Corporate Re-organisation and Establishment of NCLT & NCLAT: Perspectives & challenge By Mr. Sudhanshu Prakash & Mr. Sudeep Aravind Panicker

Introduction : The Companies Act of 2013 (The 2013 Act) envisages a paradigm shift in the process of reconstruction/re-organisation. It provisions that all the powers and functions of the high courts, company law board, company court, the BIFR under the sick industrial companies Act shall henceforth be exercised by the NCLT. Establishment of a single forum, which is dedicated to corporate matters, is a welcome move, and removes the problem of multiple regulators. However, setting up of such quasi-judicial tribunals have been a constant point of litigation, either on its legal competence or for its non-compliance with the provisions of the NCLT or with the principles laid down in the Apex court’s previous rulings. A recent petition filed in the Apex Court (against the formation of the NCLT) has resulted in the delaying the process of recruiting judicial and technical members of NCLT, which would entail in further deference in setting up of the NCLT, which by itself could find its way into the 2013 Act only after almost a decade of legal battle.

The new act purposes that the National Company Law Tribunal (NCLT) will assume the jurisdiction of high courts in context of restructuring schemes. We need to wait and see how this transpires into reality in coming days. However, a commendable step in the direction is that of simplifying court’s approved merger/amalgamation/compromise processes which include relaxation of mandates in the case of mergers of small enterprises, holding companies and their wholly owned subsidiaries etc., where the approval of NCLT will not be required. This liberalization will ease the burden of regulatory authorities and do away with lengthy implementation timelines, especially in the present times when a strengthened focus on business is the key aspect to be achieved.[1]

The 2013 Act provides for the constitution of the National Company Law Tribunal (NCLT) as the single authority for all schemes relating to restructuring. However, there is no clarity on the time factor that will be taken for the NCLT to be constituted and to become operational. Practical difficulties are (to be) expected in implementation of provisions relating to restructuring until the Ministry of Corporate Affairs (MCA) could provide sufficient clarity on these issues. The 2013 Act provides until the government notifies a date for transfer of all matters, proceedings or cases to the NCLT, the provisions of the act regard to the existing jurisdiction, powers, authority and function of the current Company Law Board and the company court will continue to apply. The 2013 act does not provide for any transitional provisions to govern the restructuring which is in progress at the time of notifying such a date. It is quite interesting to take note that BIFR was constituted without many legal hurdles. However, the establishment of the NCLT did face significant legal challenges.

The constitution and implementation of NCLT were challenged as it was seem to transfer the jurisdiction of the High court in company matters to this quasi-judicial tribunal before the Madras High Court. The judgment of the Madras High Court on the issue of constitution of NCLT and NCLAT was taken in appeal before the Hon’ble Supreme court. The Madras High Court did not disapprove the legislative competency in establishing NCLT, but expressed its concern over the independence of the mechanism and its effectiveness, A five-judge constitution bench headed by Chief Justice K. G. Balakrishnan, however, approved the amendment with certain conditions. The bench said a judicial officer or a person with legal background should head the tribunal and not a retired bureaucrat, as envisaged by the Parliament. It may be pointed out that the Law commission, as referred to by the Supreme Court in the case of L Chandra Kumar[2] had also recommended the creation of specialist Tribunals in place of generalist Courts. Therefore, the creation of National Company Law Tribunal and Appellate Tribunal and vesting in them the powers till then exercised by the High court with regard to company matters cannot be said to be unconstitutional.

Need of Specialized Courts or Tribunals: The genesis of setting up of specialized tribunals can be traced to the Supreme Court judgment in Sampath Kumar[3] case. In that case, while adopting the theory of alternative institutional mechanism for Supreme Court referred to the fact that since independence, the population explosion and the increase in litigation had greatly increased the burden of pendency in high courts. The supreme court also referred to studies conducted towards relieving the high courts of their increase load; the recommendations of the Shah committee for setting up independent tribunals as also the suggestion of the administrative reforms commission for setting up of Civil Service tribunals.[4]

The 124th law commission of India, 1988 has stated that the prevailing view in Indian jurisprudence that the jurisdiction employed by the high court is a holy cow required a review and also recommended trimming of the jurisdiction of the high courts by setting up specialist courts/tribunals by simultaneously eliminating the jurisdiction of the high courts.[5]

Part XIVA of the Constitution was inserted by the constitution (42nd Amendment) Act, 1976 containing Articles 323 A and 323 B, providing for Administrative Tribunal and Tribunals for other matters, respectively. In pursuance of the power conferred upon it by clause (1) of Article 323 A of the constitution, Parliament enacted the Administrative Tribunals Act, 1985. The Statement of Objects and Reasons of the said Act indicates that the enactment was as per the express terms of Article 323 A of the constitution and was being enacted because of the pendency of a large number of cases relating to service matter before various Courts; it is  expected that the setting up of such Administrative Tribunals to deal exclusively with service matters would go a long way in not only reducing the burden of the various courts thereby giving them more time to deal with other cases expeditiously but would also provide to the persons covered by the Administrative Tribunals speedy relief in respect of their grievances. Article 323 B of the constitution empowers Parliament or the state legislatures, to enact laws providing for the adjudication or tribunals, of disputes, complaints or offences with respect to a wide variety of matters including inter alia disputes relating to tax cases, foreign exchange matters, industrial and labour dispute cases, ceiling on urban property, election to state legislatures and Parliament, essential goods and their distributions, criminal offences etc. Clause (3) of article 323 B enables the concerned legislature to provide for the establishment of a hierarchy of tribunals and to lay down their jurisdiction, the procedure to be followed by them in their functioning etc. Sub clause (d) of clause (3) empowers the concerned legislature to exclude the jurisdiction of all courts, except the jurisdiction of the Supreme Court under article 136 of the constitution, with respect to all or any of the matters falling within the jurisdiction of the tribunals. The constitutional provision, therefore invests parliament or the state legislatures with powers to divest the traditional courts of a considerable portion of their judicial work. A number of quasi-judicial forums and tribunals have been established by the government like debt recovery tribunal, securities appellate tribunal, CESTAT, etc. with a view to provide speedier and specialized fora for dispensation of justice and disposal of various matters.

Madras High Court in the matter of R. Gandhi, president, Madras Bar Association v. Union of India[6] held that the parliament’s power to create National Company Law Tribunal and National Company Law Appellate Tribunal is clearly traceable to entries 43 & 44 of List I. The Court also viewed that parliament is thus competent to enact law with regard to the incorporation, regulation and winding of the companies. The power of regulation would include the power to set-up adjudicatory machinery for resolving the matters litigated upon, and which concern the working of the companies in all their facets.

Constitution of  NCLT & NCLAT: The setting up of NCLT as a specialized institution for corporate justice is based on the recommendations of the Justice Eradi Committee on law relating to Insolvency and Winding up of Companies.[7] The Committee examined not only the Companies Act, 1956 but also the other relevant laws having a bearing on the subject such as Sick Industrial Companies (special provisions) Act, 1993 and the recommendations of the United Nations and International Monetary Fund reports -“orderly and effective Insolvency procedures-Key issues.” The committee in its report noted that there are at present three different agencies namely, the high courts, which have powers to order winding up of companies under the provisions of the Companies Act, 1956; secondly, the company law board set up under section 10E of the Companies Act, 1956 to exercise powers conferred on it by the act or the powers of the central government delegated on it and finally Board for Industrial and Financial Reconstruction (BIFR).

With the intention of establishing a separate tribunal to deal with all issues or disputes under the Companies Act, 1956 and also to expedite speedy disposal of companies related cases, a special tribunal and an Appellate tribunal called National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) were sought to be established through the Companies (Amendment) Act 2002. As per the said amendment, as soon as the tribunal and the appellate tribunal are constituted, almost all power exercised by the high courts under the Companies Act ,1956 are sought to be transferred NCLT and NCLAT except the judicial review powers exercised under the articles 226 and 227 of the constitution of India. This was done with idea of transferring the existing powers of the Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) also those exercised by the high court in respect of winding up of companies, amalgamation and merger, rehabilitation and revival of sick industrial companies, reduction of share capital, etc. to the NCLT. NCLT was to be a quasi-judicial body to look into the company matters.[8]

Sri. R. Gandhi, President of Madras Bar Association has challenged the company’s (amendment) Act, 2002 and specially the constitution of NCLT and NCLAT through a writ petition. The government through constitution of NCLT sought through one stroke doing away with the CLB, BIFR and the jurisdiction of the High courts. Basically, the constitution and implementation of NCLT was challenged as it was seen to transfer the jurisdiction of the High Court in company matters to this quasi-judicial tribunal.[9] Justice Jayshimha Babu of the Madras high court had delivered a considered and landmark judgement on the issue of legality of constitution of NCLT and NCLAT. It should be noted that while the high court had held that the creation of NCLT and NCLAT is not unconstitutional, it has also found that certain made in parts 1B and 1C of the Companies Act, as introduced by the Companies (Amendment) Act, 2002, which inter alia contain certain regulations on tenure of the President/members of NCLT, the qualification prescribed for members, have been held to be defective. The High Court has, therefore, held that unless such provisions are duly amended by removing the defects as pointed out by the high court, it would be unconstitutional to constitute and NCLT or appellate tribunal to exercise the jurisdictions now exercised by the high courts or the CLB.

Various guidelines prescribed in the judgment were as follows:-

  • Only judges and advocates can be considered for appointment as judicial members. Furthermore, only the High Court’s Judges, or Judges who has 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 judicial member.
  • Persons who have held a Group A or equivalent post under Central or State Government with experience in services such as Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade 1) cannot be considered or 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 is like a High Court Judge.
  • Only officers holding the ranks of Secretary/Additional Secretary can be considered for appointment as Technical Members. A ‘Technical Member’ presupposes expertise in 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 ‘Expert’ and cannot be considered as being qualified for appointment as Technical member.
  • The selection committee must be headed by the Chief Justice of India or his nominee, who shall also have the casting vote. Besides, 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 & corporate affairs, and law & justice).
  • 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 their 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.
  • Two member benches must have a Judicial Member. Whenever any larger bench or any special bench constituted, the number of Technical members cannot exceed the judicial Members.[10]

This would provide for disposal of company cases in an expeditions manner and would reduce the backlog of the cases pending. In view of the above, all company related matters pending with the CLB and the Board for BIFR will also be transferred to the NCLT and the NCLAT. The Apex Court has also said that barring the judicial review power under the articles 226 and 227 of the Constitution of India, almost all jurisdictions exercised by the High Courts in this regard to the company matters would now be transferred to and exercised by the proposed Tribunal and the Appellate Tribunal.

Matters dealt by NCLT

The NCLT has been empowered to exercise the following functions:

  1. Most of the powers of the Company Law Board under the Companies Act, 1956.
  2. All the powers of BIFR for revival and rehabilitation of the sick industrial companies;
  3. Powers of the High Courts in the matters of mergers, de-mergers, amalgamations, winding up, etc.
  4. Power to order repayment of deposits accepted by Non-Banking Financial Companies as provided in section 45QA of the Reserve bank of India Act, 1934;
  5. Power to wind up companies;
  6. Power to review its own orders.

The NCLT shall have powers and jurisdiction of the Board for Industrial and Financial Reconstruction (BIFR), The Appellate Authority for Industrial and Financial Reconstruction (AAIFR), Company Law Board (CLB), High Courts relating to compromises, arrangements, mergers, amalgamations, and reconstruction of companies, winding up etc. Thus, multiplicity of litigation before various courts of quasi-judicial bodies or forums have been sought to be avoided. The Powers of the NCLT shall be exercised by the benches constituted by its President.

In the case of disputes relating to company matters, it was divided between the High Court and the Company Law Board. The disputes relating to reduction of capital, merger, amalgamation and winding up of companies were with the High Court and the power of rectification of register, complaints relating to refusal to transfer/transmission of securities, rectification of register of members, matters relating to oppression and mismanagement and other non adversarial issues were handled by CLB. Now, all these matters would be dealt with by NCLT. Further, the provisions that deal with compromises and arrangements (usually, these would be mergers and de-mergers) require High Court’s approvals. If the companies under merger are located in different States, different High Courts will be involved, leading to delays in clearances. Now, with the constitutional validity by the Supreme Court, the NCLT would regulate the merger and de-merger schemes and since it is a single body, hopefully, the processes will be simpler. One must accept that the present High Court process has worked reasonably well but having said that, the span of jurisdiction of the High Courts is vast and it becomes difficult for them to do full justice to the several conflicting priorities before them. Further, all the company matters which are registered under the BIFR and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) which are pending for revival/rehabilitation would also get transferred to NCLT  and NCLAT. Thus, the specialised body such as NCLT to deal with company law issues will provide focus and direction (and hopefully, expertise and speed) in the disposal of company matters.[11]

Accoding to MCA

The Tribunal (National Company Law Tribunal) (National Company Appellate Law Tribunal)[12]

As per Companies (Amendment) Act, 2002, the National Company Law Tribunal is envisaged as the forum to address Insolvency issues. It is hoped that this forum is constituted speedily. The Committee however takes this opportunity to focus on some important aspects widely considered important for proper functioning of such a body.

The Insolvency Tribunal should have a general, non-intrusive and supervisory role in the rehabilitation and liquidation process. Greater intervention of the Tribunal is required only to resolve disputes by adopting a fast track approach.  The Tribunal should adopt a commercial approach to dispute resolution observing the established legal principles of fairness in the process. The Tribunal should set standards of High quality and be able to meet requisite level of public expectations of fairness, impartiality, transparency and accountability. Selection of the President and the member of the Tribunal should be such so as to enable a wide mix of expertise for conduct of its work.

The Tribunal will require specialised expertise to address the issues referred to it. The law should prescribe an adequate qualification criterion for appointment to the Tribunal as well as training and continuing education for judges/members.

Rules should be made in such a way that ensure ready access to court records, court hearings, debtors and financial data and other public information.

Standards to measure the competence, performance and services of the Tribunal should be framed and adopted so that proper evaluation is done and further improvements are suggested.

The Tribunal should have clear authority and effective methods of enforcing its judgments. It should have adequate powers to deal with illegal activity or abusive conduct.

Benefits of Consituting  NCLT

Business decisions require speedy determination and the long drawn legal battles in the court of laws stifle business impetus. With the constitution of NCLT and NCLAT, multiplicity of litigation before various courts or quasi judicial bodies or forums regarding revival or rehabilitation of companies, petitions relating to merger or amalgamation or winding up will be avoided as all these matters will be heard and decided by a single alternate forum namely viz., NCLT. Further, all the parties to the dispute will be bound by the Tribunal’s orders and in case of non-availability of workable proposal for revival rehabilitation etc., the Tribunal can decide the matter on merits. For this purpose, the Tribunal may introduce its own rules and regulations or any scheme which would be acceptable to the parties. There would be various Benches which will be constituted under NCLT and NCLAT which will reduce the entire process which is presently taking several years. For instance in the case of winding up petitions, it may take even three to four years to conclude. Further, with these Tribunals in place, stripping of assets of sick companies will be avoided.

As in the case of Court, here also, individual affidavits will be filed before the NCLT and NCLAT, which will have the powers of contempt of Court. This will enable the deponents who will file affidavits to take the cases in a serious manner and, thus, it contains inbuilt mechanism for seriousness. In the case of rehabilitation of sick companies with the help of the Tribunals, the assets of the said companies would be protected. Further, there will be fund known as rehabilitation and revival fund which will be used to make payments to the workmen of the company which has been declared sick or the companies which are under liquidation process. Hence with the implementation of NCLT and NCLAT, we do hope that not only the corporate would stand to benefit but every ne including workers, creditors and stakeholders and in turn the economy as a whole would be benefitted. It is also mentioned here that presently in the proceedings of the CLB, many feel or express dissatisfaction with regard to the workings. Sometimes, corporate feels that they are not in a position to effectively perceive their cases to get speedy justice. There is also and apprehension that the orders given by the CLB are being taken very lightly and not given effect to in letter and spirit. Very often, the jurisdiction and the competence of the CLB are also questioned. Thus, these anomalies would not be there once the NCLT is in place and we can expect speedy disposal of cases which are presently being handled by CLB.[13]

Practical Challenges :As per the enactment on and from the commencement of the relevant sections of the companies (amendment) Act, 2002, the Board of Company Law

Administration (CLB) constituted under Section 10E of the Companies Act, 1956 shall stand dissolved. It may be noted that notification to dissolve the CLB under the Section 10 FA has not been yet issued by the Central Government and till such notification is issued, Company Law Board shall continue to discharge its duties and exercise its powers under the Companies Act, 1956. Though the Act of 2013 has paved the way for establishment of Tribunals, however, pending notifications of the sections and rules in relation to reconstructing and absence of transitional provisions has led to concern within industry and professionals engaged in restructuring in the corporate world.[14]

The act empowers existing enforcement agencies and provides for the establishment of new ones. These are crucial measures, as the lack of enforcement agencies, and the limited powers of existing ones, have often meant that hugely publicized arrests have often fizzled out into decade-long litigation that rarely leads to conviction. The new legislation empowers the Serious Fraud Investigation Office (SFIO) as the sole authority to investigate corporate crimes; mandates the establishment of the National Financial Reporting Authority (NFRA) to set and supervise auditing and accounting standards; and gives the National Company Law Tribunal (NCLT) power to approve certain corporate developments such as mergers and the winding up of the companies, while all corporate cases currently dealt with by high courts and other agencies will be transferred to this new body. However, these mandated changes are yet to happen; the SFIO still carries out its investigation under the old law, and rules for the establishment of the NFRA & NCLT are yet to be framed. If India’s poor history of legislative implementation is any guide, there are likely to be delays, and possibly glitches, to the process. The creation of the NFRA, for example, each already facing strong opposition from the Institute of Chartered Accountants of India (ICAI), which claims that the new body would “duplicate” its efforts and “undermine the authority of the institute”. Furthermore, better enforcement capacity will also hinge on broader reform of India’s notoriously overburdened judicial system, reform which currently does not appeared to be on the horizon.[15]

Conclusion : Time is, therefore, ripe to insure that dispensation of justice and disposal of business matters by the court and authority should be in tune with the speed with which the business is being transacted. Further certain business matters require specialized domain knowledge for dealing with the matters justifiably. Keeping in view of the pendency of legal matters and need for specialized knowledge of the persons discharging the responsibility of adjudicating the matters involving intricate issues relating to the subjects, the process of setting up of specialized tribunals has gained acceptability over a period of time.

By: Mr. Sudhanshu Prakash & Mr. Sudeep Aravind Panicker, Students of Law, School of Legal Studies, Cochin University of Science & Technology, Kochi

[1] Ernest and Young, Mergers and Acquisitions in the new age of Companies Act, 2013 (February 2014) available at, http://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies_Act/$File/Assocham_White_paper_Companies_Act.pdf (last seen at 11:30pm, 03-04-2015)

[2] L. Chandra Kumar v. UOI (1997) 3 SCC 261

[3] S. P. Sampath Kumar v. UOI (1985) 4 SCC 458

[4] Purushottam Grover, National Company Law Tribunal- A single window institution for corporate justice, available at http://www.icsi.edu/WebModules/Programmes/PCS/7PCS/BG%20PCS-6-Grover.pdf (last seen at 10:00pm, 04-03-2015)

[5] 124th  Law Commission Report, Law Commission of India, available at http://lawcommissionofindia.nic.in/101-169/Report124.pdf  (last seen at 10:00pm, 04-03-2015)

[6] (2010) 6 SCR 857

[7] Justice Eradi Committee on Law Relating to Insolvency and Winding up of Companies, available at http://pib.nic.in/focus/foyr2000/foaug2000/eradi2000.html (last seen at 10:00pm, 04-03-2015)

[8] T. V. Ganesan, Constitution of National Company Law Tribunal (NCLT) – An alternate judicial forum for company matters, available at- http://www.taxmann.com/TaxmannFlashes/%5B2010%5D018CAT00245%28ART%29.htm (last seen at 10:00pm, 04-03-2015)

[9] Ibid

[10] Writ Petition No.2198 of 2003, dated 30/03/2004

[11] Ministry of Corporate Affairs, Setting up of NCLT and NCLAT (March 19, 2012), available at –  http://pib.nic.in/newsite/erelease.aspx?relid=81235 (last seen at 3:00pm, 04-03-2015)

[12] Report of the Expert Committee on Company Law – Restructuring and Liquidation, available at, http://www.mca.gov.in/MinistryV2/chapter13.html (last seen at 10:30pm, 04-03-2015)

[13] Supra T.V Ganesan – Constitution of National Company Law Tribunal (NCLT) –
An alternate judicial forum for company matters, available at, http://www.taxmann.com/TaxmannFlashes/%5B2010%5D018CAT00245%28ART%29.htm (last seen at 10:30pm, 04-03-2015)

[14] Grant Thornton, Companies Act 2013: Implementation Challenges available at, https://www.controlrisks.com/en/newsletters/integrity-matters/issue-12/india-company-act-in-detail (last seen at 11.30pm, 04-03-2015)

[15]  India’s companies act – big step ahead, but with challenges, available at –  https://www.controlrisks.com/en/newsletters/integrity-matters/issue-12/india-company-act-in-detail (last seen at 3:00pm, 05-03-2015)

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