Monday 27 June 2016


Supreme Court paves way for NCLT AND NCLAT

                                        
The NCLT or the National Company Law  Tribunal is a consolidated adjudicating authority for corporate persons ,partnership firms and individuals in a  time bound manner for maximization of value pf assets oof such persons ,to promote entrepreneurship ,availability of credit and balance the interests of all the stakeholders.

However in recent times the   validity of the NCLT  and  NCLAT was one of the most debated issues in the company law .

The controversy   was adjudicated  by the Madras High  Court in 2010 in the case - Union of India Vs R. Gandhi, President, Madras Bar Association (“MBA”).It was in this case that   the constitutional validity of NCLT / NCLAT was upheld. It was further appealed in the Supreme Court further by the MBA (Madras Bar Association vs Union India)

This article aims to discuss both these cases in detail and the imminent outcomes.
1.      UNION OF INDIA VS. R.GANDHI

    A.      The main contentions of the Respondents (Madras Bar Association) were as follows:
        I.     
                       NCLT AND THE NCLAT were unconstitutional

(a)   Intrinsic Judicial Functions have always been performed by the High Courts and the judiciary and tribunals lie outside the judiciary.
(b)   The NCLT will now be in control of all Company Law related issues which was earlier the jurisdiction of the High Courts. The MBA stated that this not only violates the Separation of  Power[1] principle but also the   Independence of Judiciary[2] which forms an intrinsic part of the basic structure of the constitution.
(c)    Article 323B[3] of the constitution provides for adjudication or trial by tribunals with respect to matters specified in the clause 2.
Insolvency has not been specified here and therefore for such a tribunal to be formed the constitution requires amendment.

      II.            Various Provisions of the Companies Act,2002 were unconstitutional
(a)   The various provisions of Chapters IB and IC of the Act (sections 10FB, 10FD, 10FE, 10FF ,10FL(2), 10FO , 10FR(3), 10FT and 10FX)  are violative of the principles of Rule of Law,Independence of Judiciary and Separation of Powers.    
    B.      The main contentions of the Appellants( Union of India of  UOI) were as follows:
(a)   Recommendations of the Justice Eradi Committee:The UOI  held that it  had constituted a High Level Committee on Law relating to Insolvency of Companies under the Chairmanship of Justice V. Balakrishna Eradi and  other experts to examine and modify existing laws and  to suggest further reforms based on International standards.It was upon the recommendations of the Justice Eradi committee that the NCLT and the NCLAT were setup.
Benefits of the NCLT were also highlighted as follows:
o   It will help to reduce the pendency of cases and the  period of winding-up  from 20 to 25 years to about two years;
o   It will help avoid multiplicity of litigation before various  forums as all can be heard and decided by NCLT;
o   It will help in streamlining of  an appeal   on an order of the NCLT to the NCLAT, exclusively dedicated to matters arising from NCLT, with a further appeal to the Supreme Court only on points of law

(b)   Article 245[4]:It was stated that the establishment of the NCLT and NCLAT were not derived from Article 323B but from the Article 245 of the constitution read with several entries in the List 1[5] of the Seventh Schedule.
(c)    Provisions of Companies Act:It was submitted that various provisions in Parts IB and IC of theCompanies  Act,2002  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  was approved by the court in the judgement relating to   Sampath Kumar vs. Union of India[6]

The Madras High Court by its order dated 30.3.2004 held that creation of the NCLT and  NCLAT holding powers which were earlier exercised by the high courts and the Company Law Boards was not unconstitutional. However held that certain provisions(that is mainly sections   10FD(3)(f)(g)(h), 10FE, 10FF, 10FL(2), 10FR(3), 10FT) in Parts IB and IC of the Companies Act had a few defects which needed to be amended. Till such amendments are made the constitution of the NCLT and the NCLAT would be held unconstitutional.

These provisions were as follows:
1.      Sections 10FE and 10FT :






Tenure of President/Chairman and Members of NCLT and NCLAT fixed as three years with eligibility for re-appointment :
·         The High Court held that unless the term of office is fixed as at least five years with a provision for renewal, except in cases of incapacity,  misconduct and the like, the constitution of the Tribunal cannot be regarded as satisfying the essential requirements of an independent and impartial body exercising judicial functions of the state.
·         The Union Government had accepted the finding and agreed to amend section 10FE and 10FT of the Act to provide for a five year term for the Chairman/President/Members. However, the Government proposes to retain the provision for reappointment instead of `renewal', as the reappointments would be considered by a Selection Committee which would be headed by the Chief Justice of India or his nominee. As the Government proposes to have minimum eligibility of 50 years for first appointment as a Member of the Tribunal, a Member will have to undergo the process of re-appointment only once or twice



2.      Section 10FE (second proviso)
 Enabling the President/Members of NCLT to retain their lien with their parent cadre/Ministry/Department while holding office :
·         The High Court held that in so far as the President is concerned, there is no question of holding a lien and the reference to President must be deleted from the second proviso to section 10FE
·         The High Court also held that the period of lien in regard to the members of NCLT should be restricted to only one year instead of the entire period of service as a Member of NCLT.
·         The Union Of India has accepted the decision.
3.       Section 10FD(3)(f)
Appointment of Technical Member to NCLT :
·         The High Court has held that appointment of a member under the category specified in section 10FD(3)(f), can have a role only in matters concerning revival and rehabilitation of sick industrial companies and not in relation to other matters.
·          The High Court has therefore virtually indicated that NCLT should have two divisions, that is an Adjudication Division and a Rehabilitation Division and persons selected under the category specified in clause (f) should only be appointed as members of the Rehabilitation Division.
·         The Union Of India had agreed in part
4.      Section
10FD(3)(g)
Qualification for appointment of Technical Member :
·         The High Court has observed that in regard to Presiding Officers of Labour Courts and Industrial Tribunals or National Industrial Tribunal, a minimum period of three to five years experience should be prescribed, as what is sought to be utilized is their expert knowledge in Labour Laws.
 
·          The High Court has also observed that as persons who satisfy the qualifications prescribed insection 10FD(3)(g) would be persons who fall under section 10FD(2)(a), it would be more appropriate to include this qualification in section 10FD(2)(a).
·         It has also observed in section 10FL dealing with "Benches of the Tribunal", a provision should be made that a `Judicial Member' with this qualification shall be a member of the special Bench referred to in section 10FL(2) for cases relating to rehabilitation, restructuring or winding up of Companies.
·          The High Court has observed that clause (h) referring to the category of persons having special knowledge of and experience in matters relating to labour, for not less than 15 years is vague and should be suitably amended so as to spell out with certainty the qualification which a person to be appointed under clause (h) should possess.
·         The said member must confine his participation only to the Benches dealing with revival and rehabilitation of sick companies and should also be excluded from functioning as a single Member Bench for any matter.
·          The Union Government held  that it may be advisable to leave the choice of selection of the most appropriate candidate to the Committee headed by the Chief Justice of India or his nominee

5.      Section 10FL(2)
Winding up proceedings by single Member :
·         The High Court has held that it is impermissible to authorize a single member Bench to conduct the winding up proceedings after a special three Members Bench passes an order of winding up
·          if such single member happens to be a labour member appointed under section 10FD(3)(f), it would be a mockery of a specialist Tribunal.
·         The Union Of India has accepted these findings















6.      Sections 10FF and 10FK(2)
Power of Central Government to designate any member to be a Member:
·         The High Court has held that sections 10FF and 10FK(2) should be suitably amended to provide that a member may be designated as Member (Administration) only in consultation with the President
·         Member (Administration) will discharge his functions in relation to finance and administration of the Tribunal under the overall control and supervision thePresident.
·         The Union Government had accepted the decision and has agreed to drop the provision for Member Administration

7.  Section 10FX
Selection Process for President/Chairperson :
·         The High Court has expressed the view that the selection of the President/Chairperson should be by a Committee headed by the Chief Justice of India in consultation with two senior Judges of the Supreme Court
·         The Union Government has submitted that it would not be advisable to make such a provision in regard to appointment of President/Chairperson of statutory Tribunals. It is pointed out no other legislation constituting Tribunals has such a provision.







[1] Rai Sahib Ram Jawaya Kapur And Ors. vs The State Of Punjab
[2] Supreme Court vs Union Of India
[3] Constitution of India
[4] Constitution Of India
[5] Omitted
[6] S. P. Sampath Kumar vs. Union of India, on 5 May, 1987c