Relief under Section 242 Companies Act: Taking forward the discussion in the Tata-Mistry case

As if reflecting the democratic sentiment of the nation, corporate democracy swerves to the wills of the majority. Sections 241 and 242 of Companies Act, 2013 intends to act as a fulcrum to balance the interests of minority shareholders with those of majority shareholders in the corporate democracy.

Section 241 allows any member of a company to file a petition before the National Company Law Tribunal (NCLT) if the company’s affairs are being conducted in a manner that is prejudicial, oppressive or such that it amounts to mismanagement. Likewise, Section 242 confers wide powers upon the NCLT to deal with applications made under Section 241 and to grant specific reliefs with a view to bring an end to disputes.

In this write-up, the limitations that prevent the Tribunal from granting reliefs in cases of oppression and mismanagement are exhaustively discussed.

As per Section 242(1)(a), in order to avail any remedy under Section 242, it is not sufficient to prove that the alleged wrongdoing is an act of oppression, mismanagement or unfair prejudice under the former provision; the applicant has to additionally establish that the wrongdoing is of a nature that it is ‘just and equitable’ to wind up the company and that the only reason the Tribunal should not wind up is that it would unfairly prejudice the company’ or members or a part of them. This burden of proof is on the petitioning minority shareholder and the authors believe that the standard of proof is indeed a high one to meet.

This threshold was anyway high before the ruling of the Supreme Court of India in TATA Consultancy Services v. Cyrus Investments (TATA-Mistry). For instance, the courts have highlighted before that for winding up, there must be a justifiable lack of confidence in the conduct and management of the company’s affairs and that only when these conditions are violated consistently and deliberately that it may be just and equitable to wind up the company.

The threshold became even higher to meet when in the TATA-Mistry case, the Supreme Court said that the profile of the shareholders - here large charitable Tata Trusts - who would be affected by the order must also be kept in mind and that courts cannot find it just and equitable to wind up the company even if all other requirements are satisfied, if this would have impact on the public-spirited shareholder constituency.

This high ‘just and equitable standard’ limits the scope of remedies under Section 242(2). This is in contrast to jurisdictions such as the United Kingdom, where just and equitable winding up is not a condition precedent to claiming relief in similar cases. Hence, the second condition should be removed to widen the scope of the remedy and TATA-Mistry serves as a crucial reminder for this amendment.

Another limitation on the Tribunal’s exercise of powers, as observed in Shanti Prasad v. Union of India, is that there must exist a nexus between the order that may be passed by the Tribunal and the object sought to be achieved by the passing an order for relief, whereby such objective is to bring to an end the matter complained of.

The same view has been affirmed, even more loudly, in the TATA-Mistry case. The Court overturned various reliefs, such as that of the reinstatement of Cyrus Mistry as the director of the Tata group, granted by the National Company Law Appellate Tribunal (NCLAT), on the ground that it won’t bring to an end the matter complained of.

Another restriction is that the relief that a Tribunal can grant should be within the boundary of what is permitted by other laws, such as contract law.

This point was reaffirmed in TATA-Mistry. The Court, whilst overturning the NCLAT ruling and allowing for the reinstatement of Cyrus Mistry as a director, clarified that such an order of reinstatement would violate other law such as the Specific Relief Act, 1963 (SRA). This is because the contract of employment as director is a contract dependent on personal qualifications and such a contract of personal services is not specifically enforceable under Section 14 of SRA.

Now, while this kind of restriction on the Tribunal’s relief granting power may appear to be too natural to even mention, we wish to point out that there have been cases in which this basic point of restriction has been overlooked. For instance, in Vikram Bakshi v. Connaught Plaza Restaurants Ltd., the NCLT restored the status of the applicant as the managing director of the company in exercise of its powers under Section 242 even though it meant ordering for specific performance of a personal service contract.

Hence, an explicit reaffirmation of this kind of restriction in TATA-Mistry is an important step in relation to the jurisprudence of §242.

Another (debatable) restriction is that the Tribunal can grant relief under Section 242 only with respect to the violation of corporate membership rights and not individual membership rights.

Individual membership rights pertain to such rights which a member can assert in their own capacity without the sanction of the majority or without impleading the company as a co-plaintiff or defendant under Sections 241-242. Corporate membership rights refer to such rights which the shareholder can assert only in conformity with the decision of the majority of the shareholders, and is subject to the will of the majority.

In cases such as Mohan Singh v. Shivam Communications Pvt Ltd, it was observed that only grievances relating to one's rights relating to corporate membership (and not individual membership rights) could be agitated before the Tribunal. Likewise, it follows that even contractual rights would not be enforceable under Section 242.

However, these observations are contested. In Surya Estate v. Satish Kumar Bharti, the Company Law Board observed that there was nothing on record to show that membership of the company and entitlement to flats, as contested by the parties, would go hand-in-hand, and hence, relief under Section 242 is not available. However, the Delhi High Court overturned this verdict and opined that even if there may be no nexus between the status of being a shareholder and entitlement to space in the building, it would not make any difference to the burdensome, harsh and wrongful conduct of the company. Thereby, it may be interpreted that relief can be granted if an application is filed for oppression or mismanagement even in relation to violation of contractual rights. The court may grant relief under Section 242 even if the oppressive conduct is not emanating from corporate membership rights of the shareholder.

Therefore, even though the wordings of the sections contemplate that a petition for relief under Section 242 lies in respect of any violation to the interests of the company or interests of the member, the Delhi High Court ruling seems to provide for a gateway for a petitioner to plead for relief under Section 242 in instances wherein his rights as a member are per se not affected.

The Supreme Court in Usha Ananthasubramanian v. Union of India has held that the powers of the Tribunal under §241-242 can only be exercised in relation to the company whose affairs are the subject matter of the proceedings, and not in relation to the affairs of another company. Hence, the powers under Sections 241-242 cannot be utilised to rope in, say for attachment of their assets, a person who may be the head of some other organisation.

The above limitation on the exercise of powers under Section 242 has been followed in TATA-Mistry as well. The Court observed that the NCLAT had exceeded its powers in reinstating Cyrus Mistry not only on the Board of Tata Sons but also on the Board of the Tata Group companies even though the latter are not parties to the case. This is an interesting observation to make, especially in cases where conglomerates involving cross-holdings and inter-relationships are involved.

In addition to the above, there are other restrictions as well. For instance, in light of the nature of the Tribunal’s proceedings, reliefs requiring an elaborate evidentiary analysis (such as cases of fraud, forgery, fabrication of records) are to be dealt with by the civil courts, and not by the Tribunal using Sections 241-242.

Likewise, where remedies of preventive and punitive nature are provided in the statute itself, an aggrievement in those respects would not ordinarily constitute a ground for resorting to reliefs and remedies for prevention of oppression and mismanagement.

Similarly, decisions falling in the domain of the board’s affairs and relating to management or day-to-day affairs of the company lie outside the jurisdiction of the Tribunal under Section 242. Applications seeking plural remedies, which are inconsequential to one another, also cannot be entertained for grant of relief under Sections 241-242.

Scholars such as Dr Umakanth Varottil have opined that the Supreme Court has not done what was expected of it in developing or clarifying the jurisprudence regarding the substantive provisions relating to oppression and mismanagement in TATA-Mistry. That being said, the authors conclude that the contribution of the TATA-Mistry case to highlighting the scope of the relief that the Tribunal can grant, and most importantly the one that it cannot grant, is a notable one.

Priya Garg is an Assistant Lecturer at Jindal Global University, Visiting Faculty at NALSAR and Founding Trustee at The Corporate House. Eeshan Mohapatra is a student research fellow and law student at NALSAR, Hyderabad. Pravi Jain is a student research fellow and law student at NLIU, Bhopal.

Disclaimer: The views and opinions expressed in this article are those of the authors' and do not necessarily reflect the views of Bar & Bench.