#TataMistry: Why was the waiver rejected? Read NCLT’s order

The Mumbai Bench of NCLT has come out with it’s 48 page order detailing the reasons for dismissing Mistry’s waiver application to pursue the case of oppression and mismanagement against Tata Sons..After months of battling it out at the NCLT, last week NCLT dismissed Mistry’s company petition and waiver application filed against Tata Sons and others..The company petition was filed under sections 241 and 244 of the Companies Act, 2013 (Act) seeking relief under section 242..The order, inter alia, discusses at length the three stages of any suit or court proceedings,.cause of action→prima facie case→proof/ merit test.And in this case,.“Unfortunately, these petitioners want to jump the guns of cause of action test and prima facie test to reach out to merit test”.However,.“The misfortune is these Petitioners could not make out any cause of action in any of the allegations”.Even while dismissing the ‘waiver’ application‘, the Bench has undoubtedly gone into the merits of the petition to express how there exists no cause of action in any of the ‘alleged’ acts of oppression and mismanagement..The order, at the very outset seeks to establish the principles on the basis of which any oppression/mismanagement suit should be filed, and the lack of key ingredients in the instant case, thereof..The Bench observes that the purpose of sections 241-244 is not for passing ‘declaratory reliefs’ by ruling on the validity of any particular action. Rather, the purpose is to prevent ‘oppression or mismanagement’ that results from unfairly conducting the affairs of the company, ‘regardless of its legality’..Agreeing with arguments advanced by Abhishek Manu Singhvi and Ravi Kadam with regards to the exceptional nature of a ‘proviso’ and its inability to have any overriding effect on the main enactment, the Bench notes,.“Majority is always a rule, it is equally or more important to ensure that in the obsession of prevention of oppression and mismanagement, the salient features of majority rule are not obliterated.”.The Bench further discusses the ‘characteristic features’ of sections 241, 242 & 244..Apart from the more patent ingredients, it must be kept in mind that an application in this regard should be in relation to the ‘affairs of the company’ and not any other company from which the petitioner derives qualification..The Bench further observed the court’s role in trying to strike a balance between excessive interference on the one hand and protection of minority shareholder rights on the other. In this regard, the Bench referred to the judgment of Needle Industries (India) Ltd and others v. Needle Industries Newey (India) Holding Ltd. and others, where it was held that it does not matter whether act is legal or illegal, what matters is as to whether proprietary interest of the aggrieved shareholders is affected or not. Majority rule cannot be obliterated on the ground some business is doing losses..Another ingredient that needs to be looked into while considering an application filed u/s 241 is if any material change in the management by alteration of the Board, is likely to have a prejudicial affect in the affairs of the company..As per Section 241(1)(a), this prejudice to ‘class of members’ gets triggered only when action is aimed to cause discrimination to a class of members and such discrimination is potential. Dismissing Sundaram’s ‘class of member’ argument, the Bench notes,.“It can’t be canvassed by a group out of a class saying that their group being separate they have to be treated as separate class out of class and apply class prejudice to grant relief.”.And for relief u/s 242 by the Tribunal,.Acts complained shall be prejudicial or oppressive either to i) members or ii) public interest or iii) company (this section notably removes the ‘class of members’ category’) and;Facts should justify the making of winding up order on just and equitable grounds..So why are the petitioners not oppressed here?.According to the Bench, oppression remedy will trigger into action to prevent the decisions taken in the company adversely affecting the interest of the shareholders who have “no chance to participate in the board or to have their say carry some effect in the company.”.This action cannot be turned against the management “which until yesterday decided every issue in relation to the affairs of the company.”.So when can a waiver be granted?.In cases where, by the alleged act of oppression, the shareholding of the petitioner is dropped to a level so as to prevent him from filing an application u/s 241, or where his residual economic interest in the company renders him ‘remediless’ before any other forum as well..(Read the order)