TaxTMI 
TaxTMI 
2017 (4) TMI 1112
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.....S.V. Prakash Kumar, Member (Judicial) The Petitioners, Shapoorji Pallonji group, filed CA 26/2017 in CP 82/2016 seeking waiver of the qualification mandate set out in section 244{1) of the Companies Act 2013 (hereafter referred as "Act") to enable them to pursue their Petition filed u/s 241 of the Act on the ground that the interest of the Petitioners in Tata Sons Limited (Rl) is substantial, the issues raised in the Petition are more appropriate to be dealt with u/s 241 and the cause raised is substantial in importance to the Petitioners, to class of members, to the Company itself and to the Public. 2. The basic claim of the Petitioners is that they together hold 18.37% equity in Tata Sons and the affairs of the company have been/being conducted in a manner not only prejudicial and oppressive to them but also to the company and public on various grounds mentioned in the later part of this Order. 3. Though it is conventional to introduce the case with facts before discussing legal proposition involved, the petitioners counsel, to our perception, having slightly digressed from the legal proposition relevant to decide waiver plea, this Bench hereby discusses the legal proposition....
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.... provide for- (a) ......... (b) ......... Etc 244. Right to apply under section 241 (1) The following members of a company shall have the right to apply under section 241, namely: - (a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares; (b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members: Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241. Explanation -For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member. (2) Where any members of a company are entitled to make an application under subsection(l), any one ....
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....tioning party is accrued with subject matter jurisdiction available under the said section. If any case is taken on file short of facts revealing subject matter jurisdiction, then it could be like carrying a pot without any water in it and carrying baggage blindly transgressing the jurisdictional conferment given to the Tribunal. 6. We need not say that Tribunal shall be limited to the jurisdiction given to it, but there is a saying that sky is the limit to pass orders under sections 397 & 398 of the old Act, to make it true, one must show cause of action, then prima facie case and then pass proof test. It will get completeness for passing reliefs only after the Tribunal is of the opinion that case is made out under section 241 and such facts would justify the making of winding up order on just and equitable grounds and such winding up would be unfairly prejudicial to the member or members. May be it is easy to visualise an order under these sections, but to get such an order; one has to pass all the stages mentioned above. 7. The characteristic features of the sections 241,242 & 244: 1. Any member of a company complaining shall have 10% shareholding or not less than l/10th of m....
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.... or an act solely to cause harm to the petitioners. Here it is not the case, that the petitioners opposed to some acts in the past and those acts now causing injury to them. Let us see, how present perfect tense works by seeing the pictures below. This picture is taken out from some other source. The present perfect is used to discuss events that have just been completed at the moment of speaking: I have just finished homework: Image No. 1 Then next aspect is, the acts shown in present continuous, are the acts in progress. The only difference is, in the old Act, the oppression or prejudice in progress alone had been taken into consideration as affairs of the company mentioned in 397, now addition is the above three kinds covered under present perfect time. It does not mean that we can stretch the situations covered under present perfect to past and concluded actions. The actions closed shall not be raked up under section 241 of the Act. By reading these timelines, the complainant can complain the affairs of the Company where actions are in progress or actions finished which started sometime before, the actions just finished or the actions still having effect to the present. Exc....
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.... shareholder's own conduct is important, if relief is made with a motive to strangulate the company, then also no relief could be granted. Normally the decisions ot general body ol a company without aiming malafide at the complainant or other categories mentioned are never open for scrutiny, because ethos of democracy demands amenability to its decisions from its members. If the treatment by the management is restricted to situations involving inequality of treatment between shareholders, then it can be a cause of action for invoking section 241. Common law in England started applying this oppression remedy in small companies, quasi partnership companies, family companies and owner based companies, mostly private companies, reason is, in these companies, the minority cannot transfer their shares to outsiders and they cannot survive in the company by the oppressive actions of the management, as to family companies, mostly they make their livelihood and develop on those companies - therefore, since their roots are embedded in a closed company, they cannot go out; at the same time they can't suffer from oppression from inside; likewise in companies where two three friends com....
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....n to use their rights against Ebrahimi so as to force him out of the company and so it was just and equitable to wind it up. The company was wound up and Ebrahimi received his capital interest. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence^ this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' intere....
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.... courts will not interfere with internal management which runs on the principle of majority rule, which is well accepted in all spheres of contemporary world, unless the action is such which unfairly and oppressively erodes the economic interest of the member not privy to the management. This test is well set out in Needle Industries (India) Ltd and others v. Needle Industries Newey (India) Holding Ltd. and others ((1981) 3 SCC 333),in this case, facts are, one Devagnanam held meeting without serving notice in time, upon which it has been held that meeting is not illegal and the decision taken in such meeting may not be treated as non-est where no injury to proprietary rights has been caused to the aggrieved shareholders and it is said when articles of association confer power on the Board to appoint additional director, such appointment can be made even if it is not shown in agenda items (para 129,130,136,169 and 170 and para 116 & 117). The ratio evident is that it does not matter whether act is legal or illegal, what matters is as to whether proprietary interest of the aggrieved shareholders is effected or not. It has to be kept in mind that if any loss incidentally and in gene....
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....public interest now cannot be espoused, therefore if the material change is taken as ground to say public interest is prejudiced, then petition fails. 6. Unless the above conditions either under 241 (1) (a) or 241 (1) (b) are fulfilled, the member complaining cannot file a petition u/s 241 of the Act. 7. When we come to section 242, it speaks of the powers, but first part of the section speaks about what satisfaction is required to the Tribunal to make an opinion to pass orders. 8. To form an opinion u/s 242 by the Tribunal, two aspects party has to prove, one - it is invariable to prove that the acts complained in relation to the affairs of the company referred in section 241 shall be prejudicial or oppressive to the member or members or to public interest or to the interest of the company {notable change is category of class of members envisaged in section 241 (1) (b) is omitted), two - facts would justify the making of winding up order on just and equitable grounds, not only that such winding up thought would be unfairly prejudicial to such member or members. If all these conditions are fulfilled, then the Tribunal in its discretion "may" pass any order including reliefs u/s ....
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....ses whereas exception is applicable in all cases where facts fall within that exception. Here in this proviso, it is only said that the complainant can seek exemption from main enactment by filing an Application and on such Application, the Tribunal will exercise its judicial discretion whether to waive the qualification or not. When it comes to main enactment, it is mandatory on the members to have qualification to file an Application u/s 241, when it comes to proviso, the discretion is left to the Tribunal to see as to whether waiver can be granted or not. This qualification criteria is not only present in Indian enactment, it is there in Germany corporate jurisprudence as well, in every country one or other type of bar is manifest so as to prevent a litigation causing fetters to the functioning of company. 12. Any suit or for that matter any court proceeding, will have three stages; as soon as proceeding is initiated, courts will scrutiny it as to whether any cause of action is existing in petition, once petitioning party passes cause of action test, then that petitioner must present a prima facie case to avoid dismissal of the case or an unfavourable directed verdict. The peti....
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....shall adhere to natural justice in adjudication of matters. The reason behind this approach is to render speedy justice without getting stuck in the bottlenecks of procedural wrangles. Unfortunately, these petitioners want to jump the guns of cause of action test and prima facie test to reach out to merit test. But the Petitioners have mentioned the allegations of the Company Petition in a capsule form in the Waiver Application. 14. At the time of mentioning, the Petitioner's Counsel argued on Interim Reliefs, this Bench not being satisfied to pass any Interim Relief, has not granted any interim relief. Since the petitioners' side and respondents' side consented for directions to completion of pleadings, this matter was posted for main hearing with a direction to complete pleadings. It is how directions were given for completion of pleadings. Thereafter on the Petitioner's side moved a Contempt Application against the Respondents stating that the Respondents violated the orders dated 22.12.2016 passed by this Bench, on hearing that Application, this Bench dismissed the Contempt Application stating that no contempt has been made out in the said application. 15. On....
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....inated Directors. Under Article 121(a), certain decisions should be brought to the Board of Directors of Rl whereby majority of Trustees Nominated Directors could call the shots. Article 186 provides that so long as Tata Trusts collectively hold at least 40% of the paid up capital of Rl, no quorum shall be constituted in the General Meeting of the company unless at least one authorised representative jointly nominated by the Tata Trusts is present in the meeting. Article 104-B provides that so long as Tata Trusts collectively hold 40% of the paid up capital, Tata Trusts acting jointly shall have the right to nominate one third of the nominated Directors of the Board so also to remove any person so appointed and in his place, to appoint another person as Director. Article 118 provides that so long as Tata trusts collectively hold 40% of the paid up capital, a selection committee shall be constituted to recommend a person to the post of Chairman of the Board and the Board may appoint the person so recommended as Chairman of the Board. Now the allegation is the Trustees of Tata Trusts and its nominee Directors have not been exercising the powers as contained in the Articles in judici....
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....hese characteristics are present in the allegation, there cannot be any cause of action made out u/s 241. Therefore, this Bench has not noticed any cause of action for striking out these amended Articles from the Company's Constitution. In view of the reasons afore given, we have not found any facts constituting cause of action under section 241. II. The Petition highlights the concerns arising from $12billion Investment made by TSL at a substantial premium in Cora Group PLC, and the use of powers in relation to this investment. In respect to this allegation, the Petition says that R1 Company has 31.35% Shareholding in Tate Steel Limited (TSL). With that leverage, R2 in the year 2007 led the purchase of Corns Group PLC (referred as Corus) by TSL for a sum in excess of $12billion which was more than 33% of its original price, which eventually led Tata Steel go down by this purchase and ever since it has not been doing well. To revive the glory of Tata Steel, when Mr. Mistry (R11) initiated to merge this Tata Steel with Thyssen so as to rid Tata Steel from the financial sufferance, Mr Ratan Tata objected to the proposal causing loss to everybody including the Petitioners. By g....
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....oor of this nation with an installed capacity of 2,50,000 cars but the demand for this cars is only 3000 cars per year, by which, Tata Motors, once upon a time profit making company, has gone into losses consistently loosing Rs. 1000Crores, inspire of it, R2 for his emotional reasons has prevented R11 from taking crucial decision to shut down Nano Car Project. These Petitioners at least mentioned how many shares Tata Sons have in Tata Steel Limited in the earlier allegation, whereas in this allegation, it is not even mentioned how much shareholding R1 Company has in Tata Motors, it is not even mentioned that Tata Motors is subsidiary to R1 Company. In the back drop of these facts; this action cannot be called as the affair of R1 Company. Unless the allegation is an affair of R1 Company, it will not fall within four corners of Section 241, henceforth this Bench hereby holds that this allegation has not made out any cause of action. Without prejudice to the holding already given, we must make it clear unless time is along with us; we may not able to have achievement as expected. In this case, Tata group when came out with the idea of Nano, car market situation was different, compet....
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.... inter alia R-11, and the General Executive Committee formed by him (which pertinently was abruptly disbanded on 25th October, 2016 and had demanded a hike in the remuneration). The Petitioners believe that under the dictate of R2, the Board of Directors of R1 wrongly and illegally removed R11 as Executive Chairman of the Board on 24th October, 2016 to ensure that no legal steps are taken against Shiva (to whom shares were allotted in TTSL) by R1 or TTSL. The allegation of the Petitioners is that when R11 was about to take action against Shiva, R11 was unceremoniously removed as Chairman of R1 Company. Going by this averment, it is true that Article 118 is devised for appointment and removal of Chairman by recommendation of Selection Committee. By going through the Record, it appears that his removal happened not by the recommendation of the Selection Committee but by the Directors of the Board itself. However, by reading this Article, it is evident that Selection Committee shall comprise of (a) three persons nominated jointly by Sir Dorabji Tata Trust and Sir Ratan Tata Trust, who may or may not be Directors of the Company, (b) one person nominated by and from amongst the Board ....
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....tions present in Westbourne Galleries Ltd as stated above, not a company like Tata, whose network has been spread globally. For that reason alone, Lord Wilberforce started saying court interference is not right, but for the reasons mentioned above, Court interfered stating "that words are recognition of the fact that behind it, or amongst it, there are individuals, with rights and expectations and obligations inter se which are not necessarily submerged in the company structure". This ratio, according to Ebrahimi itself, is applicable in family companies, partnership based companies and owner based companies but not to companies like Tata Sons, which is completely institutionalised and professionally managed. Therefore, ratio applicable to partnership companies and family companies cannot be applied to R1 Company. In fact R11, had not been made as Chairman as of right on the ground the Petitioners have 18.37% equity Shareholding in the company. It had happened on selection. By virtue of a Selection, he had been taken as Chairman on employment. One thing always to be kept in mind is, section 241 is designed to remedy the grievance of the shareholders and shareholders alone. Therefor....
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....R2 and others constitute breach of SEBI Regulations on prohibition of insider trading by giving access to price sensitive information of the listed Tata Group Companies. It is purely an allegation relating to SEBI violation, if any such case is found in respect to insider trading, that has to be decided by SEBI not by this Tribunal. If at all SEBI decided that irregularities have been committed by the Respondents, then it is a point to be seen whether that will become a ground u/s 241 or not. At this stage, it is premature to raise such an allegation so as to victimize the answering Respondents and Rl Company, henceforth this point does not deserve to become cause of action u/s 241. VIII Another allegation is close relation of R2 with Shiva is purported to have been cause for leakage of Board Meeting discussions to Shiva, because in past also, R2did favour to Shiva at the expense of R1 in relation to Do Co Mo. On reading the Company Petition, the allegation noticed is that R2 caused issuance of 520 billion Shares of TTSL at the rate of Rs. 17 to a Company called Sterling for a throw away price of Rs. 884Crores and then issued TTSL shares to Singapore Company at a price of Rs. 26p....
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.... shadow Director or a man playing ghost role just because R11 was removed as Chairman of R1 Company. IX Actions in relation to immovable property of R1 (being a flat at Colaba) and awarding contracts of Tata power, intended to favour and benefit persons close to R2. The allegation is R2 pocketed Rs. 3crores come from MPCPL towards surrendering tenancy rights of the residential apartment that R2 used to reside in a building called Bakhtawar at Colaba, otherwise the money should have come to the company called FFC, which was at the time Tata Group Company. No details when it happened, no details as to whether R2 abused his position to do such thing, inspite of it, the petitioners have flagged Mr Tata, who made Tata $100billion conglomerate, with Rs. 3crore misappropriation without even mentioning when happened how happened, how Rl connected to it. It is their own case that FFC is today not a group company of TATA. This, we hold as an allegation without any cause of action u/s 241. X Another allegation is since Mr. Mehli Mistry was instrumental in helping R2 in buying an Agricultural land in 1993, R2 through Tata Companies bestowed various contracts upon Mr. Mehli and his Associate....
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....eeting held on 24thOctober, 2016, R-11 was removed as Chairman and thereafter the Summary Report of Deloitte was placed only in the month of November, 2016, in the said meeting, Air Asia was further funded despite there is a report concluding Air Asia had financial dealing with a Global Terrorist Mr. Hamid Reza Malakotipour. The Petitioners made all their efforts to target R2 by raising this allegation. But it is nowhere mentioned how R2 has been involved in all these transactions, that apart, since R11 himself was there all through from 2012 till before he was removed. Since R11 was there for almost five years, what prevented R11 to raise this issue either in the Board Meeting or in the General Meeting some time before he was terminated? This has become an issue for him only after he was removed as Chairman of R1 Company. R11 was a Director even before he became a Chairman, therefore, today this Petitioner could not make it as cause of action to target R2 without even placing any single document showing that R2 did something causing loss either to the company or to the Petitioners. By going through the averments of the Petition, there being neither a pleading nor a documentary mat....
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....he company, since they have 18.37% equity in the company, if equity alone is taken into consideration, they are far in excess of 10% in the shareholding and l/10th of the number also. 21. The counsel further submits that the issues having fallen within the ambit of section 241, no other court will have any jurisdiction except NCLT as envisaged under sec.430 of the Companies Act, 2013 therefore, in order to deal with these subject matters, the power of waiver ought to be applied to sub serve such purpose rather than defeat it. 22. The Counsel further submits while considering a waiver application, NCLT ought to consider the above issues as found in the case of the Petitioners and to determine by taking their case at its face value. It is not for the NCLT to go into discussion on the merits of such contentions, since to do so, would be a decision on the merits of the case whereas the NCLT at present is only to consider as to whether waiver plea is to be allowed or not. 23. The Counsel further submits that if the waiver application is sought to be rejected on the ground that it does not make out a case under sec.241, then, the only test to be applied for rejection at this stage wou....
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....By seeing the contents of the tenor of the Form, it is evident that it has to be filed along with the Petition but not after deciding the maintainability point taken up by the Respondent. The Counsel further submits that the waiver proviso cannot be interpreted in a manner so as to completely nullify the object of section 244(1). If waiver proviso is interpreted in an overbroad manner, then it would completely negate the requirement of section 244 and this would be akin to the proviso swallowing the principal section itself. The Legislative intention behind the objective threshold under sec. 244(1) is not only to weed out frivolous cases but even in other cases where substantial grievances may have been raised. The rationale behind this bar is to insulate the company from litigation by shareholders who do not meet the specified threshold. This waiver proviso could be invoked only in exceptional and compelling cases, he says, the Appellate Authority, for this reason alone held that a waiver may be granted only if "strong" grounds of waiver have been made out. 27. He relied upon three judgements Shri Raghuthilakathirtha Sreepadangalavaru Swamiji v. State of Mysore, AIR 1966 SC 1172)....
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....as to whether averments in the Petition has made out any cause of action to proceed with the said case under the respective section of law, thereafter it has to be seen whether any prima facie case has been made out to assess the probabilities of the petitioners succeeding if their averments and material thereto is not rebutted by the respondents, then it has to be seen whether there is any merit in the petition to grant the relief that the Petitioner has sought. There are three phases to be considered in the petition. (1) Cause of action test (2) prima facie case test and (3) merits (proof) test. The Petitioners to get their relief in the Company Petition, they have to pass through all these tests, wherever fail to pass the test, then there cannot be any chance for them to proceed any further. 30. We have already discussed all the allegations raised by the Petitioners to find out as to whether any cause of action is made out in any of the allegations raised by the Petitioner so as to invoke the jurisdiction under sec.241, but the misfortune is these Petitioners could not make out any cause of action in any of the allegations, as to this aspect, the Petitioners counsel or R11 coun....
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....y to the economic interest of the Petitioners, but it has not been mentioned as to what economic interest has been effected by the acts of the Respondents with respect to the affairs of the Respondent company. 33. This Bench cannot get into the details of the business decision taken by the Company because the company is the best judge to decide what decision is prudent to the company, normally the decisions taken in the General meeting will not be questioned by court, as long as fraud or malafide is not involved and not to self-serve themselves and not to defraud the Petitioners. It is not even the case of the Petitioners that the Respondents have done something so as to make gain to themselves depriving the Petitioners. Moreover, that kind of allegation could be made only when shareholders have not participated in the management decision, here R11 who is the face of the Petitioners group, continued as Chairman of this company from December, 2012 to October 2016. Had there been any decision that affected the interest of the petitioners or the company, what prevented R11 to make an issue when he was at the helm of affairs of the company. R2 who is targeted in this case, in his tenu....
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....ual control over the company and the differences are so irreconcilable causing extreme difficulty in working together which will raise vertical split in functioning of the company and also in a situation when the company fails to carry the business for the object and purpose for which it is meant or if the liabilities exceed assets causing losses consistently then also it could be said failure of substratum, which is also just and equitable situation for winding up. 36. So the Petitioners have to prove that affairs of the company have been or being conducted in a manner prejudicial or oppressive to the interest of the members or the company or the public interest and also to prove such act is just and equitable to wind up the company, then on seeing just and equitable ground for winding up, if such winding up would unfairly prejudice such member or members, then only this Tribunal can pass orders as it thinks fit. 37. In this case the petitioners at threshold itself failed to make out any cause of action to maintain the petition. 38. It is already decided that these Petitioners have no requisite qualification to maintain this petition. As to waiver, it is to be granted only rare....
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....Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction can be granted by any court or other authority in respect of any action taken or to be taken in pursuance of power conferred by or under this Act or any other Law for the time being in force, by the Tribunal or the Appellate Tribunal. 42. It is needless to say that Court can pass any order or decree unless jurisdiction is prohibited, whereas Tribunal can pass orders only when jurisdiction is conferred upon. For this reason, wherever legislature intended to confer this jurisdiction of this Tribunal, it has been explicitly mentioned to what extent it is conferred upon. The party if not in a position to make out case under this chapter, it is open to the party to approach Civil Court that is what has been said in section 430. Section 430 says as below: "430. Civil court not to have jurisdiction No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be w....
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....e running of the company on account of lack of probity in the management and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, a case for winding up may arise. However, in a given case, the principles of dissolution of partnership may apply if the apparent structure of the company is proved not to be the real structure and on piercing the veil it is found that in reality it is a partnership. Mr. Sundaram submitted that, in any event, the application of the just and equitable clause would depend upon the facts and circumstances of each case. A note of caution was also introduced that even admission of a petition could prejudice and cause immense injury to a company in the eyes of the investors, if ultimately the petition is dismissed. Mr. Sundaram urged that in a petition under Section 397/398 of the Companies Act, it was not always incumbent on the CLB to order the winding up of a company on the just and equitable principle, but in order to pass any order under Section 397, the Company Law Board would have to arrive at a specific finding that there was just and equitable reason to order such winding up." 46. Ultimately Hono....
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.....e., the complainant's personal interests are not uniquely and directly affected by the alleged wrongful conduct). 49. Looking at the scenario in England, the concern of the courts is more for the personal actions/shareholders actions, it is quite natural also, shareholders' actions will be the actions that speak about the proprietary rights of them, especially when the acts complained of solely to effect the economic interest of minority shareholders. In cases like this and more specially when the shareholders cannot get relief from any other forum, then we believe waiver is the window to ventilate their grievances in a cases like this, provided strong case is ex facie appearing on record. 50. If really, any such grievance were there to these petitioners, obviously it would become a ground for waiver and their point of substantial equity in the company would help them out, but their equity shareholding of 18.37% in the company on its own cannot become a ground for waiver. 51. Tests for invocation of reliefs keep changing from one situation to other, public interest and company interest are shown back seat as against members' interest, especially economic interest; p....