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Vol. 12 Issue 5.2 May 21, 2015
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Supreme Court upholds Constitutional Validity of Company Law
Tribunals
The National Company Law Tribunal (“NCLT”), and National Company Law
Appellate Tribunal (“NCLAT”) were contemplated as specialized tribunals in 2002 to
adjudicate matters relating to corporate restructuring, oppression and
mismanagement, winding up and sick companies, under the Companies Act, 1956.
The underlying intent was to speed up the adjudication process by providing for a
specialized forum with an appropriate blend of legal and specific subject matter
technical expertise. The jurisdiction on such matters was hitherto exercised by High
Courts, Company Law Board, and Board for Industrial and Financial Reconstruction.
The constitutional validity of NCLT and NCLAT, and the manner of their constitution
and functioning became a subject matter of litigation, with the result that these
specialized tribunals could not be operationalized. In 2010, a constitution bench of
the Supreme Court, in Union of India vs R. Gandhi, President, Madras Bar
Association [2010] 11 SCC 1, finally upheld the constitutional validity of these
tribunals. However, the Supreme Court also found certain provisions of law relating
to selection criteria of technical members[1] of these tribunals, and the selection
committee (which has the power select members of NCLT and NCLAT) were
constitutionally invalid, and directed that unless these defects are cured by
legislative amendment, constitution of NCLT and NCLAT could not be proceeded
with.
Post this judgment, NCLT and NCLAT could still not be set-up and operationalized
due to administrative reasons, and further litigation on the matter.
In September 2014, the erstwhile Companies Act, 1956 was replaced by Companies
Act, 2013 (“New Act”). Like its predecessor, the New Act also contained provisions
relating to constitution of NCLT and NCLAT, their jurisdiction and their operation. It
was expected that the provisions of the New Act address the defects pointed out the
Supreme Court judgment of 2010.
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However, the constitutionality of the provisions of the New Act was challenged again
in fresh litigation on the issue, with the result that the set-up of these tribunals could
not be proceeded with. This also impinged on the full operation of the New Act –
many provisions of the New Act on which he NCLT had jurisdiction could not be
made legally effective for want of an appropriate forum for adjudication.
The issue has finally been decided by a constitution bench of the Apex Court in its
judgment in Madras Bar Association vs Union of India pronounced on May 14, 2015.
In summary, the Court has held that:
• Set up of both NCLT and NCLAT is constitutionally valid, as has been held in the
Supreme Court judgment of 2010. The principle that, in Indian Constitution, it is
open for the legislature to provide for set up of tribunals as alternatives to the
Courts as a forum for adjudication on specialized matters, provided the tribunal in
question has all qualitative trappings and competence of the Court sought to be
replaced, has been upheld.
• However, the provisions of section 409(3) and 411(3) of the New Act providing for
selection criteria for technical members of these tribunals are constitutionally
invalid since the criteria provided in these sections dilutes the requirements
mandated by the Supreme Court in its judgment of 2010[2]. Accordingly, the
Court directed that these be cured by an appropriate amendment in law.
• Likewise, the provisions of section 412(2) of the New Act, providing for the
constitution of the selection committee which is empowered to select members of
NCLT and NCLAT are constitutionally invalid since the same is not as per the
requirements mandated by the Supreme Court in its judgment of 2010[3].
Accordingly, the Court directed that these be cured by an appropriate amendment
in law.
Noting the urgency of operationalizing these tribunals, the Supreme Court also
expressed desire that the Government take remedial action at the earliest.
BMR Comments
Addressing of the basic constitutional challenge on NCLT and NCLAT is a
big step forward, and paves way for set up and operationalization of these
specialized fora. One would hope that the other legal defects as pointed out
by the Apex Court are cured expeditiously through appropriate legislative
action.
The set-up of these tribunals would also lead to operationalization of the
Vivek Gupta, New Delhi
+91 124 669 5052
Rajendra Nalam, Mumbai
+91 22 6135 7066
Kalpesh Maroo, Bangalore
+91 80 4032 0090
Kalpesh Desai, Mumbai
+91 22 6135 7015
Siddharth Sehgal
remaining parts of the New Act (especially relating to corporate
restructurings, oppression/ mismanagement, sickness, winding up, class
action suits, etc), thus ensuring that only one law governing operations of
companies is in effect.
[1]Essentially, technical members are subject matter specialists who do not necessarily have
legal experience
[2]Essentially, the 2010 judgment mandated that Technical members of NCLT and NCLAT be
at-least of the level of Secretary or Additional Secretary from the Indian Company Law Service
or Indian Legal Service, with atleast 15 years of relevant legal/ technical experience. For
technical members selected from outside the Indian Company Law Service, or Indian Legal
Service, their area of expertize was strictly defined as per the scope of the legislation. The
provisions of the New Act did not strictly adhere to the criteria mentioned above.
[3]The 2010 judgment had mandated that the selection committee comprise four members (two
from the judiciary and two from the executive), with the casting vote being with the Chief Justice
of India, who shall be chairperson of the committee. The New Act deviated from the principle
by providing for five members (three from the executive), with no casting vote with the
chairperson
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preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no
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newsletter does not substitute the need to refer to the original pronouncements.
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