New era to start NCLT and NCLAT established

The Ministry of Corporate Affairs has issued a notification for the constitution of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) with effect from June 1, 2016.

Honorable Justice SJ Mukhopadhaya, Judge (Retired), Supreme Court of India has joined as the Chairperson of the NCLAT and Honorable Justice MM Kumar, Judge (Retd.) has joined as President of the NCLT.

With the constitution of the NCLT, the Company Law Board constituted under the Companies Act, 1956 stands dissolved.

Initially, NCLT will have eleven Benches, two at New Delhi and one each at Ahmedabad, Allahabad, Bengluru, Chandigarh, Chennai, Guwahati, Hyderabad,Kolkata and Mumbai.

Some facts analysed to understand how the said establishment of NCLT and NCLAT will be begining of new era.

A constitution bench of the Supreme Court of India in its recent judgment in Madras Bar Association vs. Union of India and Another1 has paved the way for the establishment of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) under the provisions of the Companies Act, 2013. The NCLT and the NCLAT will act as a comprehensive and overarching quasi-judicial body which will adjudicate all disputes relating to companies in India.

Existing tribunals and authorities, such as the Company Law Board, the Board of Industrial and Financial Reconstruction, the Appellate Authority for Industrial and Financial Reconstruction and the Company Courts in the jurisdictional High Courts which deal with various issues relating to companies will be done away with, and will be subsumed in the NCLT and the NCLAT once these are established and functioning. Matters currently pending before these for a too would be transferred to the NCLT and the NCLAT (as applicable).

NCLT and NCLAT under the Companies Act, 1956:

The constitutional validity of the NCLT and the NCLAT is an issue that was first tested before the Supreme Court of India in Union of India vs. R. Gandhi, President, Madras Bar Association2 (the2010 Judgment). In the 2010 Judgment, while the constitution bench of the Supreme Court held the NCLT and the NCLAT as envisaged by the Part 1B and Part 1C of the Companies Act, 1956 (the 1956 Act) to be a fit and proper body, it agreed with the views of the Madras High Court (wherefrom the issue came to the Supreme Court in appeal) that certain provisions of Part 1B and Part 1C of the 1956 Act relating to the appointment and the eligibility for membership of the NCLT and the NCLAT were “defective” and required rectification (by way of amendment).

However, pursuant to the 2010 judgment, the rectification to Part 1B and Part 1C of the 1956 Act to operationalize the NCLT and the NCLAT were not carried out. In 2013, the Companies Act, 2013 (the2013 Act) was passed by the Parliament and partially notified into effect; although, the provisions in the 2013 Act relating to the NCLT and the NCLAT were not notified. Although the rectifications to Part 1B and Part 1C of the 1956 Act directed by the Supreme Court in the 2010 Judgment had been included in Chapter XXVII of the 2013 Act, the Madras Bar Association filed the present writ petition before the Supreme Court. The Madras Bar Association prayed for a writ of declaration contending that some provisions of Chapter XXVII of the 2013 Act too suffered from the same defects as those observed in the 2010 Judgment, and therefore should be struck down as unconstitutional.

Issues already decided:

The issues raised in the present proceedings were primarily three fold: (a) A challenge to the validity of the constitution of the NCLT and the NCLAT; (b) A challenge to the prescription of qualifications including their term of office, salary, allowances etc. of the president and the members of the NCLT as well as the chairman and members of the NCLAT; and (c) A challenge to the structure of the selection committee for appointment of the president/ members of the NCLT, and the chairman/ members of the NCLAT.

At the very outset, the constitution bench of the Supreme Court categorically stated that all issues raised in the present petition were already covered by the 2010 Judgement, and consequently chose to adopt the same approach to deal with the impugned provisions of the 2013 Act.

With regard to first issue, the court held that the validity of the NCLT and NCLAT is an issue which is already res judicata since the first case clearly upheld the constitutionality of the NCLT and NCLAT on all accounts.

On the second issue, the Supreme Court held Sections 409 (3) (a), 409 (3) (c) and 411 (3) of the 2013 Act relating to the appointment and technical qualifications of members of the NCLT suffer from the same vice as the corresponding provisions in the 1956 Act (as observed in the 2010 Judgment). Accordingly, these provisions were held invalid and the Supreme Court directed that necessary corrections to these provisions, as pointed out in the 2010 Judgment, would need to be carried out. With respect to the third issue (pertaining to the selection committee for selecting the members of the NCLT and the NCLAT), the Supreme Court observed that Section 412 (2) of the 2013 Act was contrary to its observations in the 2010 Judgment. Accordingly, the Supreme Court held that Section 412 (2) of the 2013 Act was invalid and issued directions to rectify the defects in this provision in line with the recommendations in the 2010 Judgment.

One step closer to consolidation:

Even in the 2010 Judgment, the Supreme Court showed urgency and directed that the intentions of the legislature to set up a consolidated forum for adjudication of disputes relating to companies be given form at the earliest. In the present decision too, the Supreme Court directed the Union of India to disclose the status of the process of establishing the NCLT and NCLAT, and noted that the only step that remained in establishing the NCLT and the NCLAT was to appoint the president and the members of the NCLT, and the chairperson and members of the NCLAT.

The Supreme Court reiterated the need to act expeditiously and directed the Union of India to comply with the directions in its judgment at the earliest and establish and ensure proper functioning of the NCLT and the NCLAT.

The NCLT and the NCLAT, now established, will be the consolidated bodies which would adjudicate and decide all issues relating to companies in India and cases pending before the various benches of the Company Law Board, the BIFR, the AAIFR and all Company Courts across the country would be transferred to the NCLT and the NCLAT. Although the move to consolidate all proceedings relating to companies in India under the NCLT and NCLAT is an ambitious one, it is also much welcome. The absence of a multiplicity of fora, with often overlapping mandates and jurisdictions, is expected to ensure that proceedings before the NCLT and the NCLAT will be streamlined and will be closed in a more efficient manner. The Supreme Court of India having held both the NCLT and the
NCLAT as constitutionally valid and not in violation of the scheme of the constitution.

While the shift from the 1956 Act to the 2013 Act continues to be a rough ride, all companies presently litigating before various fora wait eagerly to see what the shift to, and the performance of the NCLT and the NCLAT holds.

Footnotes

 1 Judgment dated May 14, 2015 in Writ Petition (C) No. 1072 of 2013

2 (2010) 11 SCC 1

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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