Supreme Court upheld constitutional validity of NCLT and NCLAT while some provisions held unconstitutional

The present judgment, delivered by a bench headed by Chief Justice H L Dattu, emphasised on the principles of independence of the judiciary and separation of powers, underlined in the 2010 judgment.

According to the court, many of the amended provisions- did not meet the conditions set by the earlier judgment. The main illegalities were related to the selection and appointment of technical members and heads of the tribunals.

However, the Supreme Court upheld the validity of constituting National Company Law Tribunal and National Company Law Appellate Tribunal.

A five-judge constitution bench asked the government to set up NCLT and its appellate forum without further delay.

Month of May seems to be the month of judgement on NCLT.

Apex court in its judgement of 14 May 2015 observed the entire writ petition takes umbrage under the Constitution Bench’s 2010 judgement, which was delivered on 11th May 2010. Hence it is necessary to briefly consider the 2010 judgement to appreciate outcome of 2015 judgement. Madras Bar Council had earlier filed writ petition in Madras High Court challenging constitutional validity of creation of National Company Law Tribunal (‘NCLT’ for short) and National Company Law Appellate Tribunal (‘NCLAT’ for short) which were incorporated by the Legislature in Parts 1B and 1C of the Companies Act, 1956. Which culminated into Order dated 30 March 2004 of the Madras High Court.  The High Court held that creation of NCLT and vesting the powers hitherto exercised by the High Court and the Company Law Board (‘CLB’ for short) in the said Tribunal was not unconstitutional. However, at the same time, the High Court pointed out certain defects in various provisions of Part 1B and Part 1C of the Act, 1956 and, in particular, in Sections 10FD(3)(f)(g)(h), 10FE, 10FF, 10FL(2), 10FR(3), 10FT. Declaring that those provisions as existed offended the basic Constitutional scheme of separation of powers, it was held that unless these provisions are appropriately amended by removing the defects which were also specifically spelled out, it would be unconstitutional to constitute NCLT and NCLAT to exercise the jurisdiction which is being exercised by the High Court or the CLB.

The petitioner felt aggrieved by that part of the judgment vide which establishments of NCLT and NCLAT was held to be Constitutional. On the other hand, Union of India felt dissatisfied with the other part of the judgment whereby aforesaid provisions contained in Parts 1B and 1C of the Act, 1956 were perceived as suffering from various legal and Constitutional infirmities. Thus, both Union of India as well as the petitioner filed appeals before apex court against that judgment of the Madras High Court.

Those appeals were decided by the Constitution Bench of the apex court on 11th May 2010 (2010) 11 SCC 1. The Constitution Bench vide the said 2010 judgment put its stamp of approval insofar as Constitutional validity of NCLT and NCLAT is concerned. It also undertook the exercise of going through the aforesaid provisions contained in Parts 1B and 1C of the Act, 1956 and in substantial measure agreed with the Madras High Court finding various defects in these provisions.

Briefly, in 2010 judgement, it was held as under:

(i) Constitution of NCLT and NCLAT is valid.

(ii) Appointment of Judicial Members of NCLT can be from: Judges and Advocates.

(a) Amongst Judges, only High Court Judges or Judges who have served as District Judge for atleast 5 years can be Judicial member.

(b) Amongst Advocates, a person who has practiced as a Lawyer for ten years. [section 10FD(2)(c) and (d) held invalid].

(iii) Appointment of Technical Members of NCLT can be from:

(a) Officers who are holding the ranks of Secretaries or Additional Secretaries. Officers of civil services of the rank of the Secretary or Additional Secretary in Indian Company Law Service and Indian Legal Service can be considered for purposes of appointment as technical members of the NCLT.

(b) Persons having ability, integrity, standing and special knowledge and professional experience of not less than fifteen years in industrial finance, industrial management, industrial reconstruction, investment and accountancy, may however be considered as persons having expertise in rehabilitation/revival of companies and therefore, eligible for being considered for appointment as technical members. [section 10FD (3) (f) partly].

(c) Person is or has been, a Presiding Officer of a Labour Court, Tribunal or National Tribunal constituted under the Industrial Disputes Act, 1947 can be appointed as Technical member of NCLT [Section 10FD (3) (g)] subject to minimum experience of 5 years.

(d) Person is or has been, for at least 15 years in practice as a CA, CWA, CS or special knowledge of, and experience in the matters related to labour can be appointed as Technical member of NCLT. [Section 10FD (3) (c), (d), (e) and (h)]

(iv) Salary and perks of a High Court Judge shall be given to the members of NCLT.

Further, persons with 15 years’ experience in Group A post or persons holding the post of Joint Secretary or equivalent post in Central or State Government, cannot be appointed as member (Judicial or technical) of NCLT.

A “technical member” presupposes an experience in the field to which the Tribunal relates. A member of the Indian Company Law Service who has worked with Accounts Branch or officers in other departments who might have incidentally dealt with some aspect of company law cannot be considered as “experts” qualified to be appointed as technical members.[section 10FD (3) (a), (b) and (f) held invalid].

(v) The Selection Committee [section 10FX modified] should broadly be on the following lines:

(a) Chief Justice of India or his nominee – Chairperson (with a casting vote);

(b) A senior Judge of the Supreme Court or Chief Justice of High Court – Member;

(c) Secretary in the Ministry of Finance and Company Affairs – Member; and

(d) Secretary in the Ministry of Law and Justice – Member.

(vi) The term of office of three years shall be changed to a term of seven or five years subject to eligibility for appointment for one more term. [sections 10FE and 10FT modified].

(vii) The President and members cannot retain lien with their parent cadre/ministry/department for more than a year. [second proviso to Section 10FE].

(viii) To maintain independence and security in service, sub-section (3) of section 10FJ and Section 10FV should provide that suspension of the President/Chairman or member of a Tribunal can be only with the concurrence of the Chief Justice of India.

It vested authority with Central Government, which was held to be invalid.

(ix) The administrative support for NCLT and NCLAT should be from the Ministry of Law & Justice. Neither the Tribunals nor its members shall seek or be provided with facilities from the respective sponsoring or parent Ministries or concerned Department. [Sections 10FK and 10GA modified].

(x) Two-Member Benches of the Tribunal should always have a judicial member. Whenever any larger or special benches are constituted, the number of Technical Members shall not exceed the Judicial Members. [section 10FL (2)]

The cause for filing the present petition by the petitioner was the allegation of the petitioner that notwithstanding various directions given in 2010 judgment, the new provisions in the Companies Act, 2013 (the ‘Act, 2013’) are almost on the same lines as were incorporated in the Act, 1956 and, therefore, these provisions suffer from the vice of unconstitutionality as well on the application of the ratio in 2010 judgment.

It was, thus, emphasized by the petitioner that these provisions which are contained in Sections 408, 409, 411(3), 412, 413, 415, 418, 424, 425, 426, 431 and 434 of the Act, 2013 are ultra vires the provisions of Article 14 of the Constitution and, therefore, warrant to be struck down as unconstitutional.

Since no arguments were made on Sections 415, 418, 424, 426, 431 and 434 the same are not discussed in the judgement.

Briefly, issues before the apex Court were:

(i) Challenge to the validity of the constitution of NCT and NCLAT;

(ii) Challenge to the prescription of qualifications including term of their office and salary allowances etc. of President and Members of the NCLT and as well as Chairman and Members of the NCLAT; Main objection was on qualifications of Technical members.

(iii) Challenge to the structure of the Selection Committee for appointment of President/Members of the NCLT and Chairperson/ Members of the NCLAT.

(iv) Incidental issues pertaining to the power given to these bodies to punish for contempt as mentioned in Section 425 and giving power to Central Government to constitute the Benches are also raised by the petitioner.

Court referred to its 2010 Judgement – “Any tribunal to which any existing jurisdiction of courts is transferred should also be a Judicial Tribunal. This means that such Tribunal should have as members, persons of a rank, capacity and status as nearly as possible equal to the rank, status and capacity of the court which was till then dealing with such matters and the members of the Tribunal should have the independence and security of tenure associated with Judicial Tribunals.”

Though the constitution of NCLAT was upheld in 2010 Judgement, the Petitioner made reference to Apex Court’s jugdement holding National Tax Tribunal (NTT) as unconstitutional and argued that based on NTT case (2015 SCC OnLine SC 388), constitution of NCLAT be held illegal.

However, disagreeing with the same, the apex Court noted that in NTT case it had spelled out the distinguishing features between NCLT/NCLAT on the one hand and NTT on the other hand in arriving at a different conclusion. Giving several reasons, including noting that “it is not unknown rather a common feature/practice to provide one appellate forum wherever an enactment is a complete Code for providing judicial remedies. Providing one right to appeal before an appellate forum is a well-accepted norm which is perceived as a healthy tradition”, contention of petitioner that constitution of NCLAT is ultra vires was rejected.

Held: (i) the constitution of NCLT and NCLAT is valid;

It may be noted that by Notification dated 12.09.2013, the Central Government has constituted the NCLT and NCLAT.

(ii) For appointment of technical Members to the NCLT, directions contained in sub-para (ii), (iii), (iv), (v) of para 120 of 2010 judgment will have to be scrupulously followed and these corrections are required to be made in Section 409(3) to set right the defects contained therein.

Section 409(3)(a) and (c) are invalid.

Section 411(3) providing for qualifications of technical Members, is also held to be invalid.

(iii) Chief Justice of India or his nominee is to act as Chairperson of Selection Committee, with the power of a casting vote. Casting vote is not covered under section 412 (2) (a) of 2013 Act and hence held invalid.

Apex court in 2010 judgement had suggested 4 members of Selection Committee (2 judicial and 2 administrative members). Section 412 (2) prescribes 5 members of selection committee (three are from the administrative branch/bureaucracy) and hence to that extent is invlaid. Hon’ble court has suggested that one Member who could be either Secretary in the Ministry of Finance or in Company Affairs can be member and not both.

(iv) Central Government can constitute the Benches of NCLT and thus, section 419 is valid.

(v) NCLT and NCLAT can punish for its contempt and thus, section 425 is valid.

Apex Court Directed Central Government to expedite in modifying the Companies Act 2013 as suggested so that NCLT and NCLAT starts functioning in near future.

Hopefully, in monsoon session Government will bring changes to the Companies Act 2013, as suggested by the apex Court. It may be noted that the Companies Amendment Bill 2014 bringing amendment to the Companies Act 2013 was earlier passed by Lok Sabha. In Budget Session the same is passed by Rajya Sabha but with changes and hence the same needs to be placed again before Lok Sabha for its approval in monsoon session of Parliament. Now, Government may either insert amendments to the Amendment Bill 2014 related to NCLT and NCLAT as suggested by the apex Court or may bring new bill (only for amendment related to NCLT and NCLAT or all amendments afresh).

It may be noted that provisions for NCLT were made following justice Eradi Committee report which recommended that jurisdiction for winding up of companies should be vested in NCLT and not high courts, as is presently. It further recommended that NCLT should deal with rehabilitation and revival of sick industrial companies, a jurisdiction presently entrusted with BIFR under Sick Industrial Companies (Special Provisions) Act, 1985.

This not only is expected to bring much awaited change in Corporate Insolvency and speedy disposal of Corporate Cases – be it matter before BIFR, AAIFR, Company Law Board, High Court – for winding-up, merger, demergre, reduction of share capital or any arrangement or reconstruction; but also open vast opportunities for Professionals especially Company Secretaries. Hopefully, soon “friendly neighbourhood” PCS will provide said litigation services besides acting as expert, liquidator and valuer.