India: Supreme Court Approves Setting Up Of Company Law Tribunals

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

Introduction:

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.

Implications

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.

Footnotes

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions