Wednesday, May 12, 2010

Further Comments on the NCLT judgment



In an earlier post, I had noted that a Constitution Bench of the Supreme Court has upheld the establishment of the National Company Law Tribunal and the National Company Law Appellate Tribunal, in an appeal filed by the Union of India against a judgment of the Madras High Court. The judgment of the Constitution Bench (Union of India v. R. Gandhi / Madras Bar Association) is now available on JUDIS (Civil Appeal No. 3067 of 2004 with Civil Appeal No. 3717 of 2005, unanimous, judgment dated May 11, 2010, per Justice Raveendran)


What the Court held:


While it is true that the competence of Parliament to establish the NCLT and the NCLAT has been upheld, the judgment effectively approves of the principles laid down in the impugned judgment of the Madras High Court. What the Constitution Bench has held is that “the creation of National Company Law Tribunal and National Company Law Appellate Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, are not unconstitutional…” However, “We declare that Parts 1B and 1C of the Act as presently structured, are unconstitutional (and) may be made operational by making suitable amendments, as indicated above, in addition to what the Union Government has already agreed in pursuance of the impugned order of the High Court…” In sum, the legislative competence of Parliament to create the NCLT and the NCLAT has been upheld, but the particular structure of the NCLT and NCLAT presently being proposed has been held unconstitutional. Thus, in order for the NCLT and the NCLAT to come into existence, the Union of India will have to carry out several amendments beyond what was mandated in Chapters 1A and 1B of the Companies Act, 1956 inserted by the Companies (Second Amendment) Act, 2002. The decision does not decide on the constitutionality of the National Tax Tribunal (although the matter as heard together, it appears to have been de-linked).


The contentions and the controversy:


The contentions against the creation of the NCLT and NCLAT were as follows:


1. Parliament does not have any legislative competence whatsoever to vest intrinsic judicial functions, particularly those which have been traditionally performed by the High Courts for a long time, in any Tribunal outside of the Judiciary.


2. The constitution of the NCLT and transferring the entire company jurisdiction of the High Courts to the Tribunal was violative of the doctrine of separation of powers and independence of the Judiciary, particularly having regard to the proposed qualifications of membership of the NCLT.



The real controversy was with respect to the second of these contentions. At issue were Sections 10(FD)(3) and 10(FX). Section 10(FD)(3) deals with the appointment of technical members (as opposed to judicial members), while Section 10(FX) deals with the selection process for the Chairperson of the Tribunal.


Competence of Parliament:


The Union of India contended that Parliament had legislative competence under the Constitution, and that being the case, the manner of exercise of its legislative power was not subject to challenge. On the other hand, it was contended by the respondents that legislative competence to create Tribunals existed only under Articles 323-A and 323-B of the Constitution. Those two Articles deal with the creation of tribunals in respect of some specific matters and it was contended that the NCLT was not limited to those matters listed in the two Articles. This contention was rejected – it was held that legislative competence can be exercised in respect of all matters in List I of the Seventh Schedule; and Article 323-A and 323-B is not a limiting provision. The subject-matters specifically listed in those articles are not exhaustive.


Concerns over membership:


The stronger challenge, and also the ground which was pressed more strongly, was on the membership of the Tribunal. On this, the Court takes a severe view of the Union’s argument that once competence was established, there could be no further test. The Court observes:


… when we say that Legislature has the competence to make laws providing which disputes will be decided by courts and which disputes will be decided by Tribunals, it is subject to constitutional limitations, without encroaching upon the independence of judiciary and keeping in view the principles of Rule of Law and separation of powers. If Tribunals are to be vested with judicial power hitherto vested in or exercised by courts, such Tribunals should possess the independence, security and capacity associated with courts. If the Tribunals are intended to serve an area which requires specialized knowledge or expertise, no doubt there can be Technical Members in addition to Judicial Members. Where however jurisdiction to try certain category of cases are transferred from Courts to Tribunals only to expedite the hearing and disposal or relieve from the rigours of the Evidence Act and procedural laws, there is obviously no need to have any non-judicial Technical Member. In respect of such Tribunals, only members of the Judiciary should be the Presiding Officers/members of such Tribunals… Therefore, when transferring the jurisdiction exercised by Courts to Tribunals, which does not involve any specialized knowledge or expertise in any field and expediting the disposal and relaxing the procedure is the only object, a provision for technical members in addition to or in substitution of judicial members would clearly be a case of dilution of and encroachment upon the independence of the Judiciary and Rule of Law and would be unconstitutional…


The present model does NOT pass the constitutional threshold:


In applying these principles to the NCLT/NCLAT, the Court states, capturing most of the concerns against the NCLT/NCLAT, “The issue is not whether judicial functions can be transferred from courts to Tribunals. The issue is whether judicial functions can be transferred to Tribunals manned by persons who are not suitable or qualified or competent to discharge such judicial powers or whose independence is suspect…” Further, the Court holds that when Parliament proposes to substitute a Tribunal for the High Court to exercise jurisdiction on company matters which the High Court is currently exercising, the standards expected from Judicial Members and the standards for appointing Judicial members should be as nearly as possible the same as those applicable for appointment of High Court judges. The Court recognizes that Technical members may be necessary for proper functioning of the NCLT/NCLAT. In appointing Technical members, the Government should keep in mind that “A lifetime of experience in administration may make a member of the civil services a good and able administrator, but not a necessarily good, able and impartial adjudicator…” It prescribes that only an officer of Secretary level in the appropriate civil service with specialized skills can be appointed as a Technical member of the tribunal. Again, the mere fact of being a civil servant is not enough – the person appointed must have expertise in company law and allied subjects. Furthermore, no such member can be allowed to “retain a lien over his retain his lien over his post with the parent cadre or ministry or department in the civil service for his entire period of service as member of the Tribunal…


The conclusions of the Court are as follows:


1. Who can be appointed as a Judicial member?


Only Judges and Advocates can be considered for appointment as Judicial Members. Furthermore, only High Court Judges, or Judges who have served in the rank of a District Judge for at least five years, or a lawyer who has practiced for ten years, can be considered for appointment as a Judicial Member.


2. Who cannot be appointed as a Judicial member?


Persons who have held a Group A or equivalent post under Central or State Governments with experience in the services such as the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for appointment as judicial members. Their expertise in these services can at best mean that they can be considered for appointment as technical members. In sum, a judicial member must closely approximate a High Court Judge.


3. Who can be appointed as a Technical member?


Only officers holding the ranks of Secretary/Additional Secretary can be considered for appointment as Technical members.


4. Who cannot be appointed as a Technical member?


A `Technical Member' presupposes experience in the specific field to which the Tribunal relates. A member of Indian Company Law Service who has worked with Accounts Branch of that service, or officers in other departments who might have incidentally dealt with some aspect of Company Law, cannot be considered as ‘experts’ and cannot be considered as being qualified for appointment as Technical members.


5. What is the Selection Committee for appointment?


The Selection Committee must be headed by the Chief Justice of India or his nominee, who shall also have the casting vote. Besides this, there is to be a senior Judge of the High Court or the Supreme Court. The other two members can be the secretaries of some government department (such as finance & company affairs, and law & justice).


6. What is the term of office of the members?


The term of office must be seven years, or at the very least, five years. This is because the presently proposed three-year term was too short to result in development of additional expertise, and because the “said term of three years with the retirement age of 65 years is perceived as having been tailor-made for persons who have retired or shortly to retire and encourages these Tribunals to be treated as post-retirement havens. If these Tribunals are to function effectively and efficiently they should be able to attract younger members who will have a reasonable period of service…” Members cannot retain a lien over there parent cadre for a period of more than one year from joining the Tribunal. Members can be removed/suspended prior to ending of their term only with the concurrence of the Chief Justice of India.


7. How shall Benches be constituted?


Two-Member Benches must have a Judicial member. Whenever any larger bench or any special bench is constituted, the number of Technical Members cannot exceed the Judicial Members.


Conclusion:


Now, of course, some of these conclusions are rather broad – the Court is only laying down the shortcomings in the presently proposed model, and it is for the Government to take note of these principles and pass an appropriate law establishing the NCLT. Thus, the judgment has upheld the competence of the Parliament to set up the NCLT, but it has not upheld the actual establishment of the NCLT itself. Only after the Parliament modifies the present law will an actually existing and functional Tribunal be possible. It is perhaps in everyone’s interest that Parliament sticks to the Court’s views as closely as possible in enacting the new law, else another constitutional challenge would be in the offing. The ball is now back in the Parliament’s court.

7 comments:

Anonymous said...

The contents of this judgment does perhaps justify years of waiting; worth all the patience ! Its a landmark judgment in every possible way.

Would you not also highlight the fact that perhaps the very institution of technical members deserves to be abolished. I donot think there is anything in the world which lawyers and judges do not understand.

Niranjan Rajagopalan said...

agree with mr anonymous on technical members(90%. But in Patent disputes, Scientific knowledge might be necessary).

and add these two points also to the courts holding

"
The second proviso to Section 10FE enabling the President and
members to retain lien with their parent cadre/ministry/department while holding office as President or Members will not be conducive for the independence of members. Any person appointed as members should be prepared to totally disassociate himself from the Executive. The lien cannot therefore exceed a period of one year."

and


"The administrative support for all Tribunals should be from the
Ministry of Law & Justice. Neither the Tribunals nor its members shall seek or be provided with facilities from the respective sponsoring or parent Ministries or concerned Department."

Mihir Naniwadekar said...

@Anonymous:

I agree it is a landmark judgment; and is perhaps the most important judgment on the interpretation of Chandra Kumar's case. There is some confusion as to what exactly Chandra Kumar is authority for (over and above the fact that Art. 226/32 are part of basic structure). While this judgment is restricted in final decision to the NCLT, it will certainly have bearing on the NTT and other tribunals.

As far as technical members are concerned, the Court appears to have a not too favourable outlook towards them, but perhaps recognises that technical members may be necessary in some cases where specializations are necessary. Perhaps one solution could be in terms of specialization through Benches - if we were to take the example of the Bombay High Court for instance, Justices such as Justice Rebello (and more recently Justice Chandrachud who has been sitting on the tax bench) are perhaps as good an adjudicator as any party would want. Of course, practitioners appearing before Courts regularly would be in a much better position to comment on whether technical members are necessary, or whether Judges/judicial members with specializations in specific areas of law are the solution...

Anonymous said...

Ignorance is bliss....enjoy it.

Its difficult to join the issue and express honest comments for several reasons - and even setting out these reasons could probably invite contempt and other proceedings.

Time for legal fraternity to do some introspection. There is life beyond mutual admiration societies. If you know not what is wrong with yourself, you can never rectify it. Anyway, it is too much to expect all this from legal fraternity which does not even seriously debate the method of appointment of judges.

Good luck; enjoy technical member bashing but please also take a look at their records in Tribunals.

Anonymous said...

I think that the presence of technical members at the fact finding level is good. So the accountant members of the ITAT are a good system, and have done plenty of credit to the institution.

At the second appeal level or the 'appeal on substantial question of law' level, however, technical members are unnecessary in most fields. Perhaps they might be essential in patent matters, as claim construction (which would probably require basic scientific knowledge) is a question of law. But I think that in other areas of law, a technical member isn't as essential. As an advocate appearing in tax and company matters in Bombay and Karnataka high courts, that is my view- the examples from Bombay of Justices like Rebello, Chandrachud, Khanwilkar, Mohta and others shows that adequate grasp of law is what matters, not (say) high knowledge of advanced accountancy. The same is true of the new CJI Justice Kapadia, under whom hopefully commercial law in the country will develop thoroughly.

Anonymous said...

Let us not drag ITAT accountant members into this debate. In a typical combination of legal and accountant members on a division bench, accounting member is more likely to know income tax law inside out than a judicial member. As against a law member without passing a single paper on income tax in his education, a CA has to write two major papers on income tax (also a Third Paper on Tax Planning and Tax Management, if he choses that option) and an IRS passing a major examination on income tax besides decades of experience before they qualify to be accountant members. Getting them into NTT could be anything but dilution in standards of legal knowledge

Anonymous said...

No way that just because you write a compulsory tax paper for CA exam you know tax law better..! Tax law is in concept dependent on legal understanding. I am not saying that accountant members do not have that understanding; but that is NOT because of writing tax papers! The problem is not so much with CAs in any case, it is with 'technical' members having experience in 'law, accounts, trade, commerce, industry...' I have no issues with members having experience in law and accountancy. But this rubbish formulation in the NTT of members experienced in trade and commerce is basically a post-retirement posting for babudom. Good that the Court stopped that!