REMOVAL OF DIRECTOR: CRITICAL ANALYSIS OF CYRUS MISTRY-TATA SONS TRAGEDY

The path to the debate is divided into two major parts. Removal of the director by the board of directors and removal by Shareholders. The board had already passed the no-confidence motion against Cyrus Mistry for his removal. On the other hand, Tata Group had already called shareholders’ meeting regarding this. Recently, National Company Appellate Law Tribunal has rejected Cyrus Mistry’s appeal, filed against Tata Sons for Tata Sons calling Shareholders’ meeting on February 6, 2017 for his removal from his post of directorship. Cyrus Mistry, the largest shareholder of Tata Group holding 18.5% shares, was sacked by Tata Sons as its group chairman and Ratan Tata was reinstated as interim chairman. The motion to request Cyrus Mistry to step down from the directorship was moved on 15 October, 2016 on the ground that the Trust had lost confidence in Cyrus Mistry for variety of reasons.[1] Cyrus Mistry knocked the doors of appellate tribunal after the NCLT cleared way for Extraordinary General Meeting. There are different views regarding the legality of the removal. On one hand, the alleged victim states that his removal was illegal, the same manner in which Nusli Wadia, the only independent director Tata Sons had sought to remove, claimed that he had been targeted for his independence of mind and action[2] and considered his appointment as unwise by some on the other. However, before debating the issue, little background is necessary for understanding the picture.

The company is running from the money of all the retail investors and shareholders. Therefore, at the end of the day, all directors are answerable to those shareholders. It has been held through the provisions as well as various judicial precedents that right to remove a director is an inalienable right provided to shareholders. It is not necessary that there should be any proof of any mismanagement, breach of trust, misfeasance or other misconduct on the part of the director.[3] This right cannot be taken away by any MOA or AOA or any other documents or agreement of or by the company. The shareholders can remove a director by passing an ordinary resolution in the same manner they as they have the right to appoint the director. Shareholders are required to furnish a special notice[4] regarding removal of a particular director at least before 14 days of the meeting in which the resolution is supposed to be moved. The Kerela High Court has held in the case of Queens Kuries and Loans (P.) Ltd. vs. Sheena Jose & Ors.[5] that the notice must depict the grounds on which the director is proposed to be removed. However, according to the provision only shareholders holding not less than 1% of total voting power or holding shares on which an aggregate sum of not less than Rs. 5 Lacs has been paid up as on the date of notice. Shareholders are not required to state any reason in explanatory statement for removal of the director.[6] However, the director is entitled to be heard on the resolution at the meeting so as to providing him the chance to make fair presentation.

Without analysing the agreements between Tata Sons and Cyrus Mistry it cannot be termed the removal as illegal per se. According to proxy advisory firms, removal can be justified if majority board members vote against the concerned person.[7] Generally, the notice prior to at least seven days should be given before the board meeting. In case of absence of independent directors in the meeting, the resolution shall only be passed after ratification be at least one independent director, if any.[8]

There are various reasons like reduction in growth or increase in debt or decrease in turnover of the company but there may be two reasons carrying the highest weight, Questions over Cyrus Mistry’s management style and neglecting Ratan Tata’s advice. Cyrus was not popular among the interim management due to low performance in past few years. There are two instances of utmost concern which may have caused the board to remove Cyrus Mistry. Around middle of the year 2016 in June, International Arbitration Court had ordered Tata Sons to pay $1.17 billion to NTT DoCoMo for breach of contract. Whether Tata Group appealed the order is altogether a different matter. NTT DoCoMo had moved to International Court for Arbitration in London after Tata Services, with which it had collaborated, after Tata Services failed to find a buyer for or buyback 26% stake that DoCoMo was holding in Tata Services.[9] Another major idea which Ratan Tata would have never approved of was to abandon the Tata Steel’s welsh plant at Port Talbot- UK’s largest steelworks. After scrapping down the decision, Ratan Tata was hailed as saviour of UK Steel industry.[10]

However, there cannot be any real answer to the question regarding the removal of Cyrus Mistry as many things related to the management of the company are unknown. The person who had grasped what is happening on the interim can only tell.

[1] Available at http://www.business-standard.com/article/companies/seven-to-one-how-cyrus-mistry-was-removed-from-tata-sons-on-october-24-116122200013_1.html

[2] Available at http://indianexpress.com/article/business/companies/tata-motors-files-caveat-in-bombay-high-court-to-remove-nusli-wadia-cyrus-mistry-4425938/

[3] Company Law and Practice, Dr. G.K. Kapoor & Sanjay Dhamija (21 ed., 2016) Pg. 446

[4] Section 115 of The Companies Act, 2013

[5] (1993) 76 Comp. Cas. 821 Ker

[6] Life Insurance Corporation of India vs. Escorts Ltd. (1986) AIR 1370

[7] Available at http://indianexpress.com/article/business/companies/cyrus-mistry-removal-tata-group-not-illegal-ratan-tata-takes-over-3101278/

[8] Section 173(3) of The Companies Act, 2013.

[9] Available at http://economictimes.indiatimes.com/news/company/corporate-trends/tata-sons-ordered-to-pay-1-17-billion-to-japans-ntt-docomo-for-breaching-agreement/articleshow/52896325.cms

[10] Available at http://www.livemint.com/Companies/tczZPneSeIMOSd2GwlDMAL/Ratan-Tata-hailed-as-saviour-of-UK-steel-industry.html

Maharshi Thakkar, BA LLB, 3rd Year, Nirma University

Posted in LEGAL-ED and tagged , , , .

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