VALIDITY OF CONSTITUTION OF NATIONAL COMPANY LAW TRIBUNAL AND NATIONAL COMPANY LAW APPELLATE TRIBUNAL

[Mr. M. GOVINDARAJAN]

In ‘V.R. Gandhi, President, Madras Bar Association V. Union of India’ 2004 (3) TMI 423 - HIGH COURT OF MADRAS, decided on 30.03.2004 the Madras High Court in its judgment held that the creation of National Company Law Tribunal and National Company Law Appellate Tribunal and vesting the powers hitherto exercised by the High Court and Company Law Board in the said Tribunal was constitutional.   The High Court pointed out certain defection sin Sections 10FD(3)(f)(g)(h), 10FE, 10FF, 10FL(2), 10FR(3), 10(FT) of Companies Act, 1956 and declared that the said provisions offended the basic constitutional scheme of separation of powers.  The High  Court held that unless the provisions are appropriately amended by removing the defects, it would be unconstitutional to constitute National Company Law Tribunal and National Company Law Appellate Tribunal to exercise jurisdiction of High Court and Company Law Board.   In the appeal filed before the Supreme Court by both parties, the Supreme Court held that the constitution of NCLT and NCLAT is valid and agreed with the findings of Madras High Court to remove the various defects  in the provisions.

The defects that are to be removed by the Government, as recommended by the Court are as follows:

• Only Judges and Advocates can be the Judicial Member.  The Judge should have served in the rank of District Judge for at least 5 years; if Advocate he has been in practice for 10 years;
• No other person should be considered for the post of judicial member;
• Since NCLT takes the functions of High Court, the members should be the High Court Judges;
• A technical member is supposed to have experience in the field in which the Tribunal relates.  A member of Indian Company Law Service is not an expert and he cannot be appointed for this posts.  Persons having ability, integrity and special knowledge and professional experience of not less than 15 years in the industrial finance, industrial management, industrial reconstruction, investment and accountancy may be considered  for the appointment as technical members;
• The Section Committee should contain-

• Chief Justice of India or his nominee - Chairperson (with a casting vote);
• A senior Judge of the Supreme Court or Chief Justice of High Court -  Member;
• Secretary in the Ministry of Finance and Commerce - Member; and
• Secretary in the Ministry of Law and Justice - Member.

• The tenure shall be 7 years of 5 years instead of 3 years;
• Suspension of Chairperson or member can be only with the concurrence of Chief Justice of India;
• Two members bench should have always a judicial member;
• In larger bench or special bench, the number of technical members shall not exceed the judicial members.

After the Supreme Court judgment, the required amendments have not been brought out by the Government.  It has enacted Companies Act, 2013 replacing the old Act and notified during September 2013.  In that Act there are provisions for the constitution of NCLT and NCLAT; the qualifications and tenure of the members; constitution of selection committee for the selection of members. 

The Madras Bar Association challenged the provisions relating to the constitution of NCLT, NCLAT, qualification, selection committee etc., before the Supreme Court in WP 1072/2013.   The petitioners contended that the provisions in the new Act in regard to the above are in analogous to the provisions of Section  10FD, 10FE, 10FF, 10FL,  10FR and 10(FT) which were introduced in the Companies Act, 1956 by means Companies (amendment) Bill, 2002.  The petitioners contended that notwithstanding the various directions given by the Supreme Court, the new provisions are almost in line with the provisions contained in 1956 Act and suffer from the vice of unconstitutionality.  The petitioners emphasized that Sections 408, 409, 411 (3), 412, 413, 425, 431 and 434 of the Companies Act, 2013 are ultra vires of the provisions of Article 14 of the Constitution of India and are liable to be struck down.  The petitioners are also questioned the validity of Sections 415, 418, 424, 426.

The Supreme Court categorized the challenges of the petitioners into three as detailed below:

• Challenge to the validity of the constitution of NCLT and NCLAT;
• Challenge to the prescription of qualifications including the term of their office and salary, allowances etc., of President and members of the NCLT as well as the Chairperson and members of NCLAT;
• Challenge to the structure of selection committee for appointment of President/Members of NCLT and Chairperson and members of NCLAT.

Constitutional validity of NCLT and NCLAT

Section 408 of the Companies Act, 2013 gives powers to the Central Government for the constitution of National Company Law Tribunal which will consist of President and such other number of Judicial and Technical members, as the Central Government may deem necessary to be appointed by it.

Section 410 of the Companies Act, 2013 gives powers to the Central Government for the constitution of National Company Law Appellate Tribunal which will consist of a Chairperson and such other number of Judicial and Technical Members not exceeding 11 to be appointed by notification.

The Supreme Court pointed out that in its judgment in 2010 clearly upheld the validity of the constitution of NCLT and NCLAT after elaborate discussions in various issues raised by the petitioner.   The said judgment is binding on every one.   The Supreme Court held that it is not open to the petitioner  to argue this issue as it clearly operates res judicata.   The Supreme Court thus upheld the validity of constitution of NCLT and NCLAT.

Members of Tribunals

The Supreme Court compared the provisions relating to the qualification, appointment, salary and allowances etc., of the erstwhile Act with the current Act.  The Supreme Court in its earlier judgment treated Part 1C and 1D of the 1956 Act as invalid as to bring them with the realm of Constitutionality and also pointed out the corrections which were required to be made  to remove the anomalies.  The Supreme Court after analyzing the provisions contained in the new Act held that the provisions are clearly in the teeth of dicta pronounced in 2010 judgment.  The Government pointed out the various reasons for limiting the consideration of the requirements of the 2010 judgment.  The Supreme Court held that there was one very compelling reason in the mind of the court viz., gradual erosion of independence of judiciary, which was perceived as a matter of concern.  Therefore the Supreme Court held that Section 409 (3)(a) and (c) are invalid as these provisions suffer from vice.  The Supreme Court also held that Section  411(3), which provides  for qualifications of technical members is invalid.  The Supreme Court directed the Government to follow the instructions given in 2010 judgment for appointment of technical members.

Selection Committee

Section 412 of the Companies Act, 2013 provides for the constitution of Selection Committee which consists 5 members including-

• Chief Justice of India or his nominee - Chairperson;
• A Senior Judge of Supreme Court or Chief Justice of High Court - Member;
• Secretary in the Ministry of Corporate Affairs - Member;
• Secretary in the Ministry of Law and Justice - Member;
• Secretary in the Department of Financial Services in the Ministry of Finance - Member.

The Supreme Court observed that there is a deviation from the 2010 judgment in relation to the constitution of selection committee.   The erstwhile judgment required four members for the selection committee giving Chief Justice of India the power of casting vote which has been dispensed with in the present Act.  The Supreme Court further observed in the selection committee only two members are judicial members while the other 3 members are related to administrative branch which is also an attempt to erode the powers of the judiciary.  The Supreme Court emphasized on  the fact that the Chief Justice of India or his nominee is to be given the final say in the matter of selection with a right to have a casting vote.  Therefore the Supreme Court declared the Section 410 (2) as invalid.

Since the NCLT and NCLAT are yet to function the Supreme Court hoped that the Government shall take remedial measures as per the directions of the Supreme Court.

As per the directions of the Supreme Court the Government is to bring amendments in the Companies Act, 2013 in line with the directions of the Supreme Court which may take some time to come into effect.   If the same is rectified all other sections relating to the involvement of Tribunals will come into effect and thus the entire Companies Act, 2013 will act with full swing.