Supreme Court Paves the Way for Company Law Tribunal

Readers may recall
that the primary reason for the partial effectiveness of the Companies Act,
2013 (the “2013 Act”) has been the pending litigation surrounding the
constitution of the National Company Law Tribunal (“NCLT”) and the National
Company Law Appellate Tribunal (“NCLAT”). Hence, the provisions of the 2013 Act
that relate to the NCLT[1] have been kept in abeyance
pending the outcome of the litigation, while only the remaining provisions have
already been brought into force. This legislative quagmire ended yesterday with
a Constitution Bench ruling of the Supreme Court in Madras
Bar Association v. Union of India
, which upheld the constitutionality
of the 2013 Act’s provisions relating to NCLT subject to certain
qualifications. In this post, I discuss the key issues and ruling of the
Supreme Court and highlight what this might mean for the future of corporate
litigation in India.
Background and Ruling
The genesis of
this litigation goes back to a challenge mounted to the constitutional validity
of the provisions of the Companies Act, 1956 (the “1956 Act”), which were
introduced by way of the Companies (Second Amendment) Act, 2002. These
provisions catered for the constitution and functioning of the NCLT. Both the
Madras High Court as well as the Supreme Court upheld the constitutional
validity of the provisions subject to certain amendments to the legislation.
This decision of the Supreme Court in R.
Gandhi v. Union of India
has been previously discussed here.
In the wake of the
Supreme Court’s observations in that case, necessary changes were introduced to
the scheme of the NCLT, which were reflected in the 2013 Act. However, another
round of litigation ensued inter alia on
the ground that the 2013 Act does not fully reflect the observations of the
Supreme Court in R. Gandhi. Hence,
the current ruling of the Supreme Court is essentially an effort to examine the
provisions of the 2013 Act to consider whether it faithfully adheres to its
previous ruling in R. Gandhi. While
the court finds that the 2013 Act broadly does so, it also identifies some
discrepancies. Hence its final conclusion of upholding the validity of the NCLT
provisions of the 2013 Act, with qualifications to the extent of the discrepancies
identified.
The Supreme
Court’s decision is pithy and confines itself very closely to specific issues
at hand without an elaborate discussion of constitutional principles. It is
essentially verification exercise to ensure that the provisions of the 2013 Act
adhere scrupulously to R. Gandhi. In
this light, the Court pronounced its ruling on three principal issues:
(i)         Constitutional
Validity of the NCLT
On this issue, the
Court essentially echoed its decision in R.
Gandhi
on the ground that all arguments pertaining to constitutionality
were already addressed by the Court in that case and it “specifically rejected the
contention that transferring judicial function, traditionally performed by the Courts,
to the Tribunals offended the basic structure of the Constitution”. While the
petitioner sought to invoke a 2014 decision of the Supreme in Madras Bar
Association v. Union of India
in which the establishment of the
National Tax Tribunal (“NTT”) was held unconstitutional, the Court reemphasized
that there were significant differences between the NCLT and the NTT that would
justify arriving at a different conclusion.
(ii) Qualifications and Other Terms of the President and Members of
the NCLT
The challenge
essentially related to the qualifications of the Technical Members of the NCLT.
The core issue at hand was that while the Supreme Court in R. Gandhi provided that “only officers who are holding the ranks of
Secretaries or Additional Secretaries alone are to be considered for
appointment as technical Members of the NCLT”, the 2013 Act “again makes Joint
Secretary to the Government of India or equivalent officer eligible for
appointment”, if he has the relevant experience. This was found to be invalid,
and contrary to the ruling in R. Gandhi.
The Court observed that “corrections are required to be made in Section 409(3)
to set right the defects contained therein”.
(iii) Structure of Selection Committee for Appointment of Members
On this count, R. Gandhi provided for a 4-member
committee to be headed by the Chief Justice of India (or nominee) with a
casting vote. However, the 2013 Act provided for a 5-member committee without a
casting vote to the Chief Justice of India (or nominee). Moreover, the Court
found fault with the fact that in the 5-member committee, three members were
from the executive branch as against two from the judiciary, which conferred a
predominant say to the executive branch. Hence, the provisions relating to the
selection committee were held to be invalid to that extent.
In terms of the
final order, the Supreme Court noted:
33) Since, the functioning of the NCLT and NCLAT has not started so
far and its high time that these Tribunals starting functioning now, we hope that
the respondents shall take remedial measures as per the directions contained in
this judgment at the earliest, so that the NCLT & NCLAT are adequately
manned and start functioning in the near future.
Implications and Way Forward
By this judgment,
the Supreme Court has not only paved the way for the establishment of the NCLT,
but it may also potentially lead to the notification of the remaining sections
of the 2013 Act so as to make the entire legislation effective. In fact, in the
paragraph quoted above, the Court seems to display enthusiasm and even a sense
of urgency for the commencement of the tribunals.
The next question
relates to the next steps the Government could take. Certainly, in the long
run, the 2013 Act will have to be amended to bring it in line with the
observations of the Supreme Court by way of a legislation approved by
Parliament (or in the interim through an Ordinance). It would be interesting to
see if the Government seeks to commence functioning of the tribunals even
before legislative change through appropriate executive action that gives
effect to the observations of the Supreme Court. In any event, it is likely to
be a matter of time before we witness the tribunals taking shape.
At a broader
level, this development is significant as it might likely alter the face of
corporate litigation in India. While matters such as amalgamations, winding-up,
and similar cases being taken out of the regular court system, one can expect
greater efficiency in resolution of corporate disputes. Similarly, the
most-discussed class action mechanism could potentially alter corporate
behaviour. This area is bound to witness frenetic activity in the near future.



[1] Unless
indicated otherwise expressly or by context, references herein to the NCLT
include references to the NCLAT as well.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • The Supreme Court on Thursday, May 14, 2015, has uphold the validity of company law tribunal and partly allowed the writ petition filed by the Madras Bar Association challenging various provisions of Chapter XXVII of the Indian Companies Act, 2013. A constitution bench, led by Chief justice H L Dattu held a few provisions of the Companies Act, 2013. In their writ petition petitioner were challenging the validity of constitution of the National Company Law Tribunal (“NCLT”) and the Appellate tribunal (“NCLAT”), their powers to punish for contempt, prescription of qualifications including term of office, salary and allowances etc and structure of the selection committee for appointment of President/Members of the NCLT and Chairperson/Members of the NCLAT under Sections 408, 409, 411(3), 412, 413, 425, 431 and 434 of the Companies Act, 2013. The grievance of the petitioner was that notwithstanding various directions given in 2010 in the judgement of Union of India vs R. Gandhi, President, Madras Bar Association, the new provisions in the Companies Act, 2013 are almost on the same lines as were incorporated in the Companies Act, 1956 and, therefore, these provisions suffer from the vice of unconstitutionality as well on the application of the ratio in 2010 judgment.

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