Miscarriage of justice in Tata-Mistry case: SP group in review petition

In its review petition filed in the Supreme Court, the SP group has said Indian law permits “patent errors” apparent on the face of the record to be rectified. As the rights of minority shareholders will impacted by the SC order, it has moved the apex court.

These errors, apart from leading to a “miscarriage of justice” in the “Tata versus Mistry” case, also have wider ramifications for implementation of the statutory safeguards enshrined in the Companies Act 2013, it said.

It said the new the Companies Act 2013 was legislated after a lot of consultations to enhance corporate governance in the board rooms, but some of the observations and findings of the SC’s March 26 judgement in the Tata case erode the standards of governance expected under the Companies Act 2013, and dilutes the legislative intent behind the Act.

The SP group has filed a review petition in the Supreme Court after the top court rejected its appeal and set aside an earlier NCLAT order which had reinstated Mistry as chairman of the Tata group and had said that his removal was not as per the law.

The group said while on the one hand, the SC judgement holds that removal of a director “can never be oppressive or prejudicial”, on the other, it holds that where the removal is oppressive, relief can be granted. “This is relevant because if one of these two approaches is to be accepted then the complaints raised by the SP Group would fall within the formulation of the law even as laid down in the judgment,” it said.

The SP group said the judgement ignores and fails to apply explicit findings of fact by the National Company Law Appellate Tribunal (NCLAT) without even declaring these findings of fact to be perverse – which the judgement itself acknowledges is the legal standard to be met before a court of law can interfere with such findings. “Even the Tatas did not demonstrate in their civil appeal as to how any of the findings of fact by the NCLAT were perverse,” it said.

The non-consideration of Section 241(1)(b), a substantial provision of the Prevention of Oppression and Mismanagement statute of the Companies Act 2013, that go to the heart of the dispute between the parties was ignored by the SC, it said.

The SC has ignored the findings of fact of the NCLAT and wrongly declares that the justification for Cyrus Mistry’s removal cannot be gone into by the Tribunal under Section 241.

“This flawed approach has become the basis to declare that the ouster of a Chairman and Managing director (one the SC judgement acknowledges is a representative of the minority shareholder no less) and the manner employed to achieve them (which it holds was

not pre-meditated but well planned), can never be a subject matter of a complaint under Section 241 of the 2013 Act – a finding that is ex-facie contrary to Section 241(1)(b) which the Judgement overlooks in its entirety,” it said.

The SC judgement, the review petition said, holds that Cyrus Mistry was not a Managing Director of Tata Sons but only an ‘Executive Chairman’ and hence the requirement of a shareholder resolution to remove a Managing Director as required under Articles 105A would not be breached.

“These findings are contrary to the record and stand of Tatas themselves that Mistry was indeed a Managing Director. Further, the NCLAT had also observed that the removal of Mistry was contrary to the provisions of Article 118,” the SP group said.

As per the SP group, the judgement held that NCLAT did not overturn the finding of the NCLT that Mistry had leaked the email dated October 26, 2016, to the press, when the NCLAT had expressly set aside the order of the NCLT and expunged the observations of the NCLT, as being unsubstantiated by the record.

Declaring that investment holding companies such as Tata Sons whose majority shareholders are charitable trusts are effectively sui-generis, virtually granting them a judicial exemption from the application of Section 241-242 of the Companies Act, it said.

The judgment makes the error of treating the application of company law as a variable based on identity of the shareholder of the company. “Contrary to the statutory provisions of the Companies Act 2013, it seeks to dilute the fiduciary duties of Directors depending on which shareholder has nominated the director. The Judgement has overlooked the fact that a director of a company must act in the best interests of the company and the members under Section 166(2), and not just to further the interests of the shareholder who nominated the director, it said. The judgment confuses the duty of “independent judgement” expected of all directors under Section 166 with the qualification criteria for a director to be termed “Independent Director”, a special type of Director under Section 149. This confusion can set a dangerous precedent that will dilute the fiduciary duties of directors and erode the standards of corporate governance under Section 149(1) and Section

166(3), which require every company to be managed by a board of directors exercising independent judgment, the SP group said.

The SP group said the Supreme Court was not sitting in a writ jurisdiction with a constitutional challenge to the wisdom of the the Companies Act while enforcing the legislation as it stands by interpreting it was the task at hand.

“The court in seeking to comment on the wisdom of the law has eroded the fiduciary duties of directors and other safeguards to protect minority shareholders – provisions of the Companies Act that were put in place due to societal experience of directors and majoritarian shareholders not being held accountable,” it said.

The SP group also pointed out the “incorrect interpretation of statute” which would render large swathe of minority shareholders remediless. The SC judgement also reduces the test of ‘just and equitable’ to cases of deadlock and quasi-partnership which would shut the remedy from oppressive action under Sections 241-242 to a large swathe of companies – including private equity investors and foreign investors, leaving them remediless, it said. “This proposition of law is contrary to judgements rendered by co-ordinate benches of equal strength of the Supreme Court,” it said.

The SC judgement has virtually licensed unrestricted sharing of information with majority shareholders ahead of the board meetings which is inconsistent with universal principles of insider trading and selective disclosures, and a direct erosion of the provisions of the Sebi (Prohibition of Insider Trading) Regulations, 2015 – that bars communication of unpublished price sensitive information, except for legitimate purposes and that too with appropriate safeguards, it said.

It said the judgement also contains remarks about Cyrus Mistry personally for “setting his own house on fire” in connection with the leak of an email to Tata Sons directors on October 25 2016, without even noticing that the NCLAT had specifically overturned the finding of the NCLT that in this regard and expunged the remarks made in this regard, as they were wholly unsubstantiated, it said.

The SC judgement also castigates Mistry for lawfully complying with a summons issued by the Deputy Commissioner of Income Tax, virtually declaring that a director of a company must value his office or the image of the company’s shareholders more than a statutory duty to comply with law. “By castigating a director of a company for complying with the law to reply to summons from a statutory enforcement agency, has lowered the bar on probity and as diluted the accountability expected from the rule of law, it said.

The sc judgment has restored the certain findings of the NCLT on the premise that the NCLAT did not specifically overturn these findings, while setting aside the NCLT Order. ‘This approach and finding completely ignores the well settled law that when an appellate court reverses the order of the lower court on merits on certain issues and does not touch other findings, the doctrine of merger would operate and the NCLT order cannot be considered as surviving the determination of the facts and law by the NCLAT as that would imply that there are two orders touching on the same subject that operate in tandem which is untenable,” it said.

The SP group said the SC judgement also denied the relief of separation prayed by the SP Group on the ground that that it had attacked Article 75, which the court erroneously held was an exit option available to the minority shareholder. “This finding is contrary not only to the text of the Article but also to Tata Sons’ own stand in these proceedings. The Court erred in not recognising that the jurisdiction in which the court considered the matter was one aimed at resolving the matters complained of,” it said.

The SC group said its review petition seeks to set right the errors apparent on the face of the record as if these are left unaddressed, it will significantly impact the rights of minority shareholders across the country as well as erode the statutory protections accorded to them under the Companies Act 2013.