India: Tata Shareholders' Suit: Bombay High Court Revokes Leave To Proceed In A Representative Capacity

Last Updated: 13 July 2017
Article by Nitesh Jain and Juhi Mathur

The Bombay High Court on 10 July 2017 revoked its earlier leave granted under Order I Rule 8 of the Code of Civil Procedure, 1908 (Code) for the suit tilted Pramod Premchand Shah & Ors. vs. Ratan Tata & Ors. to proceed in a representative capacity.

Six shareholders of the seven listed Tata companies (Plaintiffs) have filed the suit against Tata Sons Limited, the directors of Tata Sons, certain trustees of the Sir Ratan Tata Trust and Sir Dorabji Tata Trust, and seven listed Tata companies in which Tata Sons has investments. In the suit the Plaintiffs have claimed inter alia damages in the sum of INR 41,832 crores for alleged loss caused to the 'all non-promoter shareholders' of these seven listed defendant companies owing to, inter alia, the fall in share price of those seven defendant companies as a result of the alleged illegal removal of Mr Cyrus P. Mistry as the Executive Chairman of Tata Sons by the resolution dated 24 October 2016 of the Board of Directors of Tata Sons.

By an ex-parte order dated 9 December 2017, the Bombay High Court had granted leave under Order I Rule 8 of the Code enabling the Plaintiffs to sue Tata Sons, the directors of Tata Sons and certain trustees of the Sir Ratan Tata Trust and Sir Dorabji Tata Trust and the seven listed Tata Companies on behalf of, or for the benefit, of numerous persons having the same interest in the suit. On 16 December 2016, notice of the leave was published in the Times of India and the Economic Times. Following the publication, applications were filed by a very few individual shareholders of one or more of the seven companies seeking to be impleaded in the suit.

Legal Issue Involved

Tata Sons sought to revoke the leave on the ground that the Plaintiffs, between them, neither have a common interest in the suit, nor have any interest in common with other individual non-promoter shareholders of the seven defendant Tata companies. It was Tata Sons' argument that the Plaintiffs are not shareholders of each of the seven companies arraigned as party defendants; that they are shareholders of one or more of the seven companies, each of whom have distinct Articles of Association, and a separate and independent board of directors.

The court was tasked with interpreting Order I Rule 8 of the Code which permits one or more persons to sue (or defend) with leave of the court on behalf of, or for the benefit of, numerous other persons provided that such others have "the same interest in one suit".

Decision of the Bombay High Court

The court held that 'the interest in the suit' is the prejudice or accrual of liability arising therefrom, and not the proprietary rights of the shareholders per se or the interest in protecting the share value. The court's decision follows the principle expounded by The House of Lords in the celebrated case of The Duke of Bedford vs. Ellis & Ors. considering Order XVI,  Rule 9 to the Judiciary Act, 1873 (which is in pari materia with  Order I Rule 8 of the Code)

According to the Bombay High Court, a suit under Order I Rule 8 of the Code, if filed or defended for others, then such others must form a class having a common interest in (i) the right or the liability alleged in the suit; (ii) the grievance or injury complained of; and (iii) in the relief sought (comprising of the three components of a suit). The court considered whether, even assuming there were seven different suits in respect of seven individual companies, shareholders of each company could be said to have community of interest for claiming relief in respect of fall in share prices of that particular company with the individual plaintiff complaining of such fall as such shareholders.

The court reasoned that a drop in share prices may affect different shareholders differently, that it was always possible that other non-promoters shareholders (who do not support the Plaintiffs) could hold a view that the drop in share prices could be as a result of the resistance offered by Mr. Cyrus Mistry and his non-promoter group. The court also considered that the foundational grievance pertaining to the ouster of Mr. Cyrus Mistry, may also find support amongst other non-promoter shareholders who do not want the reinstatement of Mr. Cyrus Mistry, who oppose the suit and would be forced to join the suit and defend it, when they had no intention or obligation to do so.       

During the arguments it was put forth on behalf of the Plaintiffs that the expressions 'on behalf of' and 'for the benefit of' in Clause (a) of sub-rule 1 of Rule 8 of the Code should be used as disjunctives, either may be satisfied and not both. Interpreting Clause (a) of sub-rule 1 of Rule 8 of the Code, the court held that the expressions 'on behalf of' and 'for the benefit of' cannot be read mutually exclusively, and in the facts of the case, the Plaintiffs cannot sue on behalf of others who resist Mr. Cyrus Mistry's reinstatement. Principally holding that one cannot sue on behalf of another, when such suit is to his detriment or against his interest. 

In its Judgment, the Bombay High Court has held that the Pramod Shah Suit was not a representative suit for in the circumstances of the case, the Plaintiffs cannot claim to represent such non-promoter shareholders who oppose the suit, and any decree passed would not be for the benefit of every person represented in the suit. 

As for certain non-promoter shareholders who sought to be impleaded, the court held that the same was not determinative of the issue and was merely a coincidence.

Key Take-away from the Decision

As a result of the suit losing its representative character, the Plaintiffs no longer represent 'all the non-promoter shareholders' and cannot seek damages in the quantum of INR 41,832 crores, which is on behalf of all the non-promoter shareholders. Going forward, the principles laid down by the High Court will provide a precedent to determine the test of "same interest" under Order I Rule 8 of the Code, more so in shareholder class action disputes.

On 11 July 2017, the Plaintiffs sought a stay of the Judgment to enable them to assail the same before the appellate forum, however, the Bombay High Court declined to grant a stay. While declining to grant stay, the court held that once the leave is revoked on merits, the suit cannot be allowed to continue as a representative suit and the Plaintiffs can continue the suit in their individual capacity to the extent the reliefs relate to their personal case.

Shardul Amarchand Mangaldas & Co., and the authors have successfully represented Tata Sons and its Directors in this suit before the Bombay High Court.

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