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Constitutional Validity Of Establishment Of NCLT And Its Role In Dispute Resolution

National Company Law Tribunal is the outcome of Eradi Committee, intended to be introduced in Indian legal system under the framework of Companies Act,1956. However, due to litigation with respect to constitutional validity of establishment of NCLT which went for 10 years, it was notified under Companies Act of 2013.

Both the NCLT and NCLAT were formed based on Article 245 of Indian Constitution. To reduce the burden of various forums and to take up all matters relating to company law and other corporate laws, Supreme Court upheld and allowed the constitution of both under Companies Act, 2013. NCLT provides a single roof for disputes to be litigated and settled which was not the case earlier. The paper proposes an overview of the establishment of NCLT, discusses the constitutional validity of NCLT and its role in dispute resolution.

Background
The concept of tribunals and appellant tribunals for dealing with matters related to company law was introduced in Companies (Second Amendment) Act, 2002. Under the Companies Act of 2013 (The Act), the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) was created in 2016. Both are quasi-judicial entities in India that entertain cases involving companies and corporations of India. The aforementioned Tribunals were established under the authority granted by Sections 408 and 410 of the new Companies Act, 2013.

Research Objective:
The objective of this research paper includes critically examining constitutional validity of the establishment of NCLT. Further, the purpose is to study the role NCLT has in resolution of disputes related to companies, keeping in mind the law of the land. The primary aim of the researcher is to acquire abovementioned objectives through empirical study on the topic.

NCLT: An Introduction

There is no statute that defines tribunals. Through various decisions, courts have stated that tribunals are not courts[1]. The genesis of setting up specialized tribunals can be traced from judgment of Sampath Kumar vs Union of India[2] where Supreme Court (SC) held that adoption of theory of alternative institution mechanism would lead to speedy disposal of cases thereby reducing the burden on High Court and the creation of these tribunals are within the legislative competence of Parliament and state legislatures, as stated in Article 245[3] of the constitution read with provisions under List I of the Seventh Schedule[4].

The idea of setting up NCLT was proposed for the first time to examine the laws relating to ‘Insolvency’ and ‘Winding up of Companies’. Justice Eradi Committee[5] inter alia identified multiplicity of court proceedings which was the main reason for delay in company-related matters. Given that there already exists several different fora dealing with different company matters, it was recommended the constitution of NCLT was solution to this problem. Pursuant to the recommendations[6], the Company (Second Amendment) Act, 2002 was enacted to introduce parts 1B[7] (contained provisions related to NCLT [sec10FB[8] to 10FP[9]]) and 1C[10], providing for the establishment of NCLT.

NCLT, that is a quasi-judicial body is established to handle all company-related disputes, with the exception of criminal prosecutions for violations of the Companies Act. It led to dissolution of Company Law Board (CLB) and further ousted jurisdiction of civil courts[11] and all the pending cases before them would be transferred to NCLT. The Tribunal is not bound by the stringent norms of evidence and procedure that govern the courts. It can make decisions based on natural justice principles. It was also held that matters in which power has been conferred on NCLT, the jurisdiction of civil court is completely barred[12].

Constitutional Validity of the establishment of NCLT:

The validity of NCLT was one of the most debatable topics in company law since the adoption of Companies (Second Amendment) Act, 2002. The Constitutional validity of NCLT has been challenged number of times in the higher judiciary.

In Thiru R. Gandhi vs Union of India[13], R. Gandhi, President, Madras Bar Association (MBA), submitted the first writ petition challenging its constitutional validity before the Madras High Court under Article 226[14] of the constitution. Madras High Court decided that the formation of NCLT/NCLAT and vesting in them functions previously exercised by High Courts and CLB was not unconstitutional.

Nonetheless, the Madras High Court concluded that various provisions of Parts 1B[15] and 1C[16] (Sections. 10FD, 10FE, 10FF,10FL (2), 10FO, 10FR (3) 10FT and 10FX) are flawed and unconstitutional, being in breach of basic principles of Separation of Powers, Rule of Law, and Independence of the Judiciary and which had to be sufficiently amended to establish NCLT.

The petitioner felt aggrieved by the judgement vide which establishments of NCLT was held to be constitutional. The Union of India, on the other hand, was displeased with portion of the ruling in which provisions in Parts 1B[17] and 1C[18] were deemed to have numerous legal and constitutional flaws. As a result, both the Union of India and the petitioner filed appeals to the Supreme Court against the Madras High Court’s decision.

2010 Judgement:
The appeals were decided by SC in Union of India v. R. Gandhi, President, Madras Bar Association[19]. The Constitution Bench stamped its approval on the constitutional validity of the NCLT and vesting in them, the powers and jurisdiction exercised by High Court in regard to company law matters, was not unconstitutional.

It also reviewed through provisions in Parts 1B and 1C, and in large part agreed with the Madras High Court in identifying significant flaws in these sections and has proposed corrections to remove defects in these provisions and make them valid, which is clearly mentioned in para120 of the 2010 judgment[20].

2015 Judgement:
Following the enactment of the Companies Act, 2013, a writ petition was filed with the SC under Article 32[21] of the Constitution. It was MBA again which filed the writ petition. Because the petitioners were aware of the principle of res judicata, they merely asked that NCLT be declared unconstitutional because the 2010 ruling was not particular about it.


The petitioner highlighted those provisions of Sections 409,411,412,415,418,424,426,431 and 434 of the Act[22] are ultra vires the requirements of Article 14[23] of the Constitution and, as a result, should be struck down as unconstitutional. However, in the case of Madras Bas Association vs Union of India[24], the Court affirmed the constitutional legitimacy of NCLT while declaring the regulations governing its formation to be unconstitutional since they did not follow the preceding judgement.

NCLT came into force:

After a decade of legal disputes, the Ministry of Corporate Affairs (MCA) eventually announced the provisions relating to formation and constitution of NCLT, as well as other relevant parts, with effect from June 2016, resulting in elimination of CLB with immediate effect. Furthermore, provision pertaining to the formation of Special Courts[25] for the purpose of rapid trial of offences committed under the Act, has been announced by the federal government.

Role of NCLT in dispute resolution

One of the most important features of the Act[26] is that it creates a single forum for most company law disputes. Delays in dispute settlement not only restrict new investment, but they also devalue assent, increasing business and market inefficiencies. The Act[27] combines jurisdictions of CLB, the High Court/District Court, and the BIFR, into a single Tribunal, the NCLT. Section 407[28] to 434[29] of the Act deals with NCLT & NCLAT to dissolve the dispute arising out of corporate. Aggrieved investors can now file class action lawsuits against corporate for misdoings and even seek compensation from auditors concerned, following the establishment NCLT.

The significant benefits of NCLT are accelerated dispute resolution process and uniformity of decision. NCLT was established to adjudicate and/or regulate the following types of disputes and/or activities:
  • The Tribunal decides on all proceedings under the Companies Act, including arbitration, compromise, reconstruction, and winding up
  • It is in charge of matters involving corporate mismanagement and oppression. A case can also be filed by a former employee of a company.
  • Dispute of conversion of a public company to a private company must be done only when the NCLT has given its approval.
  • It also deals with companies that commit frauds and malfeasance with their depositors and stockholders by drying away their wages. These investors/depositors are compensated by the tribunal.
  • It has the authority to investigate and deregister a business that has been registered unlawfully or fraudulently
  • A transferee can file a complaint with the NCLT if dispute arises and the firm refuses to register a transfer of its securities.
  • NCLT resolves disputes relating to request that the company’s auditors be replaced if that auditor has been involved in any fraudulent activity - the NCLT can even order such a change Suo moto.
  • The NCLT resolves disputes by approving a scheme for the resurrection and rehabilitation of a company based on an application made by any shareholder or the firm itself.
  • For a corporation to reduce its share capital, NCLT permission is required.
Apart from abovementioned points, there are multiple other disputes that are resolved by NCLT. Had it not been the case, burden on Indian Courts would have been immense. It helps in speedy process in dispute resolution, provides a simple window, avoiding unnecessary multiplicity of proceedings before various fora and reduces work load of High Court/District Court. Setting up of NCLT is directed towards faster resolution of corporate disputes, thus improving the ease of conducting business related activities.

Conclusion:
The establishment and constitution of NCLT as exclusive tribunal for administration of all matters arising under the Companies Act will undoubtedly reduce, if not eliminate, the catastrophic delay in company law proceedings, avoid multiple litigation before different forums, streamline the appeals process, and reduce burden on High Courts/District Courts.

NCLT and NCLAT should be judicial tribunals par excellence, as the Supreme Court has correctly stated, which is only achievable if members of NCLT/NCLAT are suitably qualified and conform to the prescribed standards.

End-Notes:
  1. Durga Shankar Mehta vs Thakur Raghuraj Singh, SC 1954 AIR 520.
  2. 1987 SCR (3) 233.
  3. The Constitution of India, 1950, art. 245.
  4. The Constitution of India, 1950, Schedule VII, List I.
  5. PSA, ‘National Company Law Tribunal: Will it live up to its promise?’ (29 September 2021) https://psalegal.com/wp-content/uploads/2017/01/ENewslineJuly2016.pdf
  6. Shri Justice V. Balakrishna Eradi, Report of High-level Committee on Law Relating to Insolvency and Winding up of Companies, 2000, p.47.
  7. The Company (Second Amendment) Act, 2002.
  8. The Company (Second Amendment) Act, 2002, § 10FB.
  9. The Company (Second Amendment) Act, 2002, § 10FP.
  10. The Company (Second Amendment) Act, 2002.
  11. specifically mentioned under The Companies Act, 2013, § 430.
  12. Shashi Prakash Khemka vs NEPC Micon & Others, CA 1965-66/2014.
  13. 2004 SCC Online Mad 294: (2004) 2 CTC 561.
  14. The Constitution of India, 1950, art. 226.
  15. The Companies Act, 1956, Part 1B.
  16. The Companies Act, 1956, Part 1C.
  17. Supra note 15.
  18. Supra note 16.
  19. Union of India vs R. Gandhi, President, Madras Bar Association, (2010) 11 SCC 1.
  20. Id.
  21. The Constitution of India, 1950, art. 32.
  22. The Companies Act, 2013.
  23. The Constitution of India, 1950, art. 14.
  24. Madras Bas Association vs Union of India, 2015 SCC Online SC 1094.
  25. SAMISTI Legal, ‘NCLT & NCLAT – The legal battle & the constitutional validity’ (29 September 2021) < https://samistilegal.in/nclt-nclat-the-legal-battle-the-constitutional-validity/>
  26. The Companies Act, 2013.
  27. Id.
  28. The Companies Act, 2013, § 407.
  29. The Companies Act, 2013, § 434.

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