Companies

Why the NCLAT judgement reinstating Cyrus Mistry as Tata Sons Chairman may be challenged

PALAK SHAH Mumbai | Updated on December 19, 2019 Published on December 19, 2019

Ratan Tata and Cyrus Mistry(File photo)   -  VIVEK BENDRE

The National Company Law Appellate Tribunal (NCLAT) order reinstating Cyrus Mistry as Tata Sons Chairman and holding N Chandrasekaran's appointment as illegal may not stand up to legal scrutiny, top experts told BusinessLine.

The senior lawyers told BusinessLine that some inferences drawn by NCLAT, such as nominee directors allegedly acting on behalf of Tata Trusts (and thereby Ratan Tata), a press release issued after Mistry’s removal that was prejudicial to him, and inferences drawn in the appointment of N Chandrasekaran as Tata Sons Chairman were perverse in law.

None of the legal eagles cited in this analysis, however, were willing to speak on the record as they did not want relations with current and future clients to be affected.

Chandrasekaran appointment

A senior lawyer pointed out that the “removal of Mistry was a majority board decision”. Further, there is a view that Chandrasekaran’s appointment as chairman of Tata Sons cannot to be illegal merely by upholding the fact that Mistry’s removal was illegal. Both Mistry’s removal and Chandrasekaran’s appointment were separate legal procedures. Mistry was removed in October 2016 and Chandrasekaran took over the reins later, in February 2017.

The legal experts cited here feel that the NCLAT has drawn a simplistic conclusion in the matter, ignoring Chandrasekaran’s abilities and qualifications for the job. They point out that he had nothing to do with Mistry’s removal and was appointed via a separate process of the board, within the rules of the company.

Another point that is likely to be challenged in the Supreme Court, the legal eagles say, is that the NCLAT judgement went beyond its scope by ordering the reinstatement of Mistry as Chairman of Tata Sons, when that was not even in Mistry’s prayer to the tribunal.

Inference on nominee directors

Point number 23 on page number 13 of the NCLAT order says: “No legal opinion was taken by the Board of Directors (of Tata Sons) to determine whether the removal of the ‘Executive Chairman’ (Mistry) in such a hasty manner was in accordance with the Articles. Instead, the directors strangely, purported to act on opinions allegedly taken by the Trust shareholders.”

In its order, the NCLAT has noted that two nominee directors of Tata Trusts, Nitin Nohria and N A Soonawala, stepped out of a meeting, allegedly to take instructions from Ratan Tata on how to vote in the resolution on Mistry’s removal.

In point number 183 on page number 164, NCLAT has concluded that Mistry had made out a clear case of ‘prejudicial oppressive’ action by the respondents, including Ratan Tata, Nohria and Soonawala.

Majority ruling

The experts say a key fact that the NCLAT order ignores is that Mistry was removed by a “board majority”. Seven of the 9 members voted against him. Of the two who did not fall in that camp, one abstained, while the other was Mistry himself. The order, however, appears to infer that the entire Tata Sons board was acting in an “oppressive manner” and guided by the decision of the nominee directors, they said, casting doubts on the collective intelligence and integrity of the board, which comprised eminent personalities. Even assuming for the sake of argument that the decision to oust Mistry was illegal, the same should not be construed as vitiating subsequent decisions of the board and invalidating them, the lawyers said.

Nominee directors are individuals nominated by an institution, including banks and financial institutions, on the boards of companies where these institutions have some interest. This interest could be financial, loans or equity investments and could have a direct bearing on the profitability of the nominator. Nohria and Soonawala, the two nominee directors of Tata Trusts (where Ratan Tata is a key Trustee) were supposed to facilitate monitoring of operations and business of the investee company and take decisions that were not detrimental to Tata Trusts.

This legal position of the nominee directors and the majority rule of the board is something the NCLAT has ignored while making an inference in favour of Mistry, a senior legal counsel said.

The press release

NCLAT also held a press statement by Tata Sons as “prejudicial and oppressive”. Tata Sons had issued a press release after the ouster of Mistry, which, among other things, said: “Efforts are now being made to level accusations against individuals and company boards for ignoring corporate governance norms that were supposedly upheld by the former Chairman (Mistry) while in office. The Tata Sons board gives its Chairman complete autonomy to manage opportunities and challenges. However, the tenure of the former Chairman was marked by repeated departures from the culture and ethos of the group. The Tata Sons board, in its collective wisdom, took the decision to replace its Chairman in the manner undertaken. It is unforgivable that Mr. Mistry has attempted to besmirch the image of the Group in the eyes of the employees.” It made several such statements to show how Tata Trusts was concerned over the growing trust deficit with Mistry.

The NCLAT order, in point number 164, upheld the inference that the language in the press statement showed that the company and contesting respondents knew that the action taken was ‘prejudicial’ and ‘oppressive’ to the interests of various stakeholders. Experts say the legal argument here would be that the press statement was aimed at removing apprehensions that were being cast in the media and addressing the concerns about the group after Mistry’s ouster.

Why reinstate Mistry?

Surprisingly, by ordering that Mistry be reinstated as executive chairman of Tata Sons, NCLAT has granted relief that had never been sought by Mistry either before the NCLT or the NCLAT, the lawyers noted. The petition filed in the NCLT specifically states that the petitioners are not seeking the relief of reinstating Cyrus Mistry (Respondent No 11) as chairman.

Reliance on email exchanges

Another key point in NCLAT’s conclusion that Ratan Tata was interfering in the functioning of Tata Sons was drawn from over 550 email exchanges. “Over 550 emails were exchanged demonstrating the scale of interference,” the order stated. Such interference fostered a pattern of decision making that led to Board of 1st Respondent (Tata Sons) Company being undermined.

Legal experts say the email exchanges were nothing new to Tata Sons and Tata Trusts.

They opine that this could be shown to be a regular practice of continuous consultation between the shareholder and nominee directors and others and did not constitute interference. Such consultations may very well have existed in the past as well, they pointed out, but suddenly during the three years prior to Mistry's ouster, they were sought to be treated as tools of interference and oppression. If more emails from the past are produced to show that this was indeed the case, then it could again cast doubts on NCLAT’s inference that Ratan Tata’s interference led to the illegal ouster of Mistry, they concluded.

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Published on December 19, 2019
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