Tata Consultancy Services Vs Cyrus Investments Pvt Ltd
BACKGROUND AND FACTS
Recently, the Supreme Court issued its ruling in the well-known corporate conflict case known as the Tata-Mistry dispute: Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd. & Ors. The Cyrus Mistry v. Tata lawsuit, which resulted from a boardroom coup in 2016 that saw Cyrus Mistry removed as Chairman of Tata Sons, was one of the largest corporate legal conflicts in the country. The NCLAT judgement was overturned by the bench headed by Chief Justice of India S.A. Bobde, who also affirmed the NCLT order in the Tatas’ favour. Due to the fact that it covers subjects like corporate governance, the rights of minority shareholders, the transformation of a public limited company into a private limited company, etc., this decision is noteworthy in the field of corporate law. Sections of both the Companies Act of 1956 and the Companies Act of 2013 have been interpreted by the Supreme Court.
The issue raised in the case of Tata Consultancy Services vs Cyrus Investments Pvt Ltd was whether the approval of minority shareholders was required for a scheme of arrangement between Tata Sons and Tata Consultancy Services, under Section 230 of the Companies Act, 2013[i].
The main legal issue in the case was the interpretation of Section 230 of the Companies Act, 2013, with respect to the requirement for approval of minority shareholders in case of certain types of transactions, such as a scheme of arrangement or a merger. The court was required to determine whether the approval of minority shareholders was necessary in this case and whether the scheme of arrangement was fair and reasonable and did not prejudice the rights and interests of minority shareholders.
The case of Tata Consultancy Services vs Cyrus Investments Pvt Ltd involves several provisions of the Companies Act, 2013, including Section 244, Section 232, and Section 230, Section 244 of the Companies Act, 2013[ii] provides for the power of the National Company Law Tribunal (NCLT) to make orders on various matters related to companies, including mergers and acquisitions. Section 232 of the Companies Act, 2013[iii] provides for the power of the NCLT to order a merger or amalgamation of two or more companies, subject to certain conditions and requirements, including the approval of the majority of shareholders. Section 230 of the Companies Act, 2013 provides for the power of the NCLT to sanction a compromise or arrangement between a company and its creditors or shareholders, subject to certain conditions and requirements, including the approval of the majority of shareholders and the minority shareholders.
The dispute arose when Cyrus Investments Pvt Ltd, a minority shareholder in Tata Sons, challenged the scheme of arrangement and sought to block its implementation, arguing that it would prejudice the rights and interests of minority shareholders. Cyrus Investments Pvt Ltd contended that the scheme of arrangement was unfair and oppressive to minority shareholders, as it allegedly favored Tata Sons and Tata Consultancy Services and did not provide adequate protection to the rights and interests of minority shareholders. In response, Tata Sons and Tata Consultancy Services argued that the scheme of arrangement was fair and reasonable and that the approval of minority shareholders was not required under the Companies Act, 2013. Before the NCLT, the complainant companies of the SP Group had alleged oppression and mismanagement on the grounds of violation of the company’s articles of association, illegal removal of Cyrus from the position of executive chairman, Ratan Tata treating the business as his own business while other directors acted as his puppets, shady transactions, and disastrous projects of the company. Tata Sons Ltd. said in reaction to the accusations that Cyrus had lost the trust of the company’s board. The Board had agreed to keep Cyrus on as a director after his removal from the position of Executive Chairman, but his later actions compelled them to remove him from directorship, and Cyrus never raised any concerns regarding mismanagement and oppression prior to his removal as the Executive Chairman. Ratan Tata was chosen as Chairman Emeritus at the request of Cyrus to lead the board. Additionally, Tata Sons claimed that the petition’s discussion of failed projects had left out the company’s phenomenal success, that the board’s commercial judgement errors could not be construed as mismanagement or oppression, that Cyrus was a director at the time that decisions regarding failed projects were made, and that his father was a member of the board when the Articles of Association were adopted. The hasty conversion of Tata Sons Ltd. from a public company to a private company in 2017 without adhering to the procedures outlined in Section 14 of the Companies Act, 2013 [iv]was noted by NCLAT as evidence that the majority directors had acted negatively towards the minority directors and the company. The dismissal of Cyrus as Executive Chairman and from the company’s Board of Directors was deemed unconstitutional by NCLAT because it was believed that the company’s operations were oppressive and detrimental to the appellants. Additionally, NCLAT ordered Tata Group, the largest stakeholder, to engage SP Group, the minority shareholder, before appointing any future Executive Chairman or Directors. Later when this case knocked the door of Supreme Court, it referred to the case of Scottish Cooperative Wholesale Society v. Meyer[v], where the House of Lords had construed the meaning of ‘oppressive’ as ‘burdensome, harsh and wrongful. The Court also noted the 2013 Companies Act sections 241 to 246 that address guarding against persecution and inadequate management. The Court stated that although Cyrus had been ousted from his job as executive director first, his later revelation of private corporate information to the Income Tax Department and media leaks resulted in his legitimate ouster from the board of directors.
The Supreme Court overturned the NCLAT’s ruling and ruled in favour of the Respondents on all matters[vi]. This decision addressed a number of company law issues. The Supreme Court extensively discussed the subject of minority shareholder repression and cited both English law and Indian corporate law as the concepts’ original sources. The Court determined that Cyrus Mistry’s removal from the Board was appropriate in light of his actions in breaking his fiduciary duty to the corporation and determined that his dismissal was not motivated by bias or oppression. The Court continued by noting that minority shareholders like SP Group are not granted the right to proportionate representation under the corporations Act of 2013, only small shareholders of listed corporations. Additionally, the Court ruled that due to the Company’s Articles of Association, SP Group did not have a contractual right to proportionate representation. Minority shareholders will now need to make sure that they have the right to proportionate representation contractually since they do not have such statutory rights, despite Cyrus Mistry having a somewhat weak legal case and a more compelling case for sympathy against the Tata Group.
[i] Company act, 2013
[ii] Section 244, 232, 230, 244 of the Companies Act, 2013
[iii] Section 232 of the Companies Act, 2013
[iv] Section 14 of the Companies Act, 2013
[v]Scottish Co-operative Wholesale Society Ltd v Meyer: HL 1959
[vi] Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272