Law does not permit any relief to Mistrys once their case on oppression failed

The SC judgment rejected SP Group’s case on all counts.

By M P Ram Mohan

Related posts

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts

June 5, 2023

Why investing just to save tax may be bad for you

June 5, 2023

The judgment of the Supreme Court (SC) in the Tata-Mistry case brought the curtains down on one of the most keenly watched corporate disputes of recent times. Predictably enough, a petition has been filed by the losing party, the Shapoorji Pallonji Mistry Group (SP Group) seeking a ‘review’ of the SC judgment. An argument made by some commentators in favour of the review is that the SC judgment fell short of putting an end to the matter. The court should have decided on SP Group’s plea for separation/exit including the issue of fair valuation of SP Group’s stake in Tata Sons. This, it has been argued, was required to do ‘substantial justice’ even though SP Group failed to prove its case on oppression and mismanagement. This position on the SC judgment is erroneous and lacks legal foundation.

The plain language of the Companies Act, 2013 on oppression and mismanagement is quite clear. Section 242 of the Companies Act , which is the source of jurisdiction for grant of reliefs in matters of oppression and mismanagement, states, “If ……the Tribunal is of the opinion.. that the company‘s affairs have been or are being conducted in a manner prejudicial or oppressive to any member..… the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.”

The SC judgment rejected SP Group’s case on all counts. Once the court found no merits in the “matters complained of”, there was no occasion for the court to “bring an end” to those matters. The court’s power to grant appropriate relief under Section 242 of the Companies Act indisputably is of wide amplitude but “only if” oppression or mismanagement is proved. Otherwise, the court has “no jurisdiction to pass any order”. This has been clarified by the NCLAT in Upper India Steel Manufacturing case (2017).

To support the proposition, that the SC has powers to do substantial justice even when the case of oppression and mismanagement is not proved, a reference is made to an oft-misquoted observation of the SC in the Needle Industries case (1981). The SC had observed that “even if the [petitioner in the case] had failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them as nearly as it may in the same position in which they would have been…”.

A bare reading of this observation will show that it was made with reference to the specific facts of the Needle Industries case. It was not, and not intended to act as, a legal rule of general import and universal application in all cases. In Needle Industries, the foreign shareholders of an Indian company had complained of oppression on the grounds that the company’s board had resolved to issue rights shares at a meeting of which adequate notice was not given. The complaining shareholders had argued that the meeting was illegal and non-allotment of shares to them was an oppressive conduct. It was also their allegation that shares were issued to the Indian group at a price lower than the fair value and that this had unjustly enriched the Indian shareholder group. The SC, while finding merit in the allegations, ultimately concluded that the foreign shareholder group, even if they had full notice of the meeting, could not have asked for allotment of shares to them due to a legal bar that existed under the foreign exchange regulations of the RBI. So, the non-allotment of shares did not affect the complaining shareholders’ proprietary rights and hence, the charge of oppression failed.

However, the court acknowledged that the meeting was illegal, and the Indian shareholder group had unjustly benefited at the cost of the foreign shareholder group. The court also noted that in the course of earlier court proceedings, the Indian shareholder group had offered to purchase shares from the foreign shareholder group at a premium. It is within this factual matrix that the SC passed orders – on purchase of shares and valuation – to do substantial justice to the complaining shareholders even though their case on oppression had failed. An unequivocal finding of illegality and unjust enrichment which fell short of being oppressive and could not be corrected through the ordinary course of law prompted the SC to engage in efforts to do ‘substantial justice’.

In the Tata-Mistry case, there was no comparable set of facts as in the Needle Industries case to merit the same course of action. The SP Group had sought separation as an alternative ‘relief’ from the court on the grounds that (a) Tata Sons is effectively a partnership between the Tatas and the Mistry family, and (b) Tatas have oppressed the Mistrys, i.e., the minority partner. But the SC did not agree with either of these claims. There was thus no reason for the court to do substantial justice to SP Group when it was held, both in fact and in law, that no injustice was done to them in the first place.

On the issue of ‘exit’, the SC judgment has only mentioned that seeking separation -“a divorce without acrimony” – at the very outset would have been a wise decision for SP Group. The court rightly did not go into that question any further and left the exit options (which might be workable between the parties, either within or outside the framework of the company’s Articles of Association) to negotiations between the parties. The Supreme Court had before it a lis – an appeal. The court decided it on merits. Beyond this, the court could not have been expected to play the role of a deal maker.

(The author is associate professor, law and strategy at IIM-A. Views expressed are personal)