Earlier this week, the National Company Law Appellate Tribunal issued its ruling in Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. on whether the Cyrus Mistry group’s action for oppression and mismanagement in respect of Tata Sons is maintainable.
Although the NCLAT ruled that the Mistry group’s petition did not meet the requirements of maintainability under section 244 of the Companies Act, 2013, it nevertheless exercised the power to grant a waiver. This allows the action to proceed on its merits before the National Company Law Tribunal. The ruling is an important one as it clarifies the threshold issues pertaining to the maintainability of an action for oppression and mismanagement, and the invocation of the waiver provision.
Readers may recall that late last year the Mistry group preferred a petition under sections 241, 242 and 242 of the Act against the Tata group, being the controlling shareholders of Tata Sons, the holding company that oversees the broader Tata stable of companies.
On 6 March 2017, the NCLT held that the Mistry group’s petition was not maintainable as it did not hold the minimum 10 percent shares required under section 244. The principal reason was that while the Mistry group held 18.37 percent of the equity shares in Tata Sons, that represented only 2.1 percent of the total share capital (including preference shares). Since the 10 percent requirement must be satisfied with reference to the the total “issued share capital of the company”, the Mistry group failed to demonstrate the locus standi to be able to initiate the action.
However, the Mistry group filed a separate petition before the NCLT seeking its indulgence in waiving the numerical threshold requirement (of 10 percent of the total issued share capital), which is a power available to the NCLT in the proviso to section 244 of the Act. On 17 April 2017, the NCLT rejected the Mistry Group’s waiver application, due to which the entire petition for oppression and mismanagement stood dismissed. It is against these orders that the Mistry group sought relief on appeal before the NCLAT.
The NCLAT bifurcated its consideration of the matter into two distinct but related questions. First, whether the petition preferred by the Mistry group is maintainable under sections 241, 242 and 244 of the Act. If not, secondly, whether the Mistry group has made out a case for a waiver under the proviso to section 244. The NCLAT considered each of these in turn.
61. It is also obvious on a bare reading of sections 241 and 244 of the 2013 Act, that while clause (a) and (b) of subsection (1) of section 241 deal with the subject matter of the grievances which can be raised in a petition, section 244(1) deals with locus/eligibility of the member who can raise such grievances. The subject matter of the complaint bears no connection with the eligibility of the member applying to the Tribunal except that a member seeking to make a grievance of the subject matter contained in section 241 is required to first satisfy the eligibility of section 244 of the 2013 Act.
63. No doubt, the parliament while re-enacting Section 398(2) of the Companies Act, 1956 as section 241(1)(b) has added the expression “…any class of members” at the end of section 241(1)(b) but this only enlarges the subject matter of the complaint which may be brought before Tribunal and does not alter the locus/eligibility of a member who can bring such compliant. The latter continues to be governed by section 244(1), a provision identical to the erstwhile section 399(1).
Can A Waiver Be Granted?
Here, the NCLAT elucidated at some length the parameters to be applied when considering a waiver application. The NCLAT was categorical in that it cannot deliberate on the merits of an oppression and mismanagement petition while deciding the threshold question of waiver. It noted:
145. For the aforesaid reasons we hold that the Tribunal while deciding an application for ‘waiver’ under proviso to sub-section (1) of section 244 to enable the members to apply under section 241 cannot decide the following issues: –
- Whether a prima facie case has been made or not
- Whether the petition is barred by limitation
- Whether it is a case of arbitration
- Whether allegation relates to/pertains to another company (third party)
- Whether the allegations are in the nature of directorial complaint
- Whether the applicants’ conduct disentitled them from seeking relief
- Whether the proposed application under section 241 is barred by acquiescence or waiver or estoppel
Here, the NCLAT set out a broader list of factors to be considered:
151. Normally, the following factors are required to be noticed by the Tribunal before forming its opinion as to whether the application merits ‘waiver’ of all or one or other requirement as specified in clauses (a) and (b) of sub-section (1) section 244:-
- Whether the applicants are member(s) of the company in question? If the answer is in negative, that is, the applicant(s) are not member(s), the application is to be rejected outright. Otherwise, the Tribunal will look into the next factor.
- Whether (proposed) application under section 241 pertains to ‘oppression and mismanagement’? If the Tribunal, on perusal of proposed application under section 241, forms opinion that the application does not relate to ‘oppression and mismanagement’ of the company or its members and/or is frivolous, it will reject the application for ‘waiver’. Otherwise, the Tribunal will proceed to notice the other factors.
- Whether similar allegation of ‘oppression and mismanagement’, was earlier made by any other member and stand decided and concluded?
- Whether there is an exceptional circumstance made out to grant ‘waiver’, so as to enable members to file application under section 241 etc.?
As carried bq on 25.9.17