India: Supreme Court Approves Setting Up Of Company Law Tribunals

Last Updated: 27 October 2015
Article by Link Legal India Law Services


The five-judge Constitutional Bench of the Hon'ble Supreme Court of India vide its order dated May 14,2015 in Madras Bar Association v. Union of Indiaupheld the Constitutional validity of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). This would give a go ahead to setting up of the a Tribunal, constituted to replace the Company Law Board (CLB), the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).

Background and Verdict:

Videamendment made under the erstwhile Companies Act, 1956 ("Old Act") in 2002 by Companies (Second Amendment) Act, 2002, certain provisions relating to NCLT and NCLAT were incorporated under Part 1B and 1C.

The constitutional validity of these provisions was challenged in a writ petition filed by the Madras Bar Association ("MBA") in the Madras High Court. However, at the same time, the High Court pointed out certain defects in various provisions of Part 1B and Part 1C of the Old Act, declaring that those provisions, as existed, offended the basicconstitutional scheme of separation of powers, and it was held that unlessthese provisions are appropriately amended by removing the defects which were also specifically spelled out, it would be unconstitutional toconstitute NCLT and NCLAT to exercise the jurisdiction which is being exercised by the High Court or the CLB.

A further appeal by Union of India as well as MBA was filed against the Judgment of Madras High Court which was decided by the Constitution Bench. The same was filed as MBA felt aggrieved by the part of the judgment vide which establishments of NCLT and NCLAT was held to be constitutional, whereas the Union of India felt dissatisfied by the other part judgment where provisions contained in part 1B and 1 C of the Old Act was perceived as suffering from various legal and constitutional infirmities.The said appeals were disposed by partly allowing them via Union of India v. R Gandhi, President, Madras Bar Association, [2010] 11 SCC 1 popularly known as Judgment 2010 whereby it was held that:

  • Creation of Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, were not unconstitutional.
  • Parts 1B and 1C of the Act were found to be unconstitutional; however, they may be made operational by making suitable amendments.

Though the verdict came in the year 2010, upholding the creation of NCLT and NCLAT, these two bodies could not be created and made functional immediately thereafter.

Pursuant to the observations of the Supreme Court in the aforesaidcase, the requisite changes were introduced to the scheme of NCLT under the new Companies Act, 2013 ("Act, 2013").

However, another round of litigation ensued inter alia  on the ground that not with standing various directions given in Judgment 2010, the new provisions in the Act, 2013 are almost on the same lines as were incorporated in the Act, 1956 and, therefore, these provisions suffer from the vice of unconstitutionality.

Hence, the current ruling of the Supreme Court is essentially an effort to examine the provisions of the 2013 Act and to consider whether it faithfully adheres to its previous ruling inJudgment 2010. While the court finds that the 2013 Act broadly does so, it also identifies some discrepancies.

In this light, the Court pronounced its ruling on three principal issues:

1) Validity of the constitution of NCLT and NCLAT

On this issue, the Court essentially reverberates 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".

2) Qualifications and Other Terms of the President and Members of the NCLT as well as Chairman and Members  of NCLAT

In order to empower CJ H. L.Dattu's emphasis on the principles of independence of judiciary and separation of powers, the following order was passed with respect to "Principal issues (ii) and (iii)". The first order was to hold Section 409(3)1 (a) and (c) of the Companies Act, 2013 as invalid, since these provisions suffered from unconstitutionality. Likewise, Section 411(3)2, which provided for qualifications of Technical Members, was also held invalid. Simultaneously, para 120 of 2010 Judgment will have to be scrupulously followed in respect of the appointment of Technical members to the NCLT.

Also, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as Technical members of the National Company Law Tribunal and only persons having ability, integrity, standing and special knowledge and professional experience of not less than fifteen years in industrial finance, industrial management, industrial reconstruction, investment and accountancy, may however be considered as persons having expertise in rehabilitation/ revival of Companies and therefore, eligible for being considered for appointment as Technical Members.

3) Structure of the Selection Committee for appointment of President /Chairperson /Members.

The 2013 Act provided for a 5-member committee without a casting vote to the Chief Justice of India (or nominee) which was found at fault by the Constitution Bench in 2010 judgment. The Court specificallyremarked that instead of 5 member Selection Committee, it should be 4member Selection Committeeand even the composition of such aSelection Committee was mandated in Direction No.(viii) of para 120  of 2010 Judgment.

Hence, with the new insertions and directions provided by the Court, it is observed that the Selection Committee shall broadly be on the following lines:
(a) Chief Justice of India or his nominee – Chairperson (with a casting vote);
(b) A senior Judge of the Supreme Court or Chief Justice of High Court – Member;
(c) Secretary in the Ministry of Finance and Company Affairs - Member; and
(d) Secretary in the Ministry of Law and Justice -Member.

However, now, in the new round of litigation, more provisions have been struck down. The present Judgment indicated that the legal hurdles for setting up the Tribunals are far from over. While concluding the Judgment, the court observed that since the functioning of these Tribunals has not started yet and it's high time that they start functioning now without any further delay, therefore the government has been asked to modify the rules according to the recommendations made in the Judgment at the earliest.


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.

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 behavior.The establishment and constitution of NCLT and NCLAT as exclusive Tribunals for the administration of all matters arising out of the Companies Act will definitely reduce, if not wipe out the grave delay involved in the company law proceedings, avoid multiplicity of litigation before various forums, streamline the process of appeal and reduce the burden on High Courts.


1. Section 409: Qualification of President and Members of Tribunal

2. Section 411: Qualifications of chairperson and Members of Appellate Tribunal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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