NCLT & NCLAT – The legal battle & the constitutional validity

May 3, 2018

Introduction of NCLT & NCLAT

The first Act to govern all the companies in India was enacted in the year 1913. It gave exclusive jurisdiction to the High Courts and district courts to deal with all the Company matters. After independence, the legislators felt the need for a new law to govern the companies as the Companies Act, 1913 was just the replica of the English Companies Act, Hence to suit the corporate scenario of India, Companies Act, 1956 has been enacted but it still rested the jurisdiction with the High Court and the district courts.

Companies (Amendment) Act, 1988 paved the path for the constitution of Company Law Board’s to deal with the Company matters and made the High Court as the appellate authority to it. As CLB were not effective with its five benches and did not restrict the jurisdiction of the civil courts, it led to multiplicity of causes and called for the need of a single window institution to deal and dispose of all the company matters effectively.

The concepts of tribunal and appellate tribunal for dealing with all the matters relating to Company law were introduced in the Companies (II Amendment) Act, 2002 on the recommendation of a High level committee headed by Justice V. Balakrishna Eradi.

The genesis of setting up of specialized tribunals can be traced in the Supreme Court judgment in S.V.Sampath Kumar v. Union of India[1] (hereafter referred to as UOI). In this case, the Supreme Court (hereafter referred to as SC) refers to the fact that since independence, the population explosion and the increase in litigation had greatly increased the burden of pendency in the High Courts, hence the adoption of the theory of alternative institution mechanism would lead to speedy disposal of cases thereby reducing the burden on the High court and the establishment of these tribunals are within the legislative competence of the Parliament and state legislature as given under Article 245 of the constitution read with several entries in List I of Seventh schedule.

The establishment and constitution of National Company law tribunal (hereafter referred to as NCLT) and National Company law appellate tribunal (NCLAT) as exclusive tribunals for the administration of all matters arising out of the Companies Act will definitely reduce, if not negate the fatal delay involved in the company law proceedings, avoid multiplicity of litigation before various fora, streamline the process of appeal and reduce the burden on High Courts.

These quasi-judicial bodies, with effect from June1, 2016 came into force and led to the dissolution of the existing Company law boards and further ousted the jurisdiction of the civil courts (specifically mentioned under Sec.430 of the Companies Act, 2013) and all the company cases pending before them would be transferred to these tribunals.

Comparison between CLB and NCLT:-

Features	Company Law Board	NCLT
Number of benches	It had only five benches throughout India.	It will effectively commence with 11 benches and proposes to have a bench at the seat of every High Court for speedy disposal of cases.
Composition	The members were appointed by the central government, who shall not exceed nine.	There are judicial as well as technical members, who are appointed by a 4 member Selection committee.
Amicus Curiae ( friend of the court)	—————	It can appoint Amicus Curiae for opinion on various specialized legal issues.
Contempt proceedings	—————-	It has the power to punish for contempt. (Sec.425)
Expeditious disposal of cases	—————-	Any petition or application filed before NCLT and NCLAT shall be disposed of within three months. (Sec.422)
Electronic filing	—————–	As per the Draft Rules, electronic filing and serving of Tribunal documents shall be mandatory except as provided otherwise, with effect from the date to be notified in the official gazette
Class action suits	—————-	Shareholders and creditors can now file class action suits against the company for breaching the provisions of the Act.
Appeals	Appeals were made to the High Court.	Appeals will be made to NCLAT and then to the Supreme Court within 60 days. (Sec 423)
Civil jurisdiction	No specific provision ousting the civil jurisdiction, which led to multiplicity of litigation.	It specifically ousts the jurisdiction of Civil courts. (Sec 430)

Further the introduction of NCLT has opened doors for the professionals like Chartered accountants, Cost accountants, Company secretaries by making them eligible for appointment as technical members of the tribunal, if they have an experience of 15 years and also for appearing before the tribunals for their parties.

The establishment of NCLT will also take over the functions of the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate authority for Industrial and Financial Reconstruction (AAIFR) under the Sick Industrial Companies (special provisions) Act, 1985.Further the introduction of NCLT has opened doors for the professionals like Chartered accountants, Cost accountants, Company secretaries by making them eligible for appointment as technical members of the tribunal, if they have an experience of 15 years and also for appearing before the tribunals for their parties.

The composition and functions of these mega tribunals are specifically mentioned under Part 1B and 1C of Companies act, 1956 and chapter XXVII of the Companies Act, 2013.

Commencement of the Legal battle.

After the enactment of Companies (Amendment) Act, 2002 which had provisions for the establishment of NCLT & NCLAT, the first writ petition challenging its constitutional validity was filed by Mr. R.Gandhi, President, Madras Bar Association(MBA) before the Madras High Court under Article 226 of the constitution in the case Thiru R. Gandhi v. UOI[2]

Case Brief:-

It was contended by Mr. Aravind Dattar, learned senior counsel for the petitioner that:

(i) Parliament does not have the legislative competence to vest intrinsic judicial functions that have been traditionally performed by the High Courts for nearly a century in any Tribunal outside the Judiciary.

(ii) The constitution of the NCLT and transferring the entire company jurisdiction of the High Court to the Tribunal which is not under the control of the Judiciary, is violative of the doctrine of separation of powers and independence of the Judiciary which are parts of the basic structure of the Constitution.

(iii) Article 323B of the Constitution enables the appropriate Legislature to provide for adjudication or trial by Tribunals of disputes, complaints or offences with respect to all or any of the matters specified in clause (2). Clause (2) enumerates the matters in regard to which Tribunals can be constituted. The said list is exhaustive and not illustrative. The list does not provide for constitution of Tribunal for insolvency, revival and restructuring of the company. In the absence of any amendment to Article 323B providing for a National Tribunal for revival of companies and winding up companies,
there is no legislative competence to provide for constitution of NCLT and NCLAT.

(iv) The various provisions of Chapters IB and IC of the Companies Act, 1956 (Sections. 10FD, 10FE, 10FF,10FL(2), 10FO, 10FR(3) 10FT and 10FX) are defective and unconstitutional, being in breach of basic principles of Rule of Law, Separation of Powers and Independence of the Judiciary.

Submissions of UOI:-

1) The establishment of NCLT and NCLAT to take-over the functions which are being performed by CLB, BIFR, AAIFR and the High Courts will have the following beneficial effects:

reduce the pendency of cases and reduce the period of winding-up process from 20 to 25 years to about two years;
avoid multiplicity of litigation before various fora (High Courts and quasi-judicial Authorities like CLB, BIFR and AAIFR) as all can be heard and decided by NCLT;
the appeals will be streamlined with an appeal provided against the order of the NCLT to an appellate Tribunal (NCLAT) exclusively dedicated to matters arising from NCLT, with a further appeal to the Supreme Court only on points of law, thereby reducing the delay in appeals; and
with the pending cases before the Company Law Board and all winding-up cases pending before the High Courts being transferred to NCLT, the burden on High Courts will be reduced and BIFR and AAIFR could be abolished.

2) It was further contended that the power to provide for establishment of NCLT and NCLAT was derived from Article 245 read with several entries in List I
of the Seventh Schedule and did not originate from Article 323B.

3) It was submitted that various provisions in Parts IB and IC of the Act relating to the constitution of NCLT and NCLAT were intended to provide for selection of proper persons to be their President/Chairperson/members and for their proper functioning. It was submitted that similar provisions relating to establishment of other alternative institutional mechanisms such as Administrative Tribunals, Debt Recovery Tribunals and Consumer fora, had the seal of approval of this Court in S. P. Sampath Kumar vs. Union of India.

After hearing to the arguments of both the parties, the Madras High Court upheld the constitutional validity of NCLT but held that provisions constituting these tribunals were unconstitutional; ie. Part 1B &1C of the Act as they lead to the dilution of the independence of judiciary and held that the defects mentioned have to be amended accordingly in order to bring these tribunals into force.

APPEAL TO THE SUPREME COURT:–

The parties aggrieved by the judgment filed civil appeals in the Supreme Court (SC) in 2004 and 2005.UOI contended that the High Court which rightly held that the establishment of NCLT & NCLAT was constitutional shall not have ordered an amendment to the provisions in Part 1B &1C as there were other tribunals formed under similar provisions and were held valid in Union of India v. Delhi High Court Bar Association (2002) and State of Karnataka v. Vishwabharathi House Building Co-operative Society. MBA claimed that the High Court ought not to have upheld the constitutional validity of NCLT & NCLAT and mentioned the same grounds as in the writ petition and argued for the same as unconstitutional as it was against the constitutional principles of separation of powers, independence of judiciary and rule of law.

The constitutional bench of SC with CJI K G Balakrishnan and ors, after considering each and every issue in detail with relevant precedents, in the year 2010, upheld the decision of the High Court that the creation of National Company Law Tribunal and National Company Law Appellate Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, was not unconstitutional and declared that Parts 1B and 1C of the Act as presently structured are unconstitutional as they dilute the independence of judiciary by making civil servants eligible for appointment of technical members of the tribunal, the composition of the selection committee and tenure of the members etc. and has proposed corrections to remove defects in these provisions and make them valid, which is clearly mentioned in para120 of the 2010 judgment (UOI v. R.Gandhi[3]).

Hence, Parts IB and IC of the Act, may be made operational by making suitable amendments, as indicated by SC, in addition to what the Union Government has already agreed in pursuance of the impugned order of the High Court.

THE FINAL HEARING:

Writ petition was filed before the SC in the year 2013 under Article 32 of the constitution and it was heard by the constitution bench with CJI. HL Dattu and ors, i.e, after the enactment of Companies Act, 2013. It was MBA again which filed the writ petition with Mr. Aravind Dattar as their counsel against the UOI.

The petitioners, aware about the principle of res judicata, only prayed for declaring NCLAT as unconstitutional as the 2010 judgment was not particular about NCLAT and further questioned the constitutional validity of Sec.409,411,412,415,418,424,426,431 and 434 of the Companies Act, 2013.

The SC have split the issues into the following:

Challenge to the validity of the constitution of NCLT and NCLAT;
Challenge to the prescription of qualifications including term of their office and salary allowances etc. of President and Members of the NCLT and as well as Chairman and Members of the NCLAT;
Challenge to the structure of the Selection Committee for appointment of President/Members of the NCLT and Chairperson/ 16 Members of the NCLAT.

(i) The petitioners contended that as the honorable SC in MBA v. UOI held that the establishment of the National Tax Tribunal (NTT) was unconstitutional, it is prayed that the establishment of NCLT & NCLAT be held unconstitutional on the same grounds.

But the SC held that NTT was held unconstitutional as it interfered with the independence of judiciary by vesting the power of judicial review of the High Court in itself and this is not a similar case.

(ii) The SC after comparing the amended provisions of Companies Act, 2013 with that of Companies Act, 1956 and the corrections proposed by SC to remove the defects, it was found that from the reading of para120, particularly, sub-para (ii) thereof that only officers who are holding the ranks of Secretaries or Additional Secretaries alone are to be considered for appointment as technical Members of NCLT. Provisions contained in clauses (c) and (d) of sub-section (2) and Clause (a) and (b) of sub-section (3) of Section 10FD which made Joint Secretaries with certain experience as eligible, were specifically declared as invalid. Notwithstanding the same, Section 409(3) of the Act, 2013 again makes Joint Secretary to the Government of India or equivalent officer eligible for appointment, if he has 15 years experience as member of Indian Corporate Law Service or Indian Legal Service, out of which at least 3 years experience in the pay scale of Joint Secretary. This is clearly in the teeth of dicta pronounced in 2010 judgment.

Thus, it was held that Section 409(3)(a) and (c) of the companies Act, 2013 are invalid as these provisions suffer from same vice. Likewise, Section 411(3) as worded, providing for qualifications of technical Members, is also held to be invalid. For appointment of technical Members to the NCLT, directions contained in sub-para (ii), (iii), (iv), (v) of para120 of 2010 judgment will have to be scrupulously followed and these corrections are required to be made in Section 409(3) to set right the defects contained therein. .

(iii) This issue pertains to the constitution of Selection Committee for selecting the Members of NCLT and NCLAT. Provision in this respect is contained in Section 412(2) of the companies Act, 2013.The SC held that Sec.412(2) was invalid as it did not remove the defects as mentioned in the 2010 judgment i.e, the composition of selection committee shall have 4 instead of 5 members, who are as follows:-

(a) Chief Justice of India or his nominee – Chairperson (with a casting vote);

(b) A senior Judge of the Supreme Court or Chief Justice of High Court – Member;

(d) Secretary in the Ministry of Law and Justice – Member.”

Since the Sec.412 (2) of the companies Act, 2013 deviated from these guidelines, it was held to be invalid.

Hence, SC disposed of the writ petition by upholding the constitutionality of NCLT & NCLAT and ordered the Central govt. to make necessary amendments to the provisions as mentioned above and asked them to start the functioning of these tribunals effectively.

NCLT & NCLAT come into force:-

After a legal battle of over a decade, finally the sections relating to establishment and constitution of NCLT & NCLAT and other related sections have been notified by the Ministry of corporate affairs (MCA) with effect from June1, 2016 which led to the abolition of the company law board with immediate effect.

It appears that provisions relating to reduction of share capital, winding-up and compromise or arrangement (merger/demerger/settlement), etc., will remain under the jurisdiction of High Court till the time these provisions are made effective. Further, one will have to wait for rules to be notified.

The NCLT will start functioning with eleven Benches – two at New Delhi and one each at Ahmadabad, Allahabad, Bangalore, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. The Principal Bench of the NCLT will be at New Delhi.

Further, the central govt. has notified the provision relating to the establishment of Special Courts[4] for the purpose of speedy trial of offences committed under the Companies Act, 2013 and setup eight Special Courts throughout India and it has the powers of a Session court as provided under Code of Criminal Procedure, 1973.

Justice S J Mukhopadhaya, Judge (Retd.) of Supreme Court of India shall be the chairperson of NCLAT.

Justice MM Kumar, Judge (Retd.), the same person who is currently Chairman of CLB, shall be the President of NCLT.

Insolvency matters would also come to the tribunal, once the Bankruptcy code is implemented along with the matters relating to BIFR and AAIFR under the Sick Industrial Companies (special provisions) Act, 1985.

Aggrieved investors can now file class action lawsuits against corporate for misdoings and even seek compensation from auditors concerned, following the establishment of the National Company Law Tribunal (NCLT).[5]

CONCLUSION:-

As the NCLT becomes the single window institution for corporate justice, after the dissolution of the Company law board (CLB) and all the cases pending before it and the courts, being transferred to the NCLT with certain powers resting with the High Court as the relevant provisions have not been notified yet. This would lead to:

Specialized court for the Corporate Members.
This will be only Tribunal for the Corporate Members.
It shall avoid multiplicity of litigation before various Forums.
There will be a mixture of judicial and Technical members while deciding matters
There shall a reduction in period of winding- up.
Reduction in pendency of cases.
Expeditious disposal of cases.[6]
NCLT & NCLAT have deals with exclusive jurisdiction.(should comply with principles of natural justice)
Aggrieved party may appeal to the Supreme Court within 60 days from the date of the notice of order of the NCLAT[7].
It is vested with the power to punish for contempt.[8]
NCLT ousts the jurisdiction of the civil courts.[9]

Now, the interesting point with regard to the constitution of NCLT & NCLAT is that even though they have been notified as on June1, 2016 and came into force on the same day. The issue is that as per the judgment of the SC in MBA v. UOI on May14, 2015; the Central govt. had to make certain amendments to Sec. 409(3), 411(3) and 412(2) of the Companies Act, 2013 as directed in order to make them valid. But these amendments are made only in the Companies (Amendment) Bill, 2016 which is pending before the Parliamentary Standing Committee. Hence the big question is, how will NCLT & NCLAT function without the requisite amendments in place?

In my opinion, until the Companies (Amendment) Act, 2016 comes into force; NCLT & NCLAT will not be in a position to function as one of the amendments was regarding the qualification for appointment of a technical member to the tribunal. Hence, even though Sec.466 of the Companies Act, 2016 states after the constitution of NCLT & NCLAT, the members of the CLB shall become the members of NCLT, if they satisfy the qualification criteria for the same but the major issue here is regarding the qualification in itself.

For the better functioning of NCLT & NCLAT :-

As we have already seen various tribunals setup for adjudicating certain specific matters. It is important to compute the pros and cons of those tribunals in order to make NCLT & NCLAT function in an effective manner and serve the purpose of its establishment. Although the ministry has kept this in mind and provided the requisite provisions to overcome the difficulties faced by other tribunals. Now, the recent issue regarding the failure of Debt recovery tribunal (DRT) in disposing the cases expeditiously has become a major concern as even though it has 33 DRT’s and 5 DRAT’s in place, and the time limit for disposing the cases expeditiously is six months, it is still not in a position to handle the matters effectively and is taking years to dispose the cases.

Hence, NCLT which also has a similar provision for expeditious disposal can only achieve the same if they have benches at every seat of the High court and also impose reasonable costs on the parties who delay the proceedings by asking for adjournments or not summoning on the prescribed day. There can also be appointed a surveillance committee in order to check whether the rules regarding expeditious disposal are being complied with by the tribunals as this is the main purpose for which they have been established.

References:-

All the recent notifications published by the Ministry of corporate affairs in relation to the Companies Act, 2013 @ http://www.mca.gov.in/MinistryV2/noticeandcircular.html
Judgment given by Madras High Court in Thiru R Gandhi v. UOI @ http://www.scconline.com
Judgment given by Supreme Court in UOI v. MBA @ http://supremecourtofindia.nic.in/scr/2010_v%206_piv.pdf
Judgment given by Supreme Court in MBA v. UOI @ http://judis.nic.in/supremecourt/imgs1.aspx?filename=4
Companies Act, 1956 and the amended Acts
Companies Act, 2013 and Companies(Amendment) Bill, 2016

Articles:

[1] 1987 SCR (3) 233, 1987 SCC Supl. 734

[2] 2004 SCC Online Mad 294: (2004) 2 CTC 561

[3] 2010

[4] Chapter XXVIII(Sec.435-438) of Companies Act, 2013.

[5] Sec. 245 of the Companies Act, 2013

[6] Sec. 422 of Companies Act,2013

[7] Sec.423 of the Companies Act, 2013

[8] Sec.425 of the Companies Act, 2013

[9] Sec.430 of the Companies Act, 2013

Report as on 30th June, 2016.

NCLT & NCLAT – The legal battle & the constitutional validity