Updated: March 27, 2021 11:02:28 am
The Supreme Court on Friday allowed a batch of appeals filed by the Tata Group against a December 2019 judgment of the National Company Law Appellate Tribunal (NCLAT), which had paved the way for reinstatement of Cyrus Pallonji Mistry as the Executive Chairman of Tata Sons. The judgment brings down curtains on one of the most closely watched, publicly fought boardroom wars in the history of Corporate India.
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On which aspects did the Supreme Court rule in favour of Tata Sons?
In a 282-page judgment, a three judge SC bench led by Chief Justice of India Justice S A Bobde settled all the matters in favour of the Tata Group mainly on five aspects.
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THE FIRST ASPECT is whether the NCLAT was right in forming an opinion that the affairs of the Tata Group, including at Tata Sons, were being “conducted in a manner prejudicial and oppressive to some members”, which therefore justified winding up of the company. The NCLAT had in its December 2019 judgment come to this conclusion by focusing on the removal of Mistry as Executive Chairman. In its judgment on Friday, however, the Supreme Court held that mere removal of a person from the post cannot be termed as “oppressive or prejudicial”.
THE SECOND ASPECT relates to NCLAT granting reliefs that the Mistry group had not specifically asked for in the first place. NCLAT had reinstated Mistry as Executive Chairman “for the rest of his tenure”. The SC said: “It is incomprehensible that the NCLAT directed reinstatement, and that too, of a Director of a company, after the expiry of his term of office.”
THE THIRD ASPECT relates to NCLAT restricting Tata Sons from using its powers under Article 75 of the Articles of Association, which gives Tata Sons the exclusive power to purchase the shares of any shareholder at fair market price. In its judgment, the SC held that the relief could not have been granted by the NCLAT in the first place as in the company petition originally filed by the Mistry group, there was no prayer challenging use of Article 75.
THE FOURTH ASPECT relates to NCLAT holding that the voting rights available to directors of the two trusts that are majority stakeholder in Tata Sons, was oppressive and prejudicial, and therefore curtailed. The SC held that the directors of Sir Ratan Tata Trust and Sir Dorabji Trust had the right to affirmative voting since they also had a duty towards the beneficiaries of the trust at large apart from the companies they owned. It said Mistry could not have claimed wrongdoing when he himself had sought Ratan Tata’s guidance while being appointed as the Executive Chairman.
THE FIFTH ASPECT deals with whether NCLAT was right in asking the Registrar of Companies to disallow Tata Sons’ conversion into a private company. “If someone, aggrieved after his removal from office can engage in shadow-boxing through the companies controlled by him, he cannot accuse the very same person who chose him as successor to be a shadow director. Someone who gained entry through the very same door, cannot condemn it when asked to exit,” the SC said.
What next for the Tata and Mistry groups?
The Tata Group and the Mistry Group have been together in business for more than 70 years, with the Shapoorji Pallonji Group acquiring 48% shares and 40% shares in 1965. Over the years, this stake grew to 18.37%, at which it currently stands.
Experts believe Friday’s judgment is likely to throw a spanner into the Mistry and Shapoorji Pallonji Groups’ plan to cut down on their debt. Most legal and company law experts said that since the Supreme Court has already held that the Tata Group could not be restrained from using Article 75 of its Articles of Association if it chose to, the Shapoorji Pallonji group will have no option but to sell its stake to the Tatas.
The Shapoorji Pallonji group has already said in the Supreme Court that it is ready to exit from Tata Sons, provided it gets an “early resolution” and a “fair, equitable solution”. The Tata Group has valued the Mistry family shares in Tata Sons at Rs 70,000-80,000 crore, while the Mistry family has claimed these were worth close to Rs 1.75 lakh crore.
Other experts, however, feel that left with no option but to sell to the Tatas, the Mistry family and the SP Group are likely to undertake another round of litigation to get a fair value of their stake.
Have there been other recent cases when the SC has overruled an NCLAT judgment?
Friday’s verdict in the Tata Sons case is one in a series of instances in which the NCLT, the appellate court NCLAT, and the SC have had completely different views, leading to reversals in sequential verdicts.
In the Essar Steel case, which was finally settled by the Supreme Court in November 2019, NCLT, NCLAT and the Supreme Court had all differed in their interpretations of the Insolvency and Bankruptcy Code (IBC), on various aspects — the question of the powers of the committee of creditors (CoC) and issues such as the supremacy of operational or financial creditors.
The insolvency of New Delhi-based Rave Scans, similarly, took two U-turns before being decided. Lenders to Rave Scans, one of the first firms to be taken to NCLT under the IBC, had initially rejected all four bids that came for the firm. After a nudge from the NCLT, they reconsidered one plan, which was later approved. That plan too, however, ran into trouble as one of the financial creditors, Hero Fin Corp, dissented and claimed a higher payout. The NCLT rejected Hero Fin’s contentions, which then approached the NCLAT. The NCLAT upheld the plea and added that if Hero Fin was not given the same treatment as other financial creditors within a month, the resolution plan would stand set aside.
Subsequently, a two-judge SC Bench of Justices Arun Mishra and S Ravindra Bhat overturned the NCLAT’s decision by holding that the resolution process had begun well before the amended regulation (which gave equal footing to dissenting financial creditors in IBC), and thus the appellate tribunal’s decision would be set aside.
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