Company statute. The Mistry family holds 18.4 percent equity in the closely-held Tata Sons, but if preferential stocks are omitted the ownership is less than 3 percent. It also refuses the complaint of the two investment firm requesting a waiver based on possessing at least a 10 percent stake in a business to file the case of suspected minority shareholders exploitation. A special tribunal bench had ruled that the Tata Sons board was “competent” to replace the corporation’s chief executive officer. NCLT bench had also claimed that Mistry had been removed as chairman because the Tata Sons board and its majority stakeholders had “lost trust in him.”[3]

NCLAT ORDER

Investment firms moved the NCLAT, challenging the order of the NCLT that dismissed their petitions for sustainability. They have contested withdrawing their application for a waiver. The NCLAT ruled in favour of former Tata Sons chief Cyrus Mistry on a petition opposing his dismissal as president of a giant corporation that markets everything from salt to tech services. The court has now reinstated Mistry as CEO of the ultimate holding firm of Tata Group. The NCLAT held that the resolution passed in 2016 by the Tata Sons board suspending Mistry was invalid. The company’s corresponding decision to name N. Chandrasekaran was also illegal as Mistry’s successor. “To facilitate the smoother running of the Company, although we are not willing to suspend the decision rendered today in its entirety, but to postpone a portion of the decision in so far as it involves the removal of the current CEO and the reinstatement of Mr. Cyrus Pallonji Mistry as CEO of ‘Tata Sons Limited’ for four weeks. The remainder of the judgment and instructions, such as the direction to make Mr. Cyrus Pallonji Mistry as the Director of the corporation and the Director of the three Tata Corporations, shall be immediately conformed with,” stated the NCLAT order.[4]

SUPREME COURT ORDER

The Top Court stayed the order of NCLAT to reinstate Cyrus Mistry as CEO of Tata Sons and to restore his board positions to the holding firm and also to three company firms, with a tentative remark that the first interpretation of the order was “not good” and also that the tribunal may not have provided a subsequent remedy that was not requested in the proceedings. The Court allowed the company to turn into a private corporation. The Court noted that the NCLT decision was “sorely lacking”, and decided to hear the appeals on the issue.[5]

CONCLUSION

When Mistry was dismissed, several people were shocked regarding the governance policies of the well-regarded corporation. The legal problem, but mainly arises from the following question is the conduct of the majority shareholder promoters coercive and contrary to the best interest of the company? For transparent corporate behaviour, the abrupt decision of Tata Sons to switch from a public to a private limited company shortly after Cyrus Mistry’s expulsion also expressed concerns.

The question of Tata Sons had increased the practical viability of the security of minority shareholders in India. In the case of Tata Sons, the majority of the shares are held by Tata’s philanthropy trust. Cyrus Mistry, along with his family-owned business group, holds an 18 percent stake. Mistry brought up the question of mismanagement and corruption in the act of deposing him from the office of Executive Chairman, as it was ostensibly done without pursuing the required procedures, such as an appropriate notice. He also alleged was a lack of corporate governance procedures and a reluctance of the directors to perform their fiduciary responsibility. The Tata Sons AOA was also objected to being contrary to the interests of minority shareholders.

The Companies Act, 2013 calls for legislation to protect minority owners, enabling them to bring suit to the National Company Law Tribunal (NCLT) to halt legislation that may be perceived as oppression and mismanagement. In the case brought by Cyrus Mistry, the NCLT ruling could not have acknowledged the issues about the interest of the minority shareholders. The NCLT had also said minority shareholder is obliged by majority law. While the issue of oppression and mismanagement may be an empirical issue, the NCLT decision highlighted the fact that minority shareholders are unable to challenge majority corporate actions as the level of proof and evidence needed is very high. There is a complicated situation in the Indian scenario where a high concentration of ownership with big promoters exists, the best interest of the firms and minor shareholders may be jeopardized. In the case of publicly listed companies, an additional system of checks and balances is provided by the possibility of appointing small shareholder director as well as by SEBI regulations. However, private companies do not have this provision. Hence, it is necessary to step up the corporate governance practices in these companies.

An argument that must also be remembered is the fact that Tata Sons has long been treated as a public limited company based on its profitability as laid down in the former Company Act, 1956. The changes to corporate law in 2000, as well as the amended Corporate Act in 2013, enabled Tata Sons to become a private limited company. Shortly after the Cyrus Mistry Debacle, Tata Sons pursued this right. The decision to move to a private corporation could have been to reap the benefits of the limit on the transferability of shares, which is beneficial to the majority shareholder. Nonetheless, the NCLAT judgment rekindles concerns about corporate management principles, the efficacy of the defence of minority owners, promoter responsibility, and directors’ duties. In this respect, eminent corporate law expert V. Umakanth suggested the need to lay down higher levels of company management and standards for promoters and holding corporations. Since the Supreme Court has ruled in favour of Tata and Company but these corporate governance problems will also need a solution by the enhancement of corporate law.

[1] ‘Cyrus Mistry’s Reinstatement as Chairman of Tata Group Stayed by Supreme Court’ (Livemint, 10 January 2020) <https://www.livemint.com/news/india/sc-stays-nclat-order-of-reinstatement-of-cyrus-mistry-as-chairman-of-tata-group-11578637703660.html> accessed 24 April 2020.

[2] ‘Cyrus Mistry’s Removal as Chairman of Tata Sons Was Illegal, Says NCLAT’ (The Wire) <https://thewire.in/business/cyrus-mistrys-removal-as-chairman-of-tata-sons-was-illegal-says-nclat> accessed 24 April 2020.

[3] ‘Parasaran et al. – Mr. Shailesh Paria, Adv. Ms, Sishika Rajadhyaksha,.Pdf’ <https://www.nclt.gov.in/sites/default/files/final-orders-pdf/43%20mb.pdf> accessed 24 April 2020.

[4]‘13425174335dfa10b733e05.Pdf’ <https://nclat.nic.in/Useradmin/upload

[5] ‘Breaking: Supreme Court Stays NCLAT Order Reinstating Cyrus Mistry as the Executive Chairman of Tata Sons’ <https://www.barandbench.com/news/litigation/breaking-supreme-court-stays-nclat-order-reinstating-cyrus-mistry-as-the-chairman-of-tata-sons> accessed 24 April 2020.