Supreme Court NCLT Decision dated 14th May 2015

This Supreme Court Judgement available here is a milestone in implementation of new corporate law and development of corporate jurisprudence in India. On cautious note, this is just another step effective implementation of law related to National Company Law Tribunal and its appellate body. Now, the Companies Act, 2013 need minor amendment in line of present Supreme Court decision and ball is now in court of political leadership. Supreme Court decided three important issues in the case.

Constitutional validity of NCT and NCLAT:

By Notification dated 12.09.2013, the Central Government has constituted the National Company Law Tribunal (NCLT) under power conferred by Section 408 of the Companies 2013. By the aforesaid Notification dated 12.09.2013, National Company Law Appellate Tribunal (NCLAT) has also been constituted by the Central Government under power conferred by Section 408 of the Companies 2013.

Mr. Datar primarily challenged the Constitutional validity of NCLAT without making any serious efforts to challenge the constitution of NCLT. Supreme Court observed that first of all the creation of Constitution of NCLAT has been specifically upheld in Union of India v. R. Gandhi, President, Madras Bar Association (hereinafter referred to as the ‘2010 judgment’). The Court specifically rejected the contention that transferring judicial function, traditionally performed by the Courts, to the Tribunals offended the basic structure of the Constitution in 2010 judgement. Secondly, reading of the Constitution Bench judgement in the matter of National Tax Tribunal would manifest that not only 2010 judgement was taken note of but followed as well. Thirdly, the National Tax Tribunal (NTT) was a matter where power of judicial review hitherto 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. Fourthly, 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. For all these reasons, Supreme Court held that there is no merit in this issue.

Prescription of qualifications:

Qualifications of President and Members of NCLT are mentioned in Section 409 of the Act, 2013 and that of Chairperson and Members of NCLAT are stipulated in Section 411 of the Act, 2013. The petitioner has no quarrel about the qualifications mentioned for the President and Judicial Members of the Tribunal as well as Chairperson and Judicial Members of the Appellate Tribunal. It is argued that insofar as technical Members of NCLT/NCLAT are concerned, the provision is almost the same which was inserted by way of an amendment in the Act, 1956 and challenge to those provisions was specifically upheld finding fault therewith.

Supreme Court hold that Section 409(3)(a) and (c) are invalid as these provisions suffer from same vice. Likewise, Section 411(3) as worded, providing for qualifications of technical Members, is also held to be invalid. 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. We order accordingly, while disposing of issue No.2.

In Para 120 of its 2010 Judgement, Supreme Court tabulated the corrections required to set right the defects in Parts IB and IC of the Act [the Companies (Second Amendment) Act 2002 amending the Companies Act 1956]:

(i) Only Judges and Advocates can be considered for appointment as Judicial Members of the Tribunal. Only the High Court Judges, or Judges who have served in the rank of a District Judge for at least five years or a person who has practiced as a Lawyer for ten years can be considered for appointment as a Judicial Member. Persons who have held a Group A or equivalent post under the Central or State Government with experience in the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for appointment as judicial members as provided in sub-section 2(c) and (d) of Section 10FD. The expertise in Company Law service or Indian Legal service will at best enable them to be considered for appointment as technical members.

(ii) As NCLT takes over the functions of 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. Therefore, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as Technical members of the National Company Law Tribunal. Clauses (c) and (d) of sub-section (2) and Clauses (a) and (b) of sub-section (3) of section 10FD which provide for 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, being qualified for appointment as Members of Tribunal is invalid.

(iii) A `Technical Member’ presupposes an experience in the field to which the Tribunal relates. A member of 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. Therefore Clauses (a) and (b) of sub-section (3) are not valid.

(iv) The first part of clause (f) of sub-section (3) providing that any person having special knowledge or professional experience of 20 years in science, technology, economics, banking, industry could be considered to be persons with expertise in company law, for being appointed as Technical Members in Company Law Tribunal, is invalid.

(v) 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.

Structure of the Selection Committee:

We hold that provisions of Section 412(2) of the Act, 2013 are not valid and direction is issued to remove the defect by bringing this provision in accord with sub-para (viii) of para 120 of 2010 judgment.

In sub – para (viii) of Para 120 of its 2010 Judgment, Supreme Court tabulated the corrections required to set right the defects in Parts IB and IC of the Act [the Companies (Second Amendment) Act 2002 amending the Companies Act 1956]:

Instead of a five-member Selection Committee with Chief Justice of India (or his nominee) as Chairperson and two Secretaries from the Ministry of Finance and Company Affairs and the Secretary in the Ministry of Labour and Secretary in the Ministry of Law and Justice as members mentioned in section 10FX, the Selection Committee 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.

Since, the functioning of NCLT and NCLAT has not started so far and it is high time that these Tribunals start functioning now, Supreme Court expressed its hope that the Government of India 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 near future.

Observation:

Close study of both judgement [2010 Judgement and present one] and both Act [the Companies (Second Amendment) Act 2002 and the Companies Act 2013] raised serious question on the intention of government. Both judgement ask government for judicial independence and both Act tilt for old age second employment scheme for certain rank of government officials and political favored.  If intention of government does not change, we may have another spell in Supreme Court.