Authored by Prashant Mehta & Raghav Marwaha
In contemporary corporate governance, the primacy of corporate democracy is paramount. Section 244 of the Companies Act, 2013, and the Cyrus-TATA Judgment by the National Company Law Appellate Tribunal (NCLAT) stand as a crucial pillar in safeguarding shareholder rights against oppression and mismanagement. This article examines the nuances of Section 244 and its implications in addressing grievances of minority shareholders, while upholding the principles of corporate democracy.
Understanding Oppression and Mismanagement:
Chapter XVI of the Companies Act, comprising Sections 241 to 246, delineates the framework for preventing oppression and mismanagement within companies. Oppression pertains to actions detrimental to public interest, shareholders, or the company itself, while mismanagement concerns prejudicial conduct stemming from changes in shareholding.
Section 244 delineates the eligibility criteria for initiating proceedings under Sections 241 and 242. Notably, it grants the right to initiate such proceedings to a defined subset of shareholders, including minority shareholders, upon meeting specified conditions. Furthermore, Section 244(2) allows a single member to apply for redressal with the consent of remaining shareholders.
The Proviso to Section 244 introduces a critical dimension by permitting waiver applications, wherein shareholders can seek exemption from the stipulated conditions. This provision underscores the legislature’s commitment to safeguarding the interests of even the smallest shareholders, reaffirming the principle of corporate democracy.
The discretion bestowed upon the National Company Law Tribunal (NCLT) to grant waivers under Section 244 necessitates prudence to prevent potential misuse. The Cyrus-TATA Judgment lays down mandatory factors guiding the NCLT’s decision-making process, ensuring judicious exercise of discretion and safeguarding against abuse.
Section 244 of the Companies Act, 2013, along with the jurisprudence established by the Cyrus-TATA Judgment, embodies the legislative intent to foster corporate democracy and protect shareholder rights. By providing avenues for minority shareholders to seek redressal and imposing safeguards against misuse, these provisions strike a delicate balance between majority rule and minority protection. Upholding the principles of fairness, equity, and corporate governance, Section 244 serves as a cornerstone in ensuring a conducive environment for sustainable business practices and investor confidence.
Analysis of the Tata Cyrus Case
The issue arose in one of the biggest conglomerates of India- Tata Sons Ltd. – although a Private Limited Company, was essentially controlled by 2 conglomerates/business families of India – The TATA group (Respondents) and the Shapoorji Pallonji Group (Appellants)1. The Appellants were Cyrus Investments Pvt. Ltd. and the Remaining Shapoorji Pallonji members while the Respondents were the TATA Group, all its Companies, Trusts and individuals including Mr. Ratan N. Tata. The valuation of TATA Group was in the region of 6 lac crores out of which 1 lac crores was held by Shapoorji Pallonji group2. Upon retirement of the Executive Chairman, Mr. Ratan N. Tata, to fill in his big shoes, Mr. Cyrus Mistry was elected as the Executive Chairman. However, due to issues between the parties, Mr. Cyrus Mistry was ousted from chairmanship. It was alleged by the Appellants that the ouster was illegal, there was largescale interference from Mr. Ratan Tata (despite him having retired) from the affairs of the Company, amongst other allegations. As a result, a Petition under Section 241 was filed before NCLT, Mumbai Bench along with an Application for Waiver. The NCLT, however, dismissed the Application and by implication, the proposed Application.
Against the Order of the NCLT dated 17.04.2017, the Appellants preferred an Appeal before the NCLAT. So far as the point of dismissal of the Waiver Application was concerned, the NCLAT made some interesting observations:
Firstly, TATA Sons Ltd., in totality, had 51 shareholders. Out of the 51 shareholders, there were 8 Trusts, 9 subsidiary Companies & 18 individuals (of which Mr. Ratan N. Tata was also a part) all belonging to the TATA Group and 4 shareholders of Mr. Cyrus Mistry (being Sterling Investment Corp Ltd, Cyrus Investment Pvt. Ltd., Mr. Pallonji Shapoorji, Mr. Cyrus Pallonji Mistry).
Secondly, the shareholding of TATA Sons Pvt. Ltd. was quite peculiar. A large proportion of the shareholding was in the form of preference shares even though such shareholders do not have voting rights or involvement in the functioning of the Company, etc.3 Amongst the largest shareholders were Mr. Ratan N. Tata with 31.43% of shares and Mr. Narotam S. Sekhsaria with 17.01% shares. Thus, only these two individuals, individually, (out of the 51 shareholders) held the requisite shareholding to initiate proceedings under Section 241 of the Companies Act, 2013. This was one of the reasons why the NCLAT was pleased to waive off the conditions.
Further, while the Appellants could club with other shareholders to initiate proceedings under Section 241, but this was certainly not mandatory. Additionally, although the Appellants (two in number) held just 2.82% of the total share capital (Equity + Preference share capital), however, this was a rather misleading figure as the Appellants also held 18.37% equity share capital which afforded it various rights. The issue, as mentioned above, was a large and disproportionate amount of shareholding in Preference Share Capital. NCLT also waived off the conditions on this ground.
NCLAT also considered that of the value of 6 lacs crores, 1 lac crore was owned by the Appellants – which remained undisputed by the TATA Group.4
While waiving off these conditions, NCLAT also laid down factors by way of which every NCLT must decide an Application seeking waiver of the conditions filed under the Proviso to Section 244(1).
Factors for consideration for Waiver Applications by NCLT
The NCLAT made it clear that while deciding an application for waiver, it was not for the NCLT to go into an enquiry into the merits of the matter. The NCLAT stated the following 7 points which are dependent upon “merit”:
- Prima Facie enquiry: The NCLT cannot view the matter prima facie to see if a case is made out under Section 241. However, what the NCLAT failed to consider was that in a Waiver Application, the Applicant would disclose grounds as to why the mandatory conditions set out in Section 244 shall be dispensed with. These Applications, in practice, often discuss the merits of the matter. In fact, often in cases of mismanagement, it is the case of the Applicant that the shareholding of the Applicant went down due to fraudulent acts by other shareholder(s) which is also a ground seeking waiver of the conditions stipulated in Section 244. Thus, NCLT cannot decide the Waiver Application without viewing the Proposed Application in a prima facie manner. Thus, while the reasons for not viewing the matter in a prima facie manner are understandable but unfortunately, impracticable.
- Limitation: Since the question of limitation is a question of not only fact but also of law, thus, NCLT could not go into whether the Proposed Application under Section 241 was being filed within limitation or not.
- Allegations pertaining to the conduct of affairs of another Company: If from the Application it so appears that the allegations contained therein pertain to not only the said Company but also a third (related) company, it cannot also be considered by the NCLT while deciding the Application for waiver.
- Arbitration: There is no question of referring the matter to Arbitration (under Section 8 or Section 45 of the Arbitration & Conciliation Act, 1996) whether NCLT waives off the conditions of Section 244 or not. In fact, the NCLAT in Dhananjay Mishra vs. Dynatron Services Private Limited & Ors5 held that irregularities in a Company such as financial discrepancies, delayed or non-appointment of the Director of the Company etc. are disputes which, in any case, are not arbitrable and thus, fall specifically within the mandate of NCLT. Only disputes which refer to breach of the contractual obligations, that is, breach of contract matters are arbitrable.
- Directorial Complaint: It is not for the NCLT to see if the Petition seeking redressal against acts/omissions of oppression & mismanagement are in fact in the nature of Directorial Complaint.
- Conduct of the Applicant: Irrespective of the conduct of the Applicant, it cannot be gone into while deciding the Application for Waiver.
- Acquiescence/Waiver/Estoppel: Whether the proposed Application is barred by acquiescence, waiver or estoppel cannot be gone into by the NCLT while deciding the Application for Waiver.
Applicant(s) should be Member of the Company
For the NCLT to waive off the Conditions enumerated in Section 244, it is mandatory that the proposed Application is instituted by a member. Thus, it is essential to hold shares of the said Company. However, it has been noted that the fate of a legal heir who has inherited the shares of the deceased but had not been registered (in the register) in the name of such legal heir was not dealt with in the Judgement.6
Interestingly though, the NCLT permits the filing of the proposed Application on behalf of a deceased member when it is alleged that such death was caused due to the oppression and/or mismanagement by the other members of the Company. In Meena Anand vs. Lalit Mohan Bhardwaj & Ors7, in a peculiar set of circumstances the minority shareholders alleged that the death of the promoter (who later became the minority shareholder) was due to the oppressive acts of the majority shareholder. While the said matter was subsequently settled, however, neither the Respondents in the said matter nor the NCLT itself made any comment upon such facts thereby, indirectly laying down that even upon the death of a member/shareholder, his legal heirs were free to institute proceedings under Chapter XVI.
Thus, what is essential is that the person instituting the proposed Application must be a member on the date of filing of the Petition or must be someone who would become a member with time, in anticipation.8 However, past membership in the Company (which does not subsist at the time of filing of the proposed Application) does not qualify the member to file an Application under Section 241.9 This also makes another thing very clear – any individual acting in the interest of the Company or its members, cannot institute proceedings under Section 241 if he/she himself is not a member of the said Company. Even a miniscule amount of shareholding is enough for a member to institute proceedings under Chapter XVI of the Companies Act, 2013.10
Application filed under Section 241 of The Companies Act, 2013 should pertain to ‘Oppression & Mismanagement’
The NCLAT held that if the allegations in the proposed Application do not pertain to oppression and mismanagement, it is liable to be dismissed outrightly. This is to be done without going into the chance of success of such allegations against the concerned members or the Company.
The question that arises is, how would the NCLT determine whether the proposed Application filed under Section 241 of the Companies Act, 2013 pertains to instances of oppression and/or mismanagement within the Company? For this purpose, to form an opinion, the NCLT would have to go through the proposed Application to see if the Application even relates to oppression & mismanagement. However, on the other hand, the NCLAT has made it clear that while deciding the Application under Section 244, it cannot go into the merits of the matter or even view the matter in a prime facie manner. Keeping in mind that “prima facie” would mean “at the first sight”11. This may lead to a lot of confusion. This would be construed by litigants that any allegation, even bare enough to create a case of oppression and/or mismanagement should be enough to later arm-twist the Company and the majority shareholders to succumb to its demands out of sheer pressure. However, in practice, it does not happen so. At the first hearing, while considering the Application for Waiver, NCLT conducts a check of some sort to see if the allegations in the proposed Application even make sense. Even when the NCLAT postulates that the Application cannot be viewed in a prima-facie manner, the NCLT, consciously, unconsciously or without any other option, goes into the allegations, even if not so minutely, to satisfy itself of the requirements of Section 244 can be waived off.
In fact, practically as well, for the Tribunal deciding Application under Proviso to Section 244, it would be very difficult for it to detach itself from the proposed Application under Section 241 of the Companies Act, 2013 while deciding the Waiver Applications.
Subsequent acts of Oppression and Mismanagement
It is for the Tribunal to ensure that a prior Application making similar allegations of Oppression & Mismanagement, if already decided, the proposed Application filed consequently, should not be entertained. This would be because the issue of oppression & mismanagement already stands decided and there is no need for a re-enquiry into the matter. While it is essential to protect a company from multiplicity of proceedings12, however, the question that comes is:
- What if the shareholders, even after the conclusion of the Petition, indulge in practices of oppression and mismanagement again; or
- What if the shareholders of the Company indulge in acts of oppression and mismanagement which emerge because of the Order passed by the Tribunal in the preceding Application filed under Section 241 of the Companies Act, 2013?
While the Tribunal has failed to provide a clearer answer to this question, however, it can be sufficiently construed that in such cases, the principle of res judicata would not apply since these are acts afresh and different from the previous acts of oppression & mismanagement although against the members of the same Company.
Waiver off the conditions precedent under Proviso to section 244 of the companies act, 2013
The fourth and last factor maybe called a saving clause for the NCLT. In a wide area of waiver applications where there could multitude of reasons for waiver of the conditions set out in Section 244, the NCLAT caters to these extraneous reasons under the category of “exceptional circumstance”
In Meena Anand & Ors. Vs. Sh. Lalit Mohan Bhardwaj & Ors13 – NCLT, Allahabad on a waiver Application being filed by the Petitioners who owned a meagre 3.76% share capital in the company, Anand Nirog Dham Hospital Pvt. Ltd, the NCLT held that although the shareholding of the Applicants was way less than what was required under Section 244, however, on account of the following factors, it was pleased to allow the Application for waiver:
- The main Applicant was the first director of the Company and Applicant No. 2 was the promoter of the Company.
- The decision of the NCLT was also premised on the fact that the original shareholding of the Applicants individually was above 10% each and together, was over 20%. As per the allegations in the proposed Application the shareholding went down due to the alleged oppressive acts of the Respondents.
- Furthermore, the Applicants despite being minority shareholders, were the only two directors of the Company, Anand Nirog Dham Hospitals Pvt. Ltd.
In fact, in the Cyrus-TATA Judgement, the Tribunal waived off the conditions since the valuation of TATA Group was in the region of 6 lac crores out of which 1 lac crores was held by Cyrus Mistry’s group alone.14 Furthermore, although in percentages – the Appellants held only a meagre 2.82% of shareholding but this was because of peculiar shareholding of TATA sons whereby a large chunk of shares was in the form of Preference Shares (even though such shareholders had no right to vote, etc.). In terms of equity shares, the Appellants held shares of over 18%.
Another exceptional circumstance that NCLTs, throughout the Country, consider is that when mismanagement is claimed due to which the shareholding goes below the requisite 10% stipulated in Section 244 of the Companies Act, 2013. This means that due to the acts of the shareholders of the Company, there was a substantial decrease in the shareholding of the member that has led to the filing of the proposed Application under Sections 241 & 242 of the Act.
Conclusion, Analysis and Solutions
In the realm of corporate governance, the efficacy of legal provisions often encounters real-world challenges. Section 244 of the Companies Act, 2013, designed to curb frivolous litigation by shareholders, faces scrutiny due to its practical implications in addressing cases of oppression and mismanagement. This article delves into the intricacies surrounding Section 244 and proposes amendments to enhance its effectiveness while maintaining corporate democracy and investor confidence.
The National Company Law Tribunal (NCLT), entrusted with adjudicating corporate disputes, grapples with operational hurdles. Limited bench availability and prioritization of cases delay hearings, leaving matters unheard for extended periods. The sequential handling of cases, coupled with understaffing, exacerbates the backlog, rendering NCLT benches helpless in addressing oppression and mismanagement issues effectively.
The requirement for shareholders to maintain ownership at the time of filing poses a significant hurdle, potentially denying former shareholders recourse for past grievances. Drawing from UK law, allowing former shareholders to initiate proceedings would address this gap, ensuring that instances of oppression and mismanagement do not go unpunished.
Proposal for Amendment:
Given the operational constraints faced by NCLT, there is a compelling argument to amend or remove Section 244 from the Companies Act, 2013. Eliminating this provision, which necessitates waiver applications for shareholders with minimal holdings, could streamline proceedings. Instead, a stringent review process by NCLT could prevent the influx of frivolous claims while expediting legitimate cases.
Striking a delicate balance between oversight and investor confidence is paramount. Overly stringent measures may deter investment and tarnish economic sentiment, ultimately detrimental to all stakeholders. Therefore, any amendments to Section 244 must uphold corporate democracy while fostering a conducive environment for investment and growth.
In conclusion, the challenges surrounding Section 244 of the Companies Act, 2013, necessitate a reevaluation of its efficacy in addressing shareholder disputes. By acknowledging the practical constraints faced by NCLT and proposing pragmatic solutions, the legal framework can evolve to better serve its intended purpose. Balancing the interests of shareholders, corporate governance, and investor confidence is imperative in fostering a robust and equitable business environment.
1 Cyrus Investments Pvt. Ltd. vs. TATA Sons Ltd. & Ors., Company Appeal (AT) No. 254 of 2018
2 Ibid (n 6) Page 13
3 Ibid (n 5) Para 94
4 Ibid (n 7)
5 Company Appeal (AT) No. 389 of 2018
6 Verma, A., Puri, K., Sidhu M., ‘Decoding the Tribunal’s Power to Grant Waiver under Sec. 244 of the Companies Act, 2013’ (2020) 13 NUJS L Rev 1
7 Company Petition No. 162 of 2020
8 Ibid (n 10)
9Varottil U, ‘Minority Shareholder protection As a Numbers Game’ (BloombergQuint, 2017) <https://www.bloombergquint.com/law-and-policy/minority-shareholder-protection-as-a-numbers-game> accessed 29 January 2022
10 Manoj Bathla v. Vishwanah Bathla, C. A. (AT) No. 399 of 2018
11 R.S. Nayak vs. A.R. Antulay, AIR 1968 2045
12 Ibid (n 10)
13 Ibid (n 18)
14 Ibid (n 8)