Tata-Mistry Dispute: Five Key Arguments At Company Law Tribunal

Tata Vs Mistry: What to expect in round two 

The National Company Law Tribunal will commence the final hearing on a petition filed by two Cyrus Mistry family companies against Tata Sons Ltd. and its directors on January 31. Mistry had moved the tribunal over his ouster as the chairman of Tata Sons on October 24, 2016.

The petition, filed under Sections 241, 242 and 244 of the Companies Act 2013, alleges oppression and mismanagement by the board of Tata Sons. Here are some of Mistry’s main contentions and the responses filed by Tata Sons in its affidavit.

The Threshold Dilemma

A key point on which the maintainability of the suit may depend is the percentage of Tata Sons’ shares the two Mistry companies hold. According to the Companies Act, a shareholder must own at least one-tenth of the issued share capital of a company to file a suit of oppression or mismanagement.

The Mistry petition relies on the fact that the two companies that are party to the suit together hold 18.7 percent of equity shares in Tata Sons. The Tatas disagree. Tata Sons has argued that the issued share capital includes issued equity capital and issued preference capital; and according to this calculation, the two Mistry companies hold less than 3 percent of the issued share capital.

The tribunal will have to decide whether the issued preference capital is to be considered or not. If it agrees with the Tata’s contention, the Mistry petition may not stand. The tribunal, however, has discretionary powers to waive the threshold -- which aims to prevent frivolous litigation -- if it finds that the petition is in the interest of justice and equity.

Influence Of Tata Trusts

The Mistry petition claims that changes to the articles of association (AoA) of Tata Sons in 2012 gave Tata Trusts-appointed directors more powers in the appointment and removal of the company’s chairman. As a result, Tata Trusts dominated the board of Tata Sons, and Trust-nominated directors merely acted on the instructions of those calling the shots at Tata Trusts, the petition says.

Before the AoA were amended, the selection committee for the chairman comprised five board members of Tata Sons – including two named by the Trusts, an independent director and two other directors. The amendment changed the structure to three Trust-appointed directors, one independent director and one other director of Tata Sons.

Tata Sons calls the accusation “wanton and misconceived” and that it portrays the board and management of Tata Group’s holding company as mere “yes men” of Ratan Tata. The Tatas have asked Mistry to explain why he chose to question the amendment four years after it was made, and only after his removal as executive chairman of Tata Sons. The Tatas ask why Mistry never brought up the alleged oppression and mismanagement earlier and if the state of affairs were indeed so dire, he was duty-bound to bring it to the notice of the Tata Sons board.

Lord Bhattacharya And Corus

The Mistry petition draws attention to Lord Kumar Bhattacharya, a close friend of Ratan Tata, and his remarks to the House of Lords and the U.K. media about investment commitments on behalf of “certain” Tata companies of which he wasn’t a director. The petition mentions Lord Bhattacharya’s speech in Parliament claiming credit for advising and influencing Ratan Tata into purchasing the ailing U.K. steel major Corus at a premium. The acquisition put a “huge strain on resources” of Tata Steel Ltd. and Tata Sons, the petition says.

The Tatas say that it was Mistry who had approached Lord Bhattacharya, despite being fully aware of his speech at the House of Lords, to “deliberate and discuss matters concerning the Tata group in Europe including the discussions to shut down Tata Steel operations in the U.K.” Given these circumstances, neither Mistry nor his two holding companies can point a finger at Lord Bhattacharya, says Tata Sons.

Mehli Mistry And Tata Power

Cyrus Mistry’s petition refers to a number of contracts awarded to his cousin Mehli Mistry’s firm M Pallonji & Co., allegedly without following due process.

The petition alleges that dredging contracts were awarded to M Pallonji by Tata Power Company Ltd. in 1995 even though Mehli’s company had no prior experience in the area. The petition says that the contract was renewed in 2002 without any formal bidding. Among other allegations of undue favours to Mehli, the petition cites use of the company helicopter.

Stating that the matter relates to the past, the Tatas claimed the transactions were with Tata Power, and had nothing to do with Tata Sons. Besides being barred by the law of limitations, it cannot constitute mismanagement, Tata Sons said.

Irregularities At AirAsia India

Tata Sons had picked up a 41 percent stake in AirAsia India Private Ltd. in 2013. The Mistry petition cites emails sent by Tata Sons legal counsel Bharat Vasani about large-scale irregularities dating back to 2014. Vasani was on the board of AirAsia India, and had resigned in 2015.

In the petition, Mistry says that he had received e-mails from Vasani in 2014 alleging irregularities in the leasing of aircraft and that he was not given enough time to vet the process.

In 2015, Vasani had written to AirAsia India’s chief executive officer and chief financial officer pointing out complete lack of regulatory compliance, and had recommended that no more money be released to AirAsia India until the issue was resolved. But a sum of $7 million was paid to the company, the Mistry petition says.

The petition has also made references to emails sent by Vasani to AirAsia India’s management on other issues ranging from a delay in filling the company’s accounts in 2014 to misrepresentation of losses to Tata Sons and foreign exchange violations. There is also a reference to fraudulent transaction amounting to Rs 22 crore entered into by the airline’s former CEO, according to a forensic report by Deloitte. The Mistry petition alleges these transactions were routed via hawala.

Tata Sons does not deny the irregularities, but rejects the assertion that no action was taken. It has offered to submit the Deloitte report to the tribunal in a sealed cover and said a first information report (FIR) has been registered against all the accused. Tata Sons termed the hawala allegation fraudulent and fabricated.

Tata Teleservices And Sivasankaran

The Mistry petition alleges irregularities in extending loans to Chennai-based entrepreneur C Sivasankaran, and claims that the loans led to losses at Tata Capital Ltd. The petition alleges that Tata Capital was forced to lend Rs 200 crore against a security of Rs 6 crore worth of Tata Teleservices Ltd. (TTSL) shares. The petition also seeks a forensic audit of transactions between TTSL, Sivasankaran and Ratan Tata.

The Tatas argue that the forensic audit cannot be granted as it pertains to entities which aren’t subject matters of the petition.