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Constitutional validity of NCLT: in light of Madras Bar Association Case

The National Company Law Tribunal (NCLT) was constituted by the Central Government by exercising the powers conferred upon it by section 408 of the Companies Act, 2013 (18 of 2013) on 1st June, 2016 vide an Official Notification released by the Ministry of Corporate Affairs and all the matters pending before the Company Law Board (CLB) were transferred to the NCLT.

The setting up of the NCLT as a specialized institution for corporate justice is based on the recommendations of the Justice Eradi Committee[1], a committee set up by the Central Government in 1999 to examine the laws relating to Insolvency and Winding up of Companies, with the motive of re-modelling it in line with the latest developments and innovations in the corporate law and governance, as well as to suggest reforms in the procedure that is followed at various stages in the insolvency proceedings of companies to avoid unnecessary delays.

The CLB under the Companies Act, 1956 stood dissolved with the establishment of the NCLT and NCLAT, which also consolidated the corporate jurisdiction of authorities such as the Company Law Board, BIFR (Board for Industrial and Financial Reconstruction), the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), Official Liquidator (OL) and jurisdiction and powers relating to winding up restructuring and other such provisions, vested in the High Courts �� all of which are to be subsumed by the NCLT.

Further post establishment of NCLT and NCLAT, no civil court has jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force. Further no injunction can be granted by any court or any other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal.

Presently the NCLT has thirteen benches, two at New Delhi (one being the principal bench) and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kochi, Kolkata and Mumbai.

Judicial History: Challenges to the constitutional validity of NCLT

The Constitutional validity of NCLT has been challenged number of times in the higher judiciary.

The author has tried to summarise the judicial history below:

Before High Court:

Madras Bar Council, in 2004 filed a writ petition in Madras High Court challenging constitutional validity of creation of National Company Law Tribunal ('NCLT') and National Company Law Appellate Tribunal ('NCLAT') which were incorporated by the Legislature in Parts 1B and 1C of the Companies Act, 1956 that 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 CLB 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.

In Appeal:

The petitioner felt aggrieved by the High Court 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.

2010 Judgement:

The appeals were decided by the Constitution Bench of the apex court on 11th May 2010 in Union of India v. R. Gandhi, President, Madras Bar Association[2]( '2010 judgment'). The Constitution Bench vide this 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.

2015 Judgment:

The cause for filing the petition before the Supreme Court 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) were 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 the provisions which are contained in Sections like 408, 409, 411(3), 412, 413, 415, 418 etc. of the Act, 2013 are ultra vires the provisions of Article 14 of the Constitution and, therefore, warrant to be struck down as unconstitutional. But the Court in the Madras Bas Association v. Union of India[3] case, upheld the constitutional validity of NCLT though held the provisions regarding the constitution of NCLT to be invalid for not adhering to the previous judgement.

Judicial Precedents

The two most important decisions given by the Constitution Benches of the Supreme Court of India was in 2015 Madras Bar Assn case - observing the constitutional validity of the NCLTs and resolving every possible ground that one can raise against it. The Court upheld the reasoning that Constitution Bench gave in 2010 judgement but did not mention in detail what was the reasoning and therefore the author has tried to summarise both the cases for clarity of the readers.

Union of India v. R. Gandhi, President, Madras Bar Association (2010 judgement)
Contentions: The petitioner challenged the establishments of NCLT as well as NCLAT on the common grounds that the Parliament had resorted to tribunalisation by taking away the powers from the normal courts which was essentially a judicial function and this move of the Legislature impinged upon the impartiality, fairness and reasonableness of the decision making which was the hallmark of judiciary and essentially a judicial function.

Court's reasoning

The Court rejected the argument of unconstitutionality of NCLT and NCLAT on two grounds:

  1. The argument that the constitution of a tribunal was violative of the doctrine of separation of powers and independence of the judiciary, which are parts of the basic structure of the Constitution, was invalid because it is well settled that only constitutional amendments can be subjected to the test of the basic features doctrine. Legislative measures are not subjected to basic features or basic structure or basic framework. Legislation can be declared unconstitutional or invalid only on two grounds, namely, (i) lack of legislative competence, and (ii) violation of any fundamental rights or any provision of the Constitution.

    The Court relied on several cases like Kuldip Nayar v. Union of India[4] and State of A.P. v. McDowell & Co.[5] opinion of Chandrachud J. in Indira Nehru Gandhi v. Raj Narain[6] and Beg, C.J. in his leading judgment of a seven-Judge Bench in State of Karnataka v. Union of India [7]that said:
    No doubt, as a set of inferences from a document (i.e. the Constitution), the doctrine of 'the basic structure' arose out of and relates to the Constitution only and does not, in that sense, appertain to the sphere of ordinary statutes or arise for application to them in the same way.

  2. The argument that the constitution of a tribunals under Parts 1B and 1C of Companies Act 1956 was held invalid.

    The Court observed that the issue was not whether judicial functions can be transferred from courts to tribunals. The issue was whether judicial functions can be transferred to tribunals manned by persons who are not suitable or qualified or competent to discharge such judicial powers or whose independence is suspect.
The Court observed that the reason given by the Eradi Committee for suggesting transfer of the company law jurisdiction from the High Courts to tribunals was delay and the report said- Long-drawn court proceedings:
24. Multiplicity of court proceedings is the main reason for abnormal delay in dissolution of companies��. Normally, there is a Company Court with one Company Judge in each High Court and it is not possible for the court to cope with the work relating to companies under liquidation. Apart from company matters, the court also attends to other cases in the High Court. The orders passed by Company Judge are appealable under Section 483. Normal delays and adjournments sought in court proceedings further aggravate the problem and unless all the pending cases are not finally disposed of.[8]

Thus, the tribunals with only judicial members would have served the purpose and the report did not suggest to include technical members or officers of civil services[9]
Parts IC and IB of the Companies Act proposed that 'Judicial Member' and a `Technical Member', selected under section 10FD, will decide the disputes.

The Court observed that as NCLT takes over the functions of the High Court, the members should as nearly as possible have the same position and status as High Court Judges. This can be achieved, not by giving the salary and perks of a High Court Judge to the members, but by ensuring that persons who are as nearly equal in rank, experience or competence to High Court Judges are appointed as members. If there should be technical members, they should be persons with expertise in company law or allied subjects and mere experience in civil service cannot be treated as Technical Expertise in company law. The candidates falling under section 10FD have no experience or expertise in deciding company matters.

Final Judgment:
The Court upheld the decision of the High Court that the creation of the National Company Law Tribunal and the National Company Law Appellate Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, are not unconstitutional. The Parts I-B and I-C of the Act as structured back then were held to be unconstitutional they may be made operational by making suitable amendments as suggested in the judgement.

Madras Bar Association v. Union of India (2015 judgement)
Before proceeding to the contentions of the petitioner, it becomes necessary to highlight what the Supreme Court said[10] about its previous 2010 judgement.

The Court summarised the position taken in 2010 judgement as follows:

  1. A legislature can enact a law transferring the jurisdiction exercised by courts in regard to any specified subject to any tribunal.
  2. All courts are tribunals and any tribunal to which any existing jurisdiction of courts is transferred should also be a Judicial Tribunal. Such Tribunals will 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.
  3. In context of securing the independence of judiciary, the Court observed that the Tribunals should normally have only judicial members as indiscriminate appointment of technical members in all Tribunals will dilute and adversely affect the independence of the Judiciary and lastly,
  4. The Legislature can re-organize the jurisdictions of Judicial Tribunals and while constituting Tribunals, the it can prescribe the qualifications/ eligibility criteria but that would be subject to Judicial Review. The court may interfere to preserve the independence and standards of judiciary. Such an exercise will be part of the checks and balances measures to maintain the separation of powers and to prevent any encroachment, intentional or unintentional, by either the legislature or by the executive.

Contentions and Court's reasoning:

  • The petitioner primarily challenged the Constitutional validity of NCLAT and not the constitution of NCLT. The petitioner conceded that validity of NCLAT was upheld in the 2010 judgment but because in the 2010 judgment the discussion and reasoning pertained only regarding NCLT and nothing insofar as NCLAT was concerned, therefore, conclusion which is mentioned in the 2010 judgment at the end, should not be treated as binding or to be taken as having decided this issue.

    The Court held that the question of validity of NCLAT was directly and squarely discussed in the 2010 judgement. Various facets of the challenge laid to the validity of these two fora were thoroughly thrashed out. Though, most of the discussion in 2010 judgement refers to NCLT, however, on an insight into the said discussion, it would eloquently bear it out that it is inclusive of NCLAT as well. The Court, in 2010 judgement, specifically affirmed the decision of the High Court which held that creation of NCLT and NCLAT was not unconstitutional. Therefore, the issue was hit by res judicata.
  • The other contention of the petitioner was that because the constitutionality aspect of both the forum have been dealt with in the National Tax Tribunal (NTT) judgment[11] wherein formation of National Tax Tribunal has been held to be unconstitutional, therefore, that judgement should be followed and constitution of NCLAT should be held illegal.

The Court rejected the argument on following grounds:

  1. Terming such argument to be as adventurism, the Court observed that as far as NCLAT and NCLT are concerned, their validity has already been upheld and this issue cannot be reopened.
  2. The Court distinguished between the NTT and 2010 judgement and said that the NTT was a matter where power of judicial review exercised by the High Court in deciding the pure substantial question of law was sought to be taken away to be vested in NTT which was held to be impermissible. In the instant case, there is no such situation. On the contrary, NCLT is the first forum in the hierarchy of quasi-judicial fora set up in the Act, 2013. In this scenario, NCLAT which is the first appellate forum provided under the Act, 2013 to examine the validity of the orders passed by NCLT, will have to revisit the factual as well as legal issues. Therefore, situation is not akin to NTT.[12]

In 2000, when the Eradi Committee on Insolvency and Bankruptcy recommended setting up specialised tribunals to adjudicate all matters relating to companies, it was probably inconceivable that it would take 16 years for these specialised company law tribunals to see the light of the day. Although they existed in the statute since 2002, the creation of company law tribunals was fraught with difficulties until recently when, in May 2015, the Supreme Court in Madras Bar Association v Union of India upheld the constitutionality of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) and gave the go ahead for the creation of the NCLT and the NCLAT. The Court upheld the reasoning given in the R Gandhi (2010) judgement by the Constitution Bench.

The Constitutional validity of the Tribunal was challenged on the grounds of violating basic structure of the constitution and that the legislature did not have powers to transfer judicial functions of courts to tribunals so violates rule of law and doctrine of separation of powers. In its 2010 judgement, the Court held that one can only challenge the constitutional amendments on the ground of violating basic structure and not any other legislation.

Moreover, The Court observed that the issue was not whether judicial functions can be transferred from courts to tribunals. The issue was whether judicial functions can be transferred to tribunals manned by persons who are not suitable or qualified or competent to discharge such judicial powers or whose independence is suspect.

Rule of law:
Independent judicial tribunals for determination of the rights of citizens, and for adjudication of the disputes and complaints of the citizens, is a necessary concomitant of the rule of law. The rule of law has several facets, one of which is that disputes of citizens will be decided by Judges who are independent and impartial; and that disputes as to legality of acts of the Government will be decided by Judges who are independent of the executive. Another facet of the rule of law is equality before law. The essence of the equality is that it must be capable of being enforced and adjudicated by an independent judicial forum.

Legislature has the competence to transfer any particular jurisdiction from courts to tribunals provided it is understood that the tribunals exercise judicial power and the persons who are appointed as President/Chairperson/Members are of a standard which is reasonably approximate to the standards of mainstream judicial functioning. On the other hand, if a tribunal is packed with members who are drawn from the civil services and who continue to be employees of different Ministries or government departments by maintaining lien over their respective posts, it would amount to transferring judicial functions to the executive which would go against the doctrine of separation of powers and independence of the judiciary.

The Eradi Committee recommended setting up separate tribunals to exclusively deal with company matters and transfer of company law jurisdiction from the High Court to such tribunals. Tribunals with only judicial members would have served the purpose sought to be achieved. It did not suggest that such tribunals should have technical members. The jurisdiction relating to company cases which the High Courts are dealing with can be dealt with by tribunals with judicial members alone.

Therefore, the Court conceded the fact that legislature can transfer the judicial functions but what would violate the doctrine of separation of powers and rule of law is the constitution of the tribunals ie. judicial + technical members or officers from civil services. Thus, the Court struck down the provision appointing technical members in the NCLT.

The constitution of the National Company Law Tribunal has had a great impact in the field of Company Law. This is because it has revamped the version of the conventional Company Law Board. Apart from that the functions and powers of the NCLT are also very different from the functions and powers of the conventional CLB. So far, it has proved to be a boon. Firstly, it has removed a lot of burden from the shoulder of the Courts and other institutions. The power of the Tribunal of exercising original jurisdiction over matters has ensured that there is a speedy conveyance of justice and smooth working of the justice system.

Presently, the tribunal also has the power to hear class action suits which brings forth another distinctive sort of investor majority rules system in India, which has been followed in various western nations. This will help Indian organizations in actualizing more beneficial corporate administration hones and will extend the value to the investors.

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, demerger, reduction of share capital or any arrangement or reconstruction; but also open vast opportunities for Professionals especially Company Secretaries.
Thus, the importance of NCLT and NCLATs cannot be denied and the Madras Bar Assn case has resolved all the doubts that can be raised against the constitutional validity of the establishment of such Tribunals.

  1. Shri Justice V. Balakrishna Eradi, Report of High level Committee on Law Relating to Insolvency and Winding up of Companies, 2000, p.47.
  2. Union of India v. R. Gandhi, President, Madras Bar Association, (2010) 11 SCC 1 (India).
  3. Madras Bas Association v. Union of India ,2015 SCC Online SC 1094 (India)
  4. Kuldip Nayar v. Union of India, (2006) 7 SCC 1 (India)
  5. State of A.P. v. McDowell & Co, (1996) 3 SCC 709 (India)
  6. Indira Nehru Gandhi v. Raj Narain, 1975 Supp SCC (India)
  7. State of Karnataka v. Union of India, (1977) 4 SCC 608,125(India)
  8. Supra note. 1 �116
  9. Supra note.1 �117
  10. Supra note.2
  11. Madras Bar Association v. Union of India and Anr, 2015 SCC OnLine SC 388 (India)
  12. Supra note.3 p.11

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