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 :
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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
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2. Section 10FE (second proviso)
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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.
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3. Section 10FD(3)(f)
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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
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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
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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
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6. Sections 10FF and 10FK(2)
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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.
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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.
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