21 May 2015 EY Regulatory Alert Supreme Court approves the formation of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Executive summary This alert summarizes the provisions upheld by the Supreme Court ( SC ) towards formation of NCLT and NCLAT and the impact of key changes due to the Companies Act, 2013 ( Cos Act, 2013 ) vis-a-vis. the existing provisions of corporate restructuring through schemes of arrangement under a High Court process as per the Companies Act, 1956 ( Cos Act, 1956 ).
Background and facts Prior to Cos Act, 2013 The provisions for formation of NCLT and NCLAT were first incorporated by the Legislature in the Cos Act, 1956 in the year 2002. Writ petition was filed by the Madras Bar Association ( the Petitioner ) with the Madras High Court challenging the constitutional validity of the NCLT and NCLAT. The Madras High Court in its judgement in the year 2004 ( 2004 Judgement ) upheld that the creation of NCLT and vesting the powers hitherto exercised by the High Court and the Company Law Board in the said Tribunal was not unconstitutional. However, the Madras High Court pointed out certain defects in provisions dealing with the operational part of NCLT. It also held that unless the said provisions are appropriately amended by removing the defects, it would be unconstitutional to transfer the jurisdiction of High Court, Company Law Board to NCLT and NCLAT. Aggrieved, both parties, i.e the Petitioner and the Union of India ( UOI ) filed an appeal against the said 2004 Judgement in the SC. This appeal filed against the 2004 Judgement in SC was disposed-off in the year 2010 by the Constitution Bench of SC in Union of India v. R Gandhi, President Madras Bar Association 1 ( 2010 Judgement ) which upheld the 2004 Judgement on both counts: - Constitutional validity of NCLT/NCLAT; and - Existence of defects in the operational part and the need to make amendments in the relevant provisions of Cos Act, 1956. After Cos Act, 2013 Though the verdict of the Constitutional Bench came in the year 2010, NCLT and NCLAT were not formed immediately and the matter got stuck into imbroglio of one kind or the other including a still pending Writ Petition No. 267/2012 before SC. During the interim period, the Parliament introduced the Indian Companies Act, 2013 ( Cos Act, 2013 ) containing similar provisions regarding NCLT and NCLAT. The said provisions dealing with NCLT and NCLAT have not been made effective till date. The Petitioner again challenged the provisions of NCLT and NCLAT of Cos Act, 2013 by way of a Writ Petition 2 ( Present Writ Petition ) in the SC mainly on the ground that these provisions suffer from the vice of unconstitutionality as well as the application of the ratio in 2010 Judgement. SC judgement in brief The Present Writ Petition was heard by the SC where it categorised the challenges put forth in three categories, as under: i. Challenge to the validity of the constitution of NCLT and NCLAT; ii. Challenge to the prescription of qualifications etc. of President / Chairman and Members of the NCLT/NCLAT; iii. Challenge to the structure of the Selection Committee for appointment of President/Members of the NCLT and Chairperson/Members of the NCLAT. The SC squarely applied the 2010 Judgement to this case and upheld the Constitutional validity of NCLT and NCLAT mentioned under point (i) above in its judgement dated 14 May 2015 ( SC Judgement 2015 ). As regards issues (ii) and (iii), the SC referring to the 2010 Judgement held 1 (2010) 11 SCC 1 2 Writ Petition (C) No. 1072 of 2013
that the provisions regarding establishment of NCLT and NCLAT contained in Cos Act, 2013 are not valid till the point they are not fully realigned as per the directions given in the 2010 Judgement. Further, SC has held that the technical members in NCLT / NCLAT should be of a rank equivalent to a Secretary or An Additional Secretary in the government of India, as opposed to a Joint Secretary as contemplated in the Cos Act, 2013. NCLT and NCLAT are adequately manned and start functioning in the near future. Conclusion Though the SC Judgement 2015 has given directions to expedite the provisions of NCLT and NCLAT, the pending Writ Petition No 276/2012 also needs to be settled in order to avoid any future road blocks. It has also put its stamp of approval to the directions given under the 2010 Judgement with regard to the Selection Committee, with the caveat that the Chairperson of the Selection Committee being Chief Justice of India or his nominee should have a casting vote. Steps taken so far Apart from the above, in SC Judgement 2015, SC has also considered the following steps taken till date towards setting up of NCLT and NCLAT: Thus, in order for NCLT to take over the functions currently performed by the High Court, the following needs to be addressed: - Settlement of the pending Writ Petition No 276/2012, - Completion of setup of NCLT and NCLAT; and - Notification of the relevant provisions which include provisions of Chapter XV - Compromises, arrangements and amalgamations under sections 230-240 of Cos Act, 2013 and corresponding rules. Approvals taken for creation of various positions in NCLT and NCLAT; Draft Rules on various matters prepared to place before appropriate authorities, inter alia including: - rules, remuneration and recruitment of NCLT/NCLAT members; - schemes of compromises/arrangements, and - rehabilitation of sick companies Space for Principal Bench and other Benches of NCLT at Delhi; Process initiated for set up of infrastructure; Allocation of budget heads for meeting the expenditure; and Surrender of allocated funds in 2014-2015 in view of the delay in settling up the Tribunals. Amongst aforesaid steps, SC also directed that UOI shall take remedial measures as per directions in this judgement at the earliest, so that the Upon notification of the aforesaid provisions of Chapter XV -Compromises, arrangements and amalgamations, the current procedural aspects pertaining to schemes of arrangement would undergo changes which include: i. Threshold limits provided for objections to schemes by any shareholder / creditor; ii. Threshold limits provided for obtaining dispensation from holding creditors meeting; iii. Intimation of compromise/ arrangement to be given to various authorities; iv. Mandatory requirement of auditor s certificate on accounting; v. Provision for indicating Appointed Date in schemes; vi. Exit route to be provided to dissenting shareholders; and vii. Specific provisions for merger of Specified Companies.
Comments The SC Judgement 2015 has upheld the constitutional validity for setting up the NCLT and the NCLAT and has also ensured that the judiciary has a greater role to play than the executive. Due to the petitions filed with the SC, the notification of a large number of sections including provisions for schemes of arrangements involving mergers, demergers etc. under the Cos Act, 2013, haven t been notified yet due to delay in setting up the NCLT. Once the NCLT, is set up it will not just replace the Company Law Board (CLB), but will also take care of cases that are with the High Courts, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
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