Supreme Court Paves the way for Company Law Tribunal (NCLT & NCLAT)

Readers may recall that the primary reason for the partial effectiveness of the Companies Act, 2013 (the “2013 Act”) has been the pending litigation surrounding the constitution of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”). Hence, the provisions of the 2013 Act that relate to the NCLT have been kept in abeyance pending the outcome of the litigation, while only the remaining provisions have already been brought into force. This legislative quagmire ended now with a Constitution Bench ruling of the Supreme Court in Madras Bar Association v. Union of India, which upheld the constitutionality of the 2013 Act’s provisions relating to NCLT subject to certain qualifications. In this post, I discuss the key issues and ruling of the Supreme Court and highlight what this might mean for the future of corporate litigation in India.

Background and Ruling

The genesis of this litigation goes back to a challenge mounted to the constitutional validity of the provisions of the Companies Act, 1956 (the “1956 Act”), which were introduced by way of the Companies (Second Amendment) Act, 2002. These provisions catered for the constitution and functioning of the NCLT. Both the Madras High Court as well as the Supreme Court upheld the constitutional validity of the provisions subject to certain amendments to the legislation.

In the wake of the Supreme Court’s observations in that case, necessary changes were introduced to the scheme of the NCLT, which were reflected in the 2013 Act. However, another round of litigation ensued inter alia on the ground that the 2013 Act does not fully reflect the observations of the Supreme Court in R. Gandhi. Hence, the current ruling of the Supreme Court is essentially an effort to examine the provisions of the 2013 Act to consider whether it faithfully adheres to its previous ruling inR. Gandhi. While the court finds that the 2013 Act broadly does so, it also identifies some discrepancies. Hence its final conclusion of upholding the validity of the NCLT provisions of the 2013 Act, with qualifications to the extent of the discrepancies identified.

The Supreme Court’s decision is pithy and confines itself very closely to specific issues at hand without an elaborate discussion of constitutional principles. It is essentially verification exercise to ensure that the provisions of the 2013 Act adhere scrupulously to R. Gandhi. In this light, the Court pronounced its ruling on three principal issues:

(i)         Constitutional Validity of the NCLT

On this issue, the Court essentially echoed its decision in R. Gandhi on the ground that all arguments pertaining to constitutionality were already addressed by the Court in that case and it “specifically rejected the contention that transferring judicial function, traditionally performed by the Courts, to the Tribunals offended the basic structure of the Constitution”. While the petitioner sought to invoke a 2014 decision of the Supreme in Madras Bar Association v. Union of India in which the establishment of the National Tax Tribunal (“NTT”) was held unconstitutional, the Court reemphasized that there were significant differences between the NCLT and the NTT that would justify arriving at a different conclusion.

(ii) Qualifications and Other Terms of the President and Members of the NCLT

The challenge essentially related to the qualifications of the Technical Members of the NCLT. The core issue at hand was that while the Supreme Court in R. Gandhi provided that “only officers who are holding the ranks of Secretaries or Additional Secretaries alone are to be considered for appointment as technical Members of the NCLT”, the 2013 Act “again makes Joint Secretary to the Government of India or equivalent officer eligible for appointment”, if he has the relevant experience. This was found to be invalid, and contrary to the ruling in R. Gandhi. The Court observed that “corrections are required to be made in Section 409(3) to set right the defects contained therein”.

(iii) Structure of Selection Committee for Appointment of Members

On this count, R. Gandhi provided for a 4-member committee to be headed by the Chief Justice of India (or nominee) with a casting vote. However, the 2013 Act provided for a 5-member committee without a casting vote to the Chief Justice of India (or nominee). Moreover, the Court found fault with the fact that in the 5-member committee, three members were from the executive branch as against two from the judiciary, which conferred a predominant say to the executive branch. Hence, the provisions relating to the selection committee were held to be invalid to that extent.

In terms of the final order, the Supreme Court noted:

33) Since, the functioning of the NCLT and NCLAT has not started so far and its high time that these Tribunals starting functioning now, we hope that the respondents shall take remedial measures as per the directions contained in this judgment at the earliest, so that the NCLT & NCLAT are adequately manned and start functioning in the near future.

Implications and Way Forward

By this judgment, the Supreme Court has not only paved the way for the establishment of the NCLT, but it may also potentially lead to the notification of the remaining sections of the 2013 Act so as to make the entire legislation effective. In fact, in the paragraph quoted above, the Court seems to display enthusiasm and even a sense of urgency for the commencement of the tribunals.

The next question relates to the next steps the Government could take. Certainly, in the long run, the 2013 Act will have to be amended to bring it in line with the observations of the Supreme Court by way of a legislation approved by Parliament (or in the interim through an Ordinance). It would be interesting to see if the Government seeks to commence functioning of the tribunals even before legislative change through appropriate executive action that gives effect to the observations of the Supreme Court. In any event, it is likely to be a matter of time before we witness the tribunals taking shape.

At a broader level, this development is significant as it might likely alter the face of corporate litigation in India. While matters such as amalgamations, winding-up, and similar cases being taken out of the regular court system, one can expect greater efficiency in resolution of corporate disputes. Similarly, the most-discussed class action mechanism could potentially alter corporate behaviour. This area is bound to witness frenetic activity in the near future.