NCLT: Revolutionizing the Realm of Corporate Litigation

[The
following post is contributed by Shruti
Khetan
, who is a student at the West Bengal National University of
Juridical Sciences]
After a decade-long wait, the National
Company Law Tribunal (‘NCLT’) and its appellate body, the National Company Law
Appellate Tribunal (‘NCLAT’) have finally been constituted under sections 408
and 410 of the Companies Act, 2013 (‘Act’) with effect from June 1, 2016. Such
a setup heralds a new era for resolution of corporate law disputes in India and
provides for a beneficial consolidation of corporate litigation.  The NCLT has been endowed with
all such powers
as were being exercised by the erstwhile Company Law Board
(‘CLB’), the High Court and the Board for Industrial and Financial
Reconstruction (‘BIFR’). In effect, the CLB stands dissolved; however, the High
Court and the BIFR continue to exercise jurisdiction over the matters which
have not yet been notified.[1]
1.         Historical Developments and Constitutional
Hurdles
The origin of the NCLT can be
traced back to the report of the Eradi
Committee on Laws on Insolvency and Winding up of Companies

which endorsed the need for setting up a National Tribunal to deal with matters
pertaining to revival, rehabilitation[2] and winding up of companies.[3] It also recommended the
composition of, and the extent of powers to be exercised, by the proposed tribunal.[4] Acting upon the
recommendations, the Government enacted the Companies (Second Amendment) Act,
2002 providing for the establishment of NCLT and NCALT to replace the CLB, the BIFR
and their appellate bodies.[5] However, owing to the
constitutional challenges, the provisions could not be notified. Later, the J.
J. Irani Committee in 2005 echoed similar concerns.
The constitutional validity of the
NCLT was challenged before the Madras High Court in Thiru R. Gandhi v. Union
of India
for being violative of the doctrine of separation of powers
and independence of the Judiciary. The Court found certain defects as to the
qualification of the members of the Tribunal in the impugned provisions which
offended the basic structure of the Constitution. Partly upholding the
constitutionality, the Court remarked that unless these provisions are
appropriately amended by removing the defects, it would be unconstitutional to
vest the jurisdiction in NCLT and NCLAT. Both the parties appealed before the
Constitution Bench of the Supreme Court in Union of India v. R. Gandhi[6]
(‘R. Gandhi’), which affirmed the position taken by the High Court. The
Court laid down guidelines, inter alia, for correction of qualification and
selection criteria of technical members. Pursuant to these observations, the necessary
changes were incorporated in the new Companies Act, 2013 (‘2013 Act’). However,
the legal hurdles did not stop there.
The Supreme Court, once again in
2013, considered the questions of constitutionality by examining whether the
new legislative regime did in fact adhere to the reflections made in R. Gandhi. The ruling in Madras Bar Association v. Union
of India
dismissed the grounds of encroachment of separation of powers
and upheld the legislative competence of the Parliament to confer jurisdiction
of the tribunal. However, the provisions on qualification of ‘technical
members’ were invalidated on same rationale and Parliament was directed to take
remedial measures by amending the provisions in conformity with the prescribed
guidelines.[7]
Resultantly, Sections 411 to 414
under the Act dealing with qualification of members have not been notified. The
Companies (Amendment) Bill, 2016, which is pending passage in the Parliament, addresses
the changes that have been propounded by the Court.
2.         Revisiting the Provisions Concerning
the Tribunal
i.    Vested Powers in NCLT
Twenty-nine sections of the 2013
Act relating to the NCLT have been notified by the Ministry of Corporate
Affairs (MCA), which not only transfer the power from other judicial fora to
NCLT, but also prescribe additional powers. The tribunal has been conferred
with the power, amongst other things, to direct immediate inspection of books;[8] act upon removal of directors
or auditor;[9]
order investigations into the affairs of the company;[10] call for annual general
meeting or members meetings;[11] and order reopening of the
financial accounts.[12] The NCLT is also entitled to
award damages to the investors for loss arising out of any of the specified
fraudulent acts of the company. This power extends to holding the responsible
officer personally liable. Sections 241 & 242 have empowered the tribunal to
pass necessary orders in cases of mismanagement, oppression and class action
suits.[13] Conversion of a public
company to a private company,[14] and issuance of fresh
redeemable shares in case of failure to pay the dividend[15] require the approval of the
tribunal.
In accordance with section 434,
all the pending proceedings before the CLB initiated under the Companies Act,
1956 (‘1956 Act’) are to be transferred to the tribunal.[16] The provisions providing for
transfer of cases from BIFR and the High Courts are pending notification. Upon the
relevant provisions coming into effect, the NCLT will eventually take over the
functions of BIFR and the High Court.
ii.   Structure and Working
At present, there are 11 Benches
set up in different locations across the country. The tribunal comprises a
President and such number of judicial and technical members as prescribed, who
are appointed for a term of five years. The provisions set out in detail the
requirements pertaining to qualification and manner of selection. With respect
to the working of the tribunal, it has the discretion to regulate its own
procedure as long as it does not contravene the principles of natural justice
or the provisions of the Act and the Rules made therein. It has the same powers
as a civil court including summoning a person, receiving an evidence, ordering
document production and inquiry. Any order passed has the same force as that of
a suit decree; however, the procedure laid down in Civil Procedure Code is not
binding on it.
iii.  The Appeal Mechanism
Corresponding
to Section 10FQ of the 1956 Act, section 421 envisages an appeal mechanism. It
establishes an Appellate Tribunal to which any person aggrieved by the order of
NCLT may seek an appeal within a span of 45 days, which may be extended on sufficient
cause being proved. Section 423 further provides for an appeal against the
order of the Appellate Tribunal to the Supreme Court within
60 days from the date of receipt of the order. However, no appeal would
lie from an order made by the tribunal with the consent of the parties.
Under
the erstwhile provision, the right to appeal was restricted only to questions
of law. Whereas the present appeal structure reflects the first appeal
provisions under Section 96 of the Code of Civil Procedure and thus, NCLAT is
empowered to hear appeals on questions of both fact and law. Besides, the
1956 Act allowed the decisions of the CLB to be challenged before the High
Court and then the Supreme Court. In contrast, appeals from NCLT are provided
before the Appellate Tribunal and then to the Supreme Court. This eliminates
the impediment of conflicting High Court judgements and helps attain uniformity
in the position of law on a particular subject, thereby, ensuring greater
justice. 
3.         Significant
Changes
i.    Single Forum for All Corporate Litigation
With the constitution of the NCLT,
the jurisdiction of company law matters, which were spread over different for
a, would integrate into a single body. Disputes concerning share reduction,
merger, amalgamation and winding up were adjudicated by the High Court whereas
CLB exercised its control over issues such as oppression and mismanagement,
refusal to transfer of securities, and the like. Upon becoming fully
functional, the NCLT will become the sole grievance redressal body for company
law matters. The enactment of the Insolvency and Bankruptcy Code, 2016 has
further vested in the NCLT the jurisdiction in respect of all insolvency
matters. This major development addresses the concerns of multiplicity of
litigation and provides a more robust form of protection. This would also
reduce the burden of the High Court and the civil courts to a great extent.    
ii.   Speedy and Effective Recourse to Justice
Section 422, by mandating an expeditious
disposal mechanism, comes as a harbinger of hope to the litigants who suffer
due to long drawn out civil actions. It directs the tribunals to endeavour to
dispose off the matter within three months from the date of presentation of
application. Any departure from the stated time frame must be explained in
writing and, in any case, should not exceed 90 days.[17] Further, a greater number of
benches is in place to assure timely disposal.[18]
By providing for a simplified
dispute adjudication process, India’s reputation as a destination for doing
business will also be enhanced. Small investors who have deposited their hard-earned
money in companies are safeguarded against prolonged civil actions.
iii.  Class Action and Oppression and Mismanagement
Under Section 245, the provision
for class-action suits has been incorporated. It enables one or more plaintiffs
to represent the rights and interests of a larger class of people by filing and
prosecuting a suit on their behalf before the tribunal. The relief sought may
extend to restraining the company from performing any act contrary to any
resolution passed, its charters or the provisions of the Act. The tribunal can
also award damages for any fraudulent, unlawful act of the company, its auditor
or any other person associated with it.
Another important function of
resolving disputes concerning oppression and mismanagement has been conferred
upon the tribunal. The eligibility norms for invoking the jurisdiction of the
tribunal under Section 241 in oppression cases have been relaxed by allowing a
member below the eligibility criteria to apply with the permission of the
tribunal. Further, the tribunal has been empowered to waive any or all such requirements
on an application made to it. Therefore, the members who do not meet the
criteria can still proceed against oppressive acts and mismanagement of affairs
without getting authorisation from the Central Government as was required under
the 1956 Act.
4.         The
Road Ahead
There still remain certain
considerations which are unsettled. The fate of the cases pending before BIFR
and its appellate body, especially the ones which are at final stages, is shrouded
in ambiguity. It appears that fresh applications would be required to be filed
before NCLT or NCLAT, as the case maybe. At the same time, the manner and the
time period within which the matters are to be transferred from the CLB have
not been specified. There is also no clarity about the functioning of the tribunal,
as the rules have yet not been notified. Integration of jurisdiction poses a
heavy burden upon the tribunals and the actual transfer of files to the
tribunal will suffer implementation challenges.
Having regard to the wide powers
and immense responsibility entrusted to the NCLT, the quality of justice should
not be compromised. Adequate training to the members of the tribunal and proper
infrastructure are the need of the hour. Pending notifications must be enforced
without much delay to avoid the complexities of multiplicity of fora. A strong administrative
mechanism has to be in place specifically for matters dealing with transfer of
cases.
The constitution of the NCLT is
undoubtedly a welcome measure. Taking another step towards tribunalization of
justice, this move has paved way for speedy and more effective dispensation of
justice. What remains to be seen is whether the provisions will be implemented
in letter and spirit.
– Shruti Khetan



[1] The provisions concerning compromises,
arrangements, amalgamations and winding up of companies have yet not been
notified.

[2] The
jurisdiction was originally entrusted to the BIFR under the Sick Industrial
Companies (Special Provisions) Act, 1985.
[3] The High Court exercised powers
relating to winding up of companies.

[4] Chapter
5,
Report of The High Level Committee Law Relating to
Insolvency and Winding Up Of Companies
(2000).

[5] Section 6, Companies (Second
Amendment) Act, 2002. The provisions relating to NCLT and NCLAT were
incorporated under Part 1B and 1C of the Act.

[6] [2010] 11 SCC 1.

[7] Section 409(3) & Section
411(3) were held to be invalid. The Court pronounced 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.

[8] Section 119(4), Companies Act, 2013.

[9] Sections
169(4) & 140.

[10] Section 213.

[11] Section 97,
98 & 99.

[12] Section 130.

[13] Sections
241 & 242.

[14] Section 14(1)
& (2).

[15] Section 61(1)(b).

[16] Section 434
(1)(a)(b) & (2).

[17] Section 420.

[18] Under
the Old law, CLB operated through five benches, whereas NCLT has 11 benches as
of now. More are proposed to be set up.

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

  • TENTATIVE
    As read and understood by one, the constitutional validity of the creation of National Company Law Tribunal and National Company Law Appellate Tribunal under the new corporate law of 2013 has been upheld by the apex court, agreeing with the HC decision, for the reasons set out in the Judgment.
    As would not have been unexpected, in contesting the HC decision, attention has been drawn to and reliance placed on the apex court Judgment in settling the similar dispute but differently and on distinct grounds.
    The portion selected reads:
    “….His submission was that in view of the subsequent Constitution Bench judgment of this Court in Madras Bar Association v. Union of India[2], wherein establishment of National Tax Tribunal has been held to be unconstitutional, Section 410 should also be meted out the same treatment for the reasons recorded in the said judgment pertaining to National Tax Tribunal. It is difficult to digest this argument for various reasons, which we record in the discussion hereafter…..”
    It calls for a special noting:
    In the earlier instance, the constitutional validity of the set-up of NTT was challenged, successfully so; but the principal grounds of challenge were quite different in material respects. Briefly stated, the bone of contention was the professional competence of CAs to appear and represent before the NTT. Per contra, in the instant case, it is the competence of persons to sit on the Benches of National Company Law Tribunal and National Company Law Appellate Tribunal that has been the main ground addressed and gone into.
    In the context, for an academic study, in comparison, of the two Judgments of the SC, mention may be made –offhand, pending a closer study / subject to correction if not so,- of the fact that, CAs are enabled and permitted to appear and represent before the company law Tribunals.
    It might be worthwhile to spare time and painstakingly go through the texts of the two judgments ; do so, for an in-depth appraisal and incisive appreciation of the pleas advanced by both sides, more importantly the obviously distinct lines of reasoning and logic adopted by the apex court in the two instances.
    (May have more to add)

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