The conduct of the majority shareholders to be oppressive requires the events to be considered not in isolation, but as a part of a consecutive story. The acts must be continuous on the part of the majority shareholders, continuing up to the date of filing of the petition.

The National Company Law Appellate Tribunal (hereinafter referred to as “the Tribunal) in the matter of Cyrus Investments Pvt. Ltd. Vs. Tata Sons Ltd. & Anr. (Appeal No. 254/2018), decided on 18.12.2019, has reiterated the guiding principle governing the conduct of majority shareholders which prejudicially affects the rights of the minority shareholders of a company. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company’s affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

 

 

Facts:

Pursuant to decision of Board of Directors’ of the ‘Tata Sons Limited’ dated 24th October, 2016, just few months prior to the completion of the period, Mr. Cyrus Pallonji Mistry, Executive Chairman of the Tata Sons Ltd., was suddenly removed as the Executive Chairman.  Before his removal for more than one year, a number of correspondences had taken place between Mr. Cyrus Pallonji Mistry and other members, including Mr. Ratan N. Tata about the performances of different Group Companies.

 

Because of sudden removal of Mr. Cyrus Pallonji Mistry from the post of ‘Executive Chairman’,‘Cyrus Investments Private Limited’ and ‘Sterling Investment Corporation Pvt. Ltd.’, the minority group of shareholders ‘Shapoorji Pallonji Group’ moved an application under Sections 241-242 of the Companies Act, 2013 alleging prejudicial and oppressional acts of the majority shareholders.

 

Held:

The Tribunal before answering the two above-mentioned questions discussed the provisions of oppression and mismanagement in light of the sections contained in new    and old Indian Companies Act.  The precedent given by the Supreme Court was the  guiding spirit for the Tribunal in deciding the present matter.

 

  1. The law of oppression and mismanagement:

Chapter XVI of the Indian Companies Act, 2013 relates to prevention of oppression and mismanagement in a company. Section 241 and section 242 of the Companies Act, 2013 deals with application to NCLT for relief in cases of oppression and powers of tribunals in the same.

 

The  mentioned sections provides a remedy in case, if any, member of a company complains that the affairs of the company have been or are being conducted in a manner ‘prejudicial to public interest’ or in a manner ‘prejudicial’ or ‘oppressive’ to him or any other member or members or ‘prejudicial to the interests of the company’ may file an application before the NCLT. The test, as to when the proposed measure can be subject of the proceedings under Sections 241 and 242 of the Companies Act, 2013 is dependant on two factors, namely:

 

  1. whether the affairs of the company have been or are being conducted in a manner ‘prejudicial’ or ‘oppressive’ to any member or members or ‘prejudicial to public interest’ or ‘in a manner prejudicial to the interests of the company’; and
  2. that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up.

 

Analysing the language used in section 241 of the Companies Act, the Tribunal     observed that the word ‘unfairly prejudicial’ has not been used in the section.             However ‘unfairness’ may arise or may not arise from what the parties have agreed         upon in their Articles of Association , but in the context of Indian Law, it is only to be    seen whether the power exercised by majority in circumstances to which the minority             can reasonably say that it is ‘prejudicial’ or ‘oppressive’ to their interest or interest of       any member or interest of the Company or public interest. The Indian Law  also             does not recognise the term ‘legitimate expectations’ to hold any act prejudicial or         oppressive.

 

  1. Supreme Court Precedents and the English Companies Act:

The Hon’ble Supreme Court in the matter of S.P. Jain v. Kalinga Tubes Ltd. (AIR    1965 SC 1535) held that the Indian Companies Act complies with Section     210 of the English Companies Act, 1948. The Supreme Court took up the mentioned case      under section 397 of the Companies Act 1956 and proceeded on the assumption that a  case has been made out to wind-up the  Company on just and equitable grounds. The Supreme Court, in the said matter, observed that the provision dealing with oppression and mismanagement  was introduced for the first time in the Indian Companies Act, 1913 as Section 153-C. The said section was based on Section 210 of the English Companies Act, 1948. The purpose of introducing Section 210 in the English Companies Act was to give an alternative remedy to winding up in case of  mismanagement or oppression where it was felt that though a case had been made out   on the ground of just and equitable cause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the company was allowed to continue under such directions as the court may consider proper to give. This was the genesis for the introduction of Section 153-C in the 1913 Act and Section 397 in the 1956 Act.

 The Law in new and old Act  give right to the members of a company  to apply to the court for relief provided under the Act or such other reliefs as may be suitable in the circumstances of the case, if  the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. The court then has power to make such orders as it thinks fit, if it comes to the conclusion that the afairs of the company are being conducted in a manner oppressive to any member or members and that winding up the company would unfairly prejudice such member or members, but that otherwise the facts might justify the making of a winding up order on the ground that it was just and equitable that the company should be  wound up. The law however, has not defined  what is oppression for purposes of this section,  and it is left to courts to decide on the facts of  each case whether there is such oppression.

 

The Supreme Court in this  precedence summaries the scope of section dealing with oppression and mismanagement as following:

 

  1. The oppression of which a petitioner complains must relate to the manner in which  the affairs of the company concerned are being conducted; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua share holders.
  2. It follows that the oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company’s affairs.
  • Although the facts relied on by the petitioner may appear to furnish grounds for the making of a winding up order under the ‘just and equitable’ rules, those facts must be relevant-to disclose also that the making of a winding up order would unfairly prejudice the minority members qua shareholders.
  1. Although the word ‘oppressive’ is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order,but where law provides alternative remedy by way of an appropriate order to the minority shareholders with a view to bring to an end the oppressive conduct of the majority.
  2. The power conferred on the Court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the Court in relation to be order sought by a complainer as the appropriate equitable alternative to a winding-up order.

 

 

The Supreme Court in the mentioned precedent concluded by observing that the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders depends upon the facts proved in a particular case. It is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company’s affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

 

iii. Oppression by Majority shareholders in the instant case:

 

The Tribunal analysed the Articles of Association of the Tata Sons Ltd and held that NCLT or Appellate Tribunal has no jurisdiction to hold any of the Articles illegal or arbitrary, the terms and conditions being agreed upon by the shareholders. However, if any action is taken even in accordance with law which is ‘prejudicial’ or ‘oppressive’ to any member or members or ‘prejudicial’ to the Company or ‘prejudicial’ to the public interest, the Tribunal can notice whether the facts would justify the winding up of the Company and in such case, if the Tribunal holds that it would unfairly prejudice member or members or public interest or interest of the Company, may pass appropriate order in terms of Section 242 of the Indian Companies Act, 2013.

 

In the instant case, all major decisions were taken in advance by the ‘Tata Trusts’ and for taking every decision, matters were to be placed before the ‘Tata Trusts’, in such case, independence of the Board of Directors of the Company becomes irrelevant. From the records of the consecutive chain of events provided,  the Tribunal holds that there is a clear case of ‘prejudicial’ and oppressive’ action by contesting Respondents to the interests of the company and its group companies i.e. ‘Tata Companies’ and winding up of the company would unfairly prejudice the members, but otherwise would justify a winding-up order on the ground that it was just and equitable that the company should be wound up and thereby, it is a fit case to pass order under Section 242 of the Companies Act, 2013.