Tata Mistry: Maintainability concluded, order reserved [Read entire summary]

Day 3 of the ‘final hearings’ finally put an end to the (prolonged) arguments on maintainability. The order on maintainability will be pronounced on March 6, and further arguments will continue on March 7..The oppression and mismanagement suit filed by Mistry’s investment entities against Tata Sons under Sections 241 & 244 of the Companies Act, 2013 (New Act), provides for a 10% threshold to maintain an application in this regard, just like the Companies Act, 1956 (Old Act)..All the proceedings so far in the Tata-Mistry battle, have been focused on one aspect alone i.e. of maintainability. On a bare reading, it may be said that proceedings under Section 241 can be initiated based on the qualifications that Section 244(1) provides..While the enabling Section i.e. 244(1)(a) puts the threshold at 10% or more of the ‘issued share capital’, Mistry’s investment entities hold 18.37% of the ‘equity share capital’ and merely ‘2.17%’ of the ‘issued share capital’. Thus, if one were to give a strict interpretation to the aforesaid provisions, this petition would be unmaintainable..While both sides are armed with heavyweights, Abhishek Manu Singhvi has done most of the arguing for Tata Sons and Aryama Sundaram for Mistry’s side..Most of the arguments on the final day of maintainability continued to be repetitive in nature, but there were some fresh arguments as well, presented from both sides. The arguments on maintainability throughout the proceedings can be summed up in the following five broad headings:.1. Interpretation of Sections in spirit of the New Act.Sundaram argues that the New Act has brought in a sea of changes compared to the Old Act and therefore, Sections 241 and 244 need to be interpreted in this new context of increased corporate governance standards..Also, inclusion of the term ‘class of members’ in Section 241(1)(b), which was missing in the erstwhile law, exhibits the legislature’s intent to expand the scope of these provisions from the Old Act..Singhvi, however, pointed out to the various (insignificant) changes brought into Section 244 of the New Act, which are a ‘distinction without a difference’. He further argued that proceedings under Section 241 get triggered only once (the qualifying) Section 244 opens the door for applying to Section 241 and not before; thereby dismissing the ‘class of members’ argument..He further argued that while there has been a ‘sea of changes’ in the New Law, the draftsmen voluntarily chose not to change the language of these sections in particular, demonstrating a clear intent to not depart from interpretation accorded to those sections so far..2. Addition of the term ‘class of members’ .Sundaram argued that Section 241(1)(b) of the New Act which speaks of ‘class of members’ be read into Section 244(1)(a) to allow 10% of a particular ‘class’ to apply; since a literal interpretation of the provisions would lead to absurdity inasmuch as a particular oppressed class would always not have the requisite 10%..Singhvi opposed this interpretation and once again reiterated that Section 244 is the gateway for entry into Section 241 and, that both are mutually exclusive of one another..Ravi Kadam had also pointed out, in this context, that if the ‘class of members’ reasoning as per Sundaram is valid, the 10% threshold would nonetheless be inapplicable and the entirety of the aggrieved class would have to come forward to maintain this suit and not 10% of that particular class..3. Preference and equity – two difference ‘class of members’.Sundaram argued that preference and equity are two different species of share capital and that the real control in fact lies with the ‘equity’ shareholders, thus preference share capital must be excluded from the term ‘issued share capital’..He further added that if a literal interpretation, as suggested by Singhvi, to the provisions is given, it would lead to ‘absurdity’ inasmuch as it would require 81% of the equity shareholders to maintain a suit of oppression and mismanagement, thereby defeating its very purpose. This would create an inequitable situation, argued Sundaram..Singhvi refuted by saying that if ‘issued share capital’ is read as ‘issued equity share capital’, it will amount to ‘redrafting of Section 244’. Case in point was again, Northern Projects, wherein it was held that issued share capital would comprise preference and equity both, which are enough to show the true meaning of the term ‘share capital’. Here, however, Sundaram pointed out that in this case law, the intention of the judiciary was in fact ‘to widen the net’, as should be done in the present case as well..Singhvi further referred to Section 236(1) of the New Act, that uses the term ‘issued equity share capital’. In this context, the legislature could have very well changed the wordings as suggested by Sundaram in Section 241(1)(a) as well, but not doing so shows a clear intent to not disturb that provision, or its meaning..Singhvi also referred to Section 48 of the New Act which provides for intra-class meetings and argued that if the intention was to treat preference shareholders any differently, the draftsmen would have done so as they have in several other provisions..4. Preference shares – a ‘debt’.To demonstrate the true meaning of the ‘preference shares’ in the present context, Sundaram referred to Rule 32 of the Indian Accounting Standard (IAS), as per which preference shares are treated as debt unless they are compulsorily convertible; fortifying the previous argument of this being a separate class altogether..Singhvi, however, refuted this on two grounds; firstly, that IAS cannot override the interpretation of the Section itself and secondly, that the IAS rules don’t apply Non Banking Finance Companies, which Tata Sons is..5. Section 244 – mandatory or directory?.Another argument of Sundaram was that the existence of a waiver clause in Section 244, ipso facto, makes it a directory provision and not a mandatory one..Singhvi argued that Sundaram’s argument on 244 being a directory provision is based on an ‘inarticulate premise’ and that, the very existence of waiver clause proves that Section 244 is a mandatory provision; a waiver wouldn’t be required if it wasn’t mandatory..Appearing on behalf of Mistry, Janak Dwarkadas once again presented alternate arguments in the event Singhvi’s submissions were admitted..He added that the very sections referred to by Singhvi for presenting before the Bench, need to be relooked. The meaning of the term ‘issued share capital’ under Section 2(50) in fact (like every other definition) has a precursor to it, which says that ‘unless the context otherwise requires’ and that ‘issued capital’ has been defined as ‘such capital’ as the company issued from time to time for subscription; a definition which was absent in the Old Act..He also said that the definition of a ‘member’ which Singhvi relied on has to be read along with Section 88 of the New Act which recognises equity and preference shares as a ‘separate’ class..Singhvi however, dismissed this interpretation by arguing that a need for fresh interpretation isn’t required since the context hasn’t changed..After having heard arguments on maintainability for three long days, whether or not Mistry’s petition will be held maintainable depends on the interpretation which the Bench will chose, Singhvi’s or Sundaram’s. Needless to add, an order on maintainability will determine the future course of arguments.