The action on the legal front in the Tata-Mistry episode has been playing out in the National Company Law Tribunal (NCLT) over the last few weeks. This is on account of an action for oppression and mismanagement initiated by two Mistry companies (the Mistry Group) that are shareholders of Tata Sons against the company as well as its directors and officers. The action was brought under sections 241, 242 and 244 of the Companies Act, 2013 (the 2013 Act). The maintainability of the petition was, however, contested by the respondents (i.e., principally the Tata Group). The Tata Group argued that the action was not maintainable in view of section 244 of the 2013 Act, the relevant parts of which are extracted below:
244. (1) The following members of a company shall have the right to apply under section 241, namely:—
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.
Facts and Issues
The facts of the case and the issue at hand are rather straightforward. The Mistry Group held 2.17% of the total issued share capital of Tata Sons Limited, which represented 18.37% of the equity shares of the company. Moreover, the Mistry Group comprised two members out of a total of 51 members in the company. The nub of the issue is whether the 10% requirement stipulated in section 244 ought to be satisfied by taking into account the entire issued share capital of the company, including equity and preference shares (in which case the Mistry Group falls below the threshold) or whether it should take into account only the equity share capital of the company (in which case the Mistry Group satisfies the requirement).
Despite the relative simplicity of the facts and the legal issue at hand, a number of legal arguments were put forth on both sides that led to an extensive debate that required the NCLT to engage in a careful interpretation of the relevant provisions of the 2013 Act.
The Tata Group argued that a literal interpretation of the relevant provisions indicate that a petition for an oppression action must be supported by shareholders holding at least 10% of the total issued share capital of the company. Moreover, they argued that the relevant provisions of the 2013 Act are in pari materia with that of the Companies Act, 1956 (the 1956 Act) wherein the courts had clearly stipulated that the threshold must be satisfied by taking into account both equity and preference shares and not merely equity shares. They relied upon Northern Projects Limited v. Blue Coast Hotels and Resorts Limited. This largely adopted a textual interpretation of section 399 of the 1956 Act. The Mistry Group, however, argued that there were considerable differences between the 1956 Act and the 2013 Act and that the NCLT was required to engage in the purposive interpretation of the legislation. They also raised a number of other arguments, which are addressed below.
After considering the arguments placed by both sides, NCLT ruled that the 10% requirement must be satisfied with reference to the total issued capital of the company and not merely the equity share capital. Accordingly, the action brought by the Mistry Group was held to be not maintainable. The following are some of the key reasons enunciated by the NCLT:
1. Lack of material differences between the 1956 Act and the 2013 Act
At the outset, the NCLT engaged in a detailed comparison of the text of the two statutes, and found that there were no significant differences. Hence, cases (such as Northern Projects) decided under the 1956 Act would hold good under the 2013 Act as well.
2. Reference in section 241 to “class” of shareholders
The Mistry Group placed considerable emphasis on the fact that the expression “class” of shareholders has been used in section 241(1)(b) of the 2013 Act, which was absent in the 1956 Act. For example, one of the aspects of mismanagement in accordance with that provision relates to the likelihood “that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members”. However, the NCLT held that the reference to “class” of members in section 241(1)(b) cannot dilute the right to complain, which is conferred in section 244, noting that “class concept has not been introduced in section 244 of the new Act thereby the phrase ‘class of members’ added to mismanagement clause will not have any bearing, not even remotely relatable to the qualification mentioned u/s 244 of the new Act.”
3. Whether redeemable preference shares are debt
The Mistry Group argued that under the relevant accounting standards, redeemable preference shares have been treated as debt, and hence they must be excluded from the purview of “issued share capital” under section 244. This effectively aids in their contention that only equity shares must be considered for purpose of determining the 10% threshold. The NCLT rejected this argument on the ground that the accounting standards cannot be used to “obfuscate the mandate of the statute”, since the 2013 Act contains detailed definitions of the various aspects that cannot be ignored. Moreover, accounting standards are primarily related to accounting policies, valuation norms and disclosure requirements.
4. Ambit of the Waiver Clause
The Mistry Group argued that the existence of the waiver clause in the form of the proviso takes away the mandatory nature of the threshold (maintainability) question, and makes the legal provisions directory. However, this too was rejected by the NCLT upon an interpretation of the relevant terms used in the legal provisions.
5. Interpretation of the Legislation
Finally, the NCLT held that where the statutory provisions are “clear and clean language understandable, no interpretation is required”. Hence, it decided to rely upon a literal interpretation of the statute, which it found to be unambiguous, and did not entertain the invitation by the Mistry Group to engage in purposive interpretation. For this reason, it also refused to indulge in a discussion surrounding several judicial precedents put forward by the Mistry Group, and instead relied upon the sole precedent of Northern Projects, which it found applicable to the facts and law in the case.
Although the dispute before the NLCT has attracted a great deal of attention due to the high profile nature of the episode, the legal issues involved on the maintainability question are relatively straightforward. To that extent, the conclusion arrived at by the NCLT is not surprising.
The more important development will likely occur at the next stage, i.e., when the NCLT considers the request of the Mistry Group to waive the requirement of meeting the threshold of 10% of the issued share capital of the company. What would be more interesting are the criteria that the NCLT would adopt while considering the waiver request. Here, the NCLT may have a comparatively clean slate given the absence of such a waiver provision in the 1956 Act (although that legislation did allow the Central Government to authorize shareholders to bring an action even though they did not satisfy the maintainability threshold). No matter which way the waiver issue is decided, that and the maintainability issue already decided are almost certain to be subject matters of appeal and further debate.