NCLT IS A REALITY NOW
Is tribunalization effective way to reduce burden of the courts and provide speedy remedies. Income Tax Appellate Tribunal (ITAT), State Administrative Tribunal (SAT), Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Debt Recovery Tribunal (DRT), Central Administrative Tribunal (CAT), Intellectual Property Rights Tribunal, Electricity Tribunal and even a Railway Claims Tribunal—we have enough already. However, it’s time for one more. Eight years after they were first proposed, National Company Law Tribunals (NCLTs) are about to become reality, which is thanks to last week’s Supreme Court ruling. Will the creation of NCLTs take a load off corporate India's back? Will they work?
OVER the last 25 years, Parliament has systematically taken away important judicial functions of the High Courts and the civil courts and vested them in quasi-judicial tribunals. However, there is a fear that in the process the stature of our High Courts has been reduced and, if this trend continues, vitally important cases will come to be decided by tribunals that are wholly controlled by the executive. The tribunalization of our judicial system will lead to consequences that our country will bitterly regret. Despite the fact that the functioning of most tribunals is in a pathetic state, the zeal to create more tribunals has not abated. Very few have realized that the real solution lies in strengthening the existing courts and confining tribunals to a few specialized areas. It is equally important to ensure that specialized tribunals are not manned by generalist civil servants or judges.
The Government planned to set up the National Company Law Tribunal under the newly enacted Companies Act, 2013. The National Company Law Tribunal is to be established as a quasi-judicial body. The mandate of the Tribunal is to adjudicate upon matters dealing with corporate and company related disputes. While the principal bench of the tribunal is to be set up in New Delhi, several other benches are touted to be set up in various states. The number of such benches could range from 12 to 13, across the country.
The National Company Law Tribunal would have the jurisdiction to deal with the disputes which were earlier within the power of Company Law Board, Board of Industrial and Financial Reconstruction and High Courts. As such, the scope of NCLT’s power shall extend to disputes relating to oppression and mismanagement, sick companies and their revival and winding up procedure with respect to companies. The orders of the National Company Law Tribunal are appealable in the National Company Law Appellate Tribunal.
The validity of the National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’) was one of the most debated issues in the company law since the introduction of Companies (Second Amendment) Act, 2002 to the Companies Act, 1956. The controversy was put to rest by the Supreme Court in 2010 in the case - Union of India Vs R. Gandhi, President, Madras Bar Association – wherein the constitutional validity of NCLT / NCLAT was upheld. The provisions relating to NCLT / NCLAT were included in the Companies Act, 2013 and such provisions were again challenged by Madras Bar Association.
Recently, by its order dated 14th May 2015, the Supreme Court upheld the constitutional validity of the NCLT / NCLAT provisions.
Brief Analysis of SC Ruling in Madras Bar Association Vs Union of India & Anr.:
On May 14, 2015, the Constitution Bench of the Supreme Court led by Chief Justice HL Dattu partly allowed the writ petition filed by the Madras Bar Association wherein it struck down the validity of Technical Member appointment & Selection Committee constitution but it upheld the validity of the NCLT / NCLAT under the Companies Act, 2013. The provisions relating to NCLT & NCLAT were also challenged under the Companies Act, 1956 (in Union of India Vs R. Gandhi, President, Madras Bar Association), wherein the SC’s Constitution Bench upheld the validity of NCLT / NCLAT and certain provisions relating to constitution of board of company law administration were held as ‘unconstitutional’.
In the present case, the SC’s Constitution Bench rejected Sr. Advocate Arvind Datar’s (representing the writ petitioner, Madras Bar Association) contention that UoI Vs R. Gandhi judgment did not deal with constitution of NCLAT. The SC held that the Constitution Bench categorically dealt with the constitutional validity of NCLT & NCLAT under the caption “Whether the constitution of NCLT and NCLAT under Parts 1B & 1C of Companies Act are valid”.
SC completely dismissed Madras Bar Association’s reliance on 2014 ruling of SC, wherein the constitution of National Tax Tribunal (NTT) was held as ‘unconstitutional’. SC remarked that such ‘adventurism’ on the petitioner’s part is totally unfounded and stated that the earlier ruling in UoI Vs R. Gandhi is of Constitution Bench and is binding on the co-ordinate Bench as well.
Apex court differentiated the NTT ruling from NCLT/NCLAT and held that the NTT was a matter where power of judicial review exercised by the High Court was vested in NTT which was sought to be unconstitutional. SC observed that NCLT is the ‘first forum’ in the hierarchy of quasi-judicial fora set-up under the Companies Act, 2013 and stated that NCLT, would not only deal with question of law but would be called upon to thrash out the factual disputes/aspects as well.
With respect to the issue of constitutionality of provisions for appointment of technical members to NCLT/NCLAT, the constitution bench of SC relied on its earlier ruling in Union of India Vs R. Gandhi and observed that only officers holding ranks of Secretaries or Additional Secretaries can be considered for appointment as Technical members.
The SC held the constitution of Selection Committee (for selecting the Members of NCLT and NCLAT) as invalid and stated that instead of 5 members Selection Committee, it should be 4 members (2 from administrative branch + 2 from judiciary) Selection Committee. The 4-member Selection Committee shall include - Chief Justice, Senior Judge, Secretary in the Finance Ministry and Law Secretary, with the caveat that the Chief Justice will have a casting vote.
Impact of the SC Ruling on constitutional validity of NCLT & NCLAT:
The recent SC ruling on the constitutional validity of NCLT & NCLAT is one of the biggest leaps for the corporate sector and the professional fraternity. The step will have a positive impact on the corporate restructuring (i.e. mergers and acquisitions, capital restructuring, revival of sick companies and dispute related matters) as the NCLT will not just only replace the Company Law Board (CLB), but will also bring under its umbrella cases filed with the High Courts, Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
It seems that matters pertaining to winding up have been taken out of jurisdiction of NCLT and NCLAT by recent amendment to the Companies Act, 2013 in 2015. However, Section 270 (which are yet to be made effective) onwards still refer to “Tribunal”.
The NCLT / NCLAT formation is welcome step as it will reduce the burden of the Supreme Court, High Courts and CLBs on the corporate law related matters, which will ultimately help in unlocking the value of distressed assets. NCLT / NCLAT being the ‘specialized benches’ for corporate law related mattes, it is expected that the matters will be listed and heard in an expeditious and time bound manner.
The formation of NCLT / NCLAT will open wide gates for the practicing Chartered Accountants, practicing Company Secretaries, and practicing Cost Accountants, as they would now be able to represent their client companies in matters requiring Tribunal approval i.e. mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters. Until the formation of the NCLT/NCLAT, the practicing professionals (CA, CS & CWA) could appear only before the CLB and for the matters being heard by the HC and Supreme Court, only Advocates were eligible for arguments and representation. Now all practicing professionals (Advocates, practicing CA, practicing CS & practicing CWA) will be treated at par for representation before NCLT / NCLAT.
For entering / establishing oneself in the field of NCLT / NCLAT, it would be desirable of a practicing professional to take some efforts for enhancing their skill sets, some of which are listed below:
(1) Thorough study of the provisions of Companies Act, 2013;
(2) Thorough study of the Secretarial Standards,
(3) In-depth analysis and study of the provisions of Companies Act, 2013 as well as 1956 relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;
(4) Thorough knowledge of the case-laws on the topics relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;
(5) Developing art of advocacy and soft skill;
(6) Having basic knowledge relating to Tax Laws, Accounting treatments in matters relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;
Here’s how the NCLTs will now work:
Tribunals will comprise one principle bench at Delhi, and then as many other benches as the Central Government thinks fit. Each bench will have at least one judicial member and one technical member.
Members will be selected by a committee that includes:
· The Chief Justice of India or his nominee
· A senior High Court or Supreme Court judge
· One representative of the Ministry of Law and Justice
· One representative of the Ministry of Finance and Company Affairs.
To ensure the tribunals’ independence:
· No tribunal member will remain associated with a ministry or a civil service department after appointment.
· All administrative support will be provided by the law ministry.
As per the Supreme Court’s directions, technical members of the tribunal must have:
· At least 15 years experience in industrial management, reconstruction, investment or accountancy
· Or, have held a high ranking post in the Indian Company Law Service.
Judicial members must have:
· At least five years of experience as high court or district court judges
· Or, at least ten years of experience as lawyers.
With the ever increasing corporate growth in the recent past in India coupled with various technological and rapid economic growth, the need of the hour is to have a good, proper and efficient mechanism to tackle the disputes, restructuring, mergers, amalgamations, revival, rehabilitation of companies and various other issues which a corporate would face and also to expeditiously dispose of the same. Handling a company dispute is a complicated matter and requires lot of attention, caution, specilization and we require experts to handle these cases. So far, the functions are handled by the CLB, BIFR and the High Courts, which to a greater extent performed their part in a well-defined manner with slight minor exceptions. There are no shortcomings in the present system of the High Courts which discharge its functions like entertaining winding up petitions, seeking sanction of the High Court for compromises, arrangements, mergers, demergers and for sanctioning scheme of amalgamations, etc. It may not be out of place to mention that the CLB has also been discharging its complicated responsibilities under the provisions of prevention of oppression and mismanagement and application for relief in case of mismanagement under section 397/398 of the Companies Act, 1956 and various other provisions. The Government needs to provide speedy and effective remedy to the corporate since corporate cannot wait for long to get their disputes/schemes sanctioned. After the implementation of the NCLT, it is to be seen how the new proposed Tribunals, viz., NCLT and NCLAT, would discharge their functions in future.