Case Summary: Tata Consultancy Services Ltd. V. Cyrus Investments Pvt. Ltd.

• Case Title: Tata Consultancy Services Ltd. & Ors. V. Cyrus Investments Pvt. Ltd & Anr.
• Citation: 2021 9 SCC 449, Civil Appeal Nos. 4409–4410 of 2019
• Court: Supreme Court of India
• Bench: V. Ramasubramanian, A.S. Bopanna, S.A. Bobde.
• Date of Judgement: 26 March 2021
• Relevant Statutes/Key Provisions: 
• Companies Act, 2013

1. Section 241: Application to Tribunal for Relief in Case of Oppression and Mismanagement.
2. Section 242: Powers of Tribunal
3. Section 169: Removal of directors

• The challenged articles within the Articles of Association of Tata Sons Ltd.: 

1. Article 75: Allows the transfer of ordinary shares by special resolution without prior notice.
2. Article 86: Requires the presence of a Tata Trusts representative at general meetings if Tata Trusts collectively holds at least 40% of the company’s paid-up capital.
3. Article 104: Grants Tata Trust the right to nominate three ‘Trustee Nominated Directors.’
4. Article 118: Establishes a selection committee to recommend the appointment of the Chairman if Tata Trusts holds at least 40% of the paid-up equity capital.
5. Article 121: Mandates that decisions of the Board require affirmative consent from a majority of ‘Trustee Nominated Directors.’
6. Article 121-A: Requires the decision to be brought before the Board, where ‘Trustee Nominated Directors’ hold the majority.

• Principles of corporate governance

1. Business Judgement Rule: This rule is a legal presumption that while making business decisions, directors of a company act in good faith, on an informed basis, and in the company’s best interests. It also protects directors from legal liability for poor outcomes of business decisions if these conditions are met.
2. Based on the rationale that directors must be free to take commercial risks without fear of constant litigation in a risky business environment.

Introduction

The Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. verdict by the Supreme Court of India is a historic ruling that has profoundly influenced the Indian jurisprudence in terms of oppression and mismanagement, minority shareholder rights and judicial restraint in issues touching on corporate governance. The case decision not only makes it clear that the authority of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) under the Companies Act, 2013, but also serves to promote the idea that the courts should not intervene in commercial decision-making by corporate boards unless the statutory thresholds have been clearly passed

Brief Facts

The Tata Sons Ltd. is the main holding company of Tata Group which is one of the oldest and largest business conglomerates in India. The Executive Chairman of Tata Sons Ltd. successively replaced Mr. Ratan Tata with Mr. Cyrus Pallonji Mistry in December 2012. His appointment was considered to have been a generational change of leadership in the Tata Group. With time, there developed a disagreement between Mr. Mistry and the Board of Tata Sons on the business strategy, the issues of governance, and the legacy decisions. The Board of Tata Sons made a resolution on 24 October 2016 to oust Mr. Mistry as the Executive Chairman. He was later expelled as a Director in some of the Tata Group companies. Cyrus Investment Pvt. Ltd and Sterling Investment Corporation Pvt. Ltd. who collectively owned about 18.4% of the shareholding in Tata Sons, were aggrieved with such acts and petitioned before the National Company Law Tribunal (NCLT), Mumbai under Sections 241 and 242 of the Companies Act, 2013. The petition purported that the dismissal of Mr. Mistry was an act of minority shareholder oppression and mismanagement of the affairs of the company. The NCLT based on the pleadings and evidence rejected the petition because the acts alleged did not meet the statutory elements of oppression or mismanagement. The respondents were not satisfied with this decision, so they became the applicants of the National Company Law Appellate Tribunal (NCLAT). The NCLAT overturned that decision of the NCLT and determined that the dismissal of Mr. Mistry was oppressive was reinstated as Executive Chairman, and imposed conditions on the operations of Tata Sons under its Articles of Association, and granted several far-reaching reliefs to the management of the company. Tata Consultancy Services Ltd., Tata Sons Ltd. and other associated companies of the Tata Group went to the Supreme Court of India challenging the judgment of NCLAT.

Issues Involved

1. Whether the action by Tata Sons to oust Cyrus Mistry as the Executive Chairman and a Director of the company was a case of minority shareholding oppression under Section 241 of the Companies Act, 2013. The prejudice of the majority shareholders on the interest of the company or the shareholders. 
2. Whether the NCLAT was acting outside its jurisdiction by interfering with the internal management and governance of Tata Sons Ltd in regard to Section 242.
3. Whether this loss of confidence is a valid ground that can be sustained in law to have a Chairman or a Director removed.
4. Whether the Articles of Association of Tata Sons Ltd were oppressive or unfair to the minority shareholders.

Arguments

Cases presented on behalf of the Appellants (Tata Group Companies). The appellants argued that Mr. Mistry removal had been made in full compliance with the Articles of Association of Tata Sons Ltd. and requirements of the Companies Act, 2013. It was contended that removal of a Chairman or Director even without warning is not necessarily oppression unless it is demonstrated to be oppressive, burdensome and prejudiced against to minority shareholders. The appellants also presented that, NCLAT had exceeded its statutory authority in reinstating Mr. Mistry and restructuring the governance structure of Tata Sons. They underlined that the business judgement rule did not require courts and tribunals to intervene in commercial and managerial decision making. It was also argued that loss of confidence is a recognised principle in the corporate governance and that no company can be forced to retain a Chairman or a Director in whom the Board has lost trust. Arguments in support of the Respondents (Cyrus Investments Pvt. Ltd. and Anr.). The respondents claimed that Mr. Mistry was removed without any transparency, abruptly and without any reason and this was against the accepted principles of fair corporate governance. They argued that the majority shareholders behaved in a manner that seemed oppressive to the interests of the minorities and they took advantage of their superiority to marginalise Mr. Mistry. Arguing further, it was claimed that the Articles of Association of Tata Sons gave excessive power to the majority shareholders, which institutionalised oppression. The respondents defended the action of the NCLAT to intervene by citing the fact that these reliefs were needed to level fairness and balance in the firm.

Judgement

The Supreme Court permitted the appeals, reversed the determination of the NCLT, and reinstated the judgement of the NCLT dismissing the petition of oppression and mismanagement.

Legal Reasoning of the Court

The Supreme Court made a voluminous examination of the meaning of oppression under the Section 241 of Companies Act, 2013. The Court accepted that oppression has to be ongoing, cruel, and onerous, and expressed satisfaction with the judgement or a discharge of management is not an attempt at that. The Court insisted that a lack of confidence is one of the valid reasons why a Chairman or a Director may be removed, especially when the trust and compatibility with the Board are important in a company. It noted that tribunals are not in a position to force a firm to retain an individual in a top position when there is no mutual trust. The Court also determined that NCLAT had overstepped its mandate by reinstating Mr. Mistry and intervening in the running of Tata Sons without substantive legal reasons. Section 242 authority should be used sparingly in a rather remedial manner rather than a punitive one. In connection to Articles of Association, the Court ruled that, shareholders who are aware that they are binding themselves to the Articles of Association, cannot at a later stage claim that the Articles are oppressive, unless they are proved to be illegal or unconscionable

Ratio Decidendi 

Termination of Chairman or Director pursuant to the statutory provisions and Articles of Association does not constitute oppression or mismanagement as referred in Section 241 of the Companies Act, 2013, unless the conduct in question is recurrent, severe and prejudicial to the tiny shareholders or company interests. 

Obiter Dicta 

The Court provided significant remarks about the necessity of judicial restraint in the corporate governance affairs by warning tribunals that they must not replace their own opinion with that of corporate boards when it comes to making business decisions. It reiterated that commercial wisdom is not under tribunals regarding appellate review.

 Final Decision

The Supreme Court decision is that there was no oppression or mismanagement proved, and it returned the autonomy of Tata Sons Ltd. in its internal management. The appeals were admitted and the reliefs imposed by the NCLAT were quashed to the full. 

Conclusion

The case of Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. is one of the most authoritative case studies of corporate governance as far as the boundaries of judicial intervention are concerned. The ruling provides a delicate equilibrium between minority shareholder protection and corporate boards independence. The Supreme Court has given a much needed sense of certainty to corporate India by strengthening the business judgement rule and a clear understanding on what is covered under Section 241 and 242 of the Companies Act, 2013. The case remains a foundation piece on the company law and tribunal jurisdiction in modern India.

References

[1] Tata Consultancy Servs. Ltd. & Ors. v. Cyrus Inv. Pvt. Ltd. & Ors., (2021) 9 S.C.C. 449 (Ind.) (Supreme Ct. of India Mar. 26, 2021). https://indiankanoon.org/doc/5416696/.