#TataMistry: Day 2, arguments on ‘maintainability’ bounce back and forth at the NCLT

Day two of the final hearing of the oppression and mismanagement suit filed by Cyrus Mistry’s investment entities against Tata Sons and others, much like most hearings so far, continued to be about maintainability..The suit so filed, after bouncing back to the National Company Law Tribunal (NCLT) from NCLAT, was due to be heard for final hearings on the 13th and 14th February for Mistry’s arguments and 20th and 21st for Tata’s arguments..It is pertinent here to note the part of the NCLAT order which has been, to a certain extent, the cause of chaos at NCLT..“……However, we are of the opinion that during the final hearing the question of maintainability should be decided first and if it is answered in negative, against the appellants, the question of waiver of the petition be decided if any strong ground has been made out to claim exception under proviso to sub section (1) of Section 244. In case, aforesaid issues are decided in favour of the appellants, then the Tribunal can decide the case on merit.”.While it was agreed between both sides that maintainability and waiver will be heard consecutively for a combined order, the course of arguments was later changed and waiver wasn’t argued at all. Presumably, arguments on waiver before passing an order on maintainability would amount to a violation of the NCLAT order..Dozens of case laws were presented from both sides to strengthen their arguments..While Aryama Sundaram’s arguments largely focused on segregating the various classes of shareholders viz. the equity from the preference, Janak Dwarkadas segued into an alternative argument in the event the Bench does not appreciate Sundaram’s argument of segregation..The crux of their arguments, however, can be best summed up in the example presented by Dwarkadas: if a company has 90% preference shareholding and only 10% equity shareholding, it is virtually impossible for even 99% of the real ‘controllers’ (equity shareholders) to bring about a suit of oppression and mismanagement, if a strict interpretation is given to the Section 244(1)(b) of the Companies Act, 2013 (New Act)..The ‘absurdity’ that it will lead to is what calls for a liberal construction of the term ‘share capital’ and, the inclusion of a ‘class of members’ as a ‘new’ category gives them the right to apply..Refuting the above reasoning provided by Sundaram and Dwarkadas, Abhishek Singhvi argued that Sections 241 and 244 of the New Act have a “remarkable reciprocal harmony”, which is being curtailed, and that the case of Northern Projects Ltd. Vs. Blue Coast Hotels and Resorts Ltd. is by itself sufficient to interpret the true meaning of the term ‘share capital’- to include both equity and preference..Also going against the change in intent brought about by the New Act, Singhvi continued to say that Section 244 of the New Act is pari materia to Section 399 of the Companies Act, 1956 (Old Act) except that the term ‘provided that’ under Section 399 has been changed to ‘subject to’ under Section 244..While arguments will now continue on February 20, The NCLT now has to broadly answer the following to conclude on the issue of maintainability :.(1) Does the 10% filter provided for under Section 244 of the New Act mean that the NCLT has ‘no jurisdiction’ to allow an application by persons holding less than 10% or, if it simply ‘bars that jurisdiction’?.(2) Whether the eligibility criteria (10%) stipulated under Section 244 of the New Act determines right to apply, or is it the cause of action under Section 241 that determines this right?.(3) Are the corresponding provisions of the New Act pari materia with that of the Old Act in this regard?.(4) The intention of the legislature behind the inclusion of the term ‘class of members’ in Section 241 (1)(b), and whether the 10% stipulation applies intra that particular class? Does the entire class have to be aggrieved to be able to maintain a suit?. Read Day 1 arguments on maintainability here.