Saturday, October 15, 2016

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.

1 comment:

vswami said...

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)