Supreme Court paves way for National Company Law Tribunal and Appellate Tribunal

On 14 May 2015, a Constitution Bench of the Supreme Court has upheld the validity of the National Company Law Tribunal and the National Company Law Appellate Tribunal and has paved the way for setting up of these tribunals after taking care of the observations of the Court.

However the bench has held the provisions of the Companies Act, 2013 in regard to the appointment of technical members and to the composition of the selection committee as invalid. It has held that for the appointment as technical members of NCLT, officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered.

The validity of NCLT and NCLAT, otherwise than certain aspects, had already been upheld by a Constitution Bench of the Supreme Court in 2010 in the case of Union  of  India  v.  R.  Gandhi, President, Madras Bar Association [(2010) 11 SCC  1] (R Gandhi case) where the impugned sections were in regard to the Companies Act, 1956. The present Writ Petitions sought to challenge the corresponding provisions in regards to NCLT and NCLAT under the Companies Act, 2013.

Background

In the R Gandhi case, Supreme Court had upheld the Constitutional validity of NCLT and NCLAT. However it agreed with the view of Madras High Court judgment impugned therein from which the R Gandhi appeal had arose, in regard to Parts 1B and 1C of the 1956 Act. In R Gandhi case, the Constitution Bench had held:

57. We therefore dispose of these appeals, partly allowing them, as follows:
(i) We uphold the decision of the High Court that the creation of National Company Law Tribunal and 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.
(ii) We declare that Parts 1B and 1C of the Act as presently structured, are unconstitutional for the reasons stated in the preceding para. However, Parts IB and IC of the Act, may be made operational by making suitable amendments, as indicated above, in addition to what the Union Government has already agreed in pursuance of the impugned order of the High Court

However even after the R Gandhi judgment, the Tribunals could not be set up. In the mean while, Parliament of India passed the 2013 Act, replacing the 1956 Act. The 2013 Act also contains the corresponding provisions in relation to the constitution of NCLT and NCLAT.

Writ Petitions

Madras Bar Association filed the present writ petitions contending that “notwithstanding various directions given in R Gandhi  judgment, the new provisions in the 2013 Act, 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.”

Hearing

On 10 April 2015, Chief Justice of India had constituted a five-judge Constitution Bench comprising of Chief Justice HL Dattu and justices AK Sikri, Arun Mishra, Rohinton F Nariman and Amitava Roy. The Bench heard the arguments on 6 May 2015 when Sr. Advocate Arvind P Datar argued for the Madras Bar Association while the Union of India was represented by ASGs PS Patwalia and Pinky Anand.

Judgment

Bench categorised the challenges in the writ petion in three categories:

1. Validity of the constitution of NCT and NCLAT;
2. 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;
3. Structure of the Selection Committee for appointment of President/Members of the NCLT and Chairperson/Members of the NCLAT.

Issue 1 – Validity of the constitution of NCLT and NCLAT

Bench first of all noted that as in R Gandhi, the constitutional validity of NCLT and NCLAT has already been upheld and therefore “it was not open to the petitioner even to argue this issue as it clearly operate as res judicata”.

Issue 2 – Qualifications etc. of President and Members

Qualifications of President and Members of NCLT are provided in Section 409 of the 2013 Act and that of Chairperson and Members of NCLAT are stipulated in Section 411 of the 2013 Act. The petitions had only challenged the qualifications of technical Members of NCLT/NCLAT which are similar to those under the 1956 Act which had already been held to be unconstitutional in the R Gandhi case.

The provisions in the 1956 and 2013 Act provide for the appointment of Technical Members of NCLT from amongst the officers of the rank of Joint Secretaries with certain experience. R Gandhi had held that such appointments could be made from officers of the rank of Secretaries or Additional Secretaries alone.

Reiterating the opinion of the Constitution Bench in R Gandhi case, Court held:

Thus, we 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.

Thus Supreme Court has reiterated the solution postulated by the court in R Gandhi case that the technical Members of the NCLT/NCLAT should be selected from only those officers who hold rank of Secretaries or Additional Secretaries and have technical expertise.

Issue 3 – Selection Committee for selecting Members of NCLT and NCLAT

Section 412(2) of the 2013 Act provides that the Selection Committee shall consist of:

1. Chief Justice of India or his nominee- Chairperson;
2. a senior Judge of the Supreme Court or a Chief Justice of High Court— Member;
3. Secretary in the Ministry of Corporate Affairs— Member;
4. Secretary in the Ministry of Law and Justice— Member; and
5. Secretary in the Department of Financial Services in the Ministry of Finance— Member.

In the R Gandhi case, Constitution Bench while dealing with the corresponding provision in 1956 Act which was slightly different from the present provision had observed that Chief Justice of India, or his nominee should possess the final say in the matter of selection with right to have a casting vote. Reiterating such a position bench termed Section 412(2) of the 2013 Act to be unconditional holding:

In the face of the all pervading prescript available on this very issue in the form of a binding precedent, there is no scope for any relaxation as sought to be achieved through the impugned provision and we find it to be incompatible with the mandatory dicta of 2010 judgment. Therefore, 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.

Setting up of NCLT and NCLAT

Observing that the Union of India may take steps to make the Tribunals functional in accordance with the present decision of the Court, it held:

Since, the functioning of NCLT and NCLAT has not started so far and its high time that these Tribunals start 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 near future.