COMPANY LAW TRIBUNALS-THE WAY AHEAD

COMPANY LAW TRIBUNALS-THE WAY AHEAD - GULSHAN KOLTE ABSTACT Recently, a Constitution Bench of the Supreme Court (headed by Balakrishnan C.J.) has upheld IN THE CASE OF Union of India v. R. Gandhi / Madras Bar Association, the establishment of the National Company Law Tribunal and the National Company Law Appellate Tribunal, in an appeal filed by the Union of India against a judgment of the Madras High Court. The principal challenge to the constitutionality of the NCLT is based on the wholesale transfer of jurisdiction of the High Court in company matters to a quasi-judicial tribunal. On this account this article deals with the various aspects of NCLT and Supreme Courts Judgement. Introduction Business decisions require speedy determination and the long drawn legal battles in the Court of Law stifle business impetus. The Companies (Second Amendment) Act, 2002, has brought a relief to Companies, litigants and the Courts by creating two specialised bodies to bring about speedy disposal of the colossal cases pending before the High Court and the Companies Law Board. These specialised bodies called the National Company Law Tribunal [NCLT] and National Company Law Appellate Tribunal [NCLAT] have provided a glimmer of hope in Company litigation. Corporate disputes concerning mergers and acquisitions and amalgamations will be decided by the proposed fast-track adjudication body, National Company Law Tribunal (NCLT), the legality of which was approved by the Supreme Court with some riders.Giving its ruling on the long-drawn legal battle, the Supreme Court had approved establishment of the NCLT, a quasi-judicial body which will be manned, said the apex court, by judicial persons. Background of NCLT Before the Companies (Second Amendment) Act, 2002, Corporates were required to apply to High Courts for proceedings such as merger/amalgamation, reduction of capital and winding up of companies. But the High Courts being over burdened with other matters, used to take very long time to dispose off these matters, and as a result of which the society was not able to derive the intended benefits out of such decision. Even the Winding Up petitions before the various High Courts have been pending for a very long time. Similarly various matters before the Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) have been pending for a very long period. Therefore, it was desired that, in place of various bodies presently looking into different matters like merger/amalgamation, acquisition and reconstruction, revival and rehabilitation and winding up of Companies, a body should be constituted to handle all these matters and to dispose of all pending matters as well as fast disposal of new matters which might be referred to it in the future. On this account, the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, a retired Supreme Court Judge, to review the law relating to insolvency and Winding Up of Companies and other laws like The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) etc. The Committee made various recommendations with the main objective of expediting the revival/ rehabilitation of a sick Company and protection of workers’ interest, which were incorporated in the Companies (Amendment) Bill, 2001. The said Bill was subsequently passed by both the Houses of the Parliament and finally got the assent of the President of India on 13th January, 2002 and became the Companies (Amendment) Act, 2002. Consistent with the underlying objectives, as aforesaid, and in the backdrop of the experience of administration of SICA and winding up process, the Companies (Second Amendment) Act, 2002 provides for setting up of the National Company Law Tribunal (NCLT). On setting up of NCLT, all the matters relating to companies, which were earlier handled, by various High Courts, CLB, BIFR and AAIFR will now be handled by the NCLT. Pending matters with the High Courts and CLB will be transferred to NCLT. As the SICA has not yet been repealed, the sick Companies will continue to be under BIFR. Only sick ancillary undertakings will come under the jurisdiction of NCLT, as the newly inserted definition of Industrial Undertaking, seems to be faulty. Further, the definition of Industrial Undertaking is explicitly exempting the Small Scale Industries (SSI) from its ambit and therefore, SSI will remain out of the purview of the BIFR and the NCLT both. Decision of the Court While it is true that the competence of Parliament to establish the NCLT and the NCLAT has been upheld, the judgment effectively approves of the principles laid down in the impugned judgment of the Madras High Court. What the Constitution Bench has held is that “the creation of National Company Law Tribunal and National Company Law Appellate Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, are not unconstitutional…” However, “We declare that Parts 1B and 1C of the Act as presently structured, are unconstitutional (and) may be made operational by making suitable amendments, as indicated above, in addition to what the Union Government has already agreed in pursuance of the impugned order of the High Court…” In sum, the legislative competence of Parliament to create the NCLT and the NCLAT has been upheld, but the particular structure of the NCLT and NCLAT presently being proposed has been held unconstitutional. Thus, in order for the NCLT and the NCLAT to come into existence, the Union of India will have to carry out several amendments beyond what was mandated in Chapters 1A and 1B of the Companies Act, 1956 inserted by the Companies (Second Amendment) Act, 2002. The decision does not decide on the constitutionality of the National Tax Tribunal (although the matter as heard together, it appears to have been de-linked). The contentions and the controversy: The contentions against the creation of the NCLT and NCLAT were as follows: 1. Parliament does not have any legislative competence whatsoever to vest intrinsic judicial functions, particularly those which have been traditionally performed by the High Courts for a long time, in any Tribunal outside of the Judiciary. 2. The constitution of the NCLT and transferring the entire company jurisdiction of the High Courts to the Tribunal was violative of the doctrine of separation of powers and independence of the Judiciary, particularly having regard to the proposed qualifications of membership of the NCLT. The real controversy was with respect to the second of these contentions. At issue were Sections 10(FD)(3) and 10(FX). Section 10(FD)(3) deals with the appointment of technical members (as opposed to judicial members), while Section 10(FX) deals with the selection process for the Chairperson of the Tribunal. Competence of Parliament: The Union of India contended that Parliament had legislative competence under the Constitution, and that being the case, the manner of exercise of its legislative power was not subject to challenge. On the other hand, it was contended by the respondents that legislative competence to create Tribunals existed only under Articles 323-A and 323-B of the Constitution. Those two Articles deal with the creation of tribunals in respect of some specific matters and it was contended that the NCLT was not limited to those matters listed in the two Articles. This contention was rejected – it was held that legislative competence can be exercised in respect of all matters in List I of the Seventh Schedule; and Article 323-A and 323-B is not a limiting provision. The subject-matters specifically listed in those articles are not exhaustive. Concerns over membership: The stronger challenge, and also the ground which was pressed more strongly, was on the membership of the Tribunal. On this, the Court takes a severe view of the Union’s argument that once competence was established, there could be no further test. The Court observes: “… when we say that Legislature has the competence to make laws providing which disputes will be decided by courts and which disputes will be decided by Tribunals, it is subject to constitutional limitations, without encroaching upon the independence of judiciary and keeping in view the principles of Rule of Law and separation of powers. If Tribunals are to be vested with judicial power hitherto vested in or exercised by courts, such Tribunals should possess the independence, security and capacity associated with courts. If the Tribunals are intended to serve an area which requires specialized knowledge or expertise, no doubt there can be Technical Members in addition to Judicial Members. Where however jurisdiction to try certain category of cases are transferred from Courts to Tribunals only to expedite the hearing and disposal or relieve from the rigours of the Evidence Act and procedural laws, there is obviously no need to have any non-judicial Technical Member. In respect of such Tribunals, only members of the Judiciary should be the Presiding Officers/members of such Tribunals… Therefore, when transferring the jurisdiction exercised by Courts to Tribunals, which does not involve any specialized knowledge or expertise in any field and expediting the disposal and relaxing the procedure is the only object, a provision for technical members in addition to or in substitution of judicial members would clearly be a case of dilution of and encroachment upon the independence of the Judiciary and Rule of Law and would be unconstitutional…” The present model does NOT pass the constitutional threshold: In applying these principles to the NCLT/NCLAT, the Court states, capturing most of the concerns against the NCLT/NCLAT, “The issue is not whether judicial functions can be transferred from courts to Tribunals. The issue is whether judicial functions can be transferred to Tribunals manned by persons who are not suitable or qualified or competent to discharge such judicial powers or whose independence is suspect…” Further, the Court holds that when Parliament proposes to substitute a Tribunal for the High Court to exercise jurisdiction on company matters which the High Court is currently exercising, the standards expected from Judicial Members and the standards for appointing Judicial members should be as nearly as possible the same as those applicable for appointment of High Court judges. The Court recognizes that Technical members may be necessary for proper functioning of the NCLT/NCLAT. In appointing Technical members, the Government should keep in mind that “A lifetime of experience in administration may make a member of the civil services a good and able administrator, but not a necessarily good, able and impartial adjudicator…” It prescribes that only an officer of Secretary level in the appropriate civil service with specialized skills can be appointed as a Technical member of the tribunal. Again, the mere fact of being a civil servant is not enough – the person appointed must have expertise in company law and allied subjects. Furthermore, no such member can be allowed to “retain a lien over his retain his lien over his post with the parent cadre or ministry or department in the civil service for his entire period of service as member of the Tribunal…” The conclusions of the Court are as follows: 1. Appointment of Judicial Members Only Judges and Advocates can be considered for appointment as Judicial Members. Furthermore, only High Court Judges, or Judges who have 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 a Judicial Member. Persons who have held a Group A or equivalent post under Central or State Governments with experience in the services such as the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for 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 must closely approximate a High Court Judge. 2. Appointed of Technical member Only officers holding the ranks of Secretary/Additional Secretary can be considered for appointment as Technical members. A Technical Member presupposes experience in the 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 ‘experts’ and cannot be considered as being qualified for appointment as Technical members. 5. Selection Committee for Appointment The Selection Committee must be headed by the Chief Justice of India or his nominee, who shall also have the casting vote. Besides this, 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 & company affairs, and law & justice). 6. Constitution of Benches Two-Member Benches must have a Judicial member. Whenever any larger bench or any special bench is constituted, the number of Technical Members cannot exceed the Judicial Members. 7. Term of office of the members 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 there 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 Conclusion Now, of course, some of these conclusions are rather broad – the Court is only laying down the shortcomings in the presently proposed model, and it is for the Government to take note of these principles and pass an appropriate law establishing the NCLT. Thus, the judgment has upheld the competence of the Parliament to set up the NCLT, but it has not upheld the actual establishment of the NCLT itself. Only after the Parliament modifies the present law will an actually existing and functional Tribunal be possible. It is perhaps in everyone’s interest that Parliament sticks to the Court’s views as closely as possible in enacting the new law, else another constitutional challenge would be in the offing. The ball is now back in the Parliament’s court.

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