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Construction : Legalese | November 2016 | Source : Infrastructure Today

Simplifying Corporate Adjudication

The establishment of a National Company Law Tribunal (NCLT) and its Appellate Tribunal (NCLAT) will provide for an efficient, timely and one stop-shop dispute resolution mechanism, preventing fragmentation of disputes relating to companies before multiple forums.

The concept of establishing a separate and judicial body for resolving corporate disputes was evolved in the year 2002, by an amendment to the erstwhile Companies Act, 1956. However, the proposed quasi-judicial body could not be notified by the Central government due to various legal hurdles in formation and constitution of the same.

The Central government had set up the Eradi Committee, headed by former Supreme Court Judge Justice V Balakrishna Eradi for looking into the legal aspects on establishing a single judicial body for corporate dispute resolution, and a law relating to insolvency of companies.

After the enactment of the new Companies Act 2013, the Ministry of Corporate Affairs (MCA) vide its notification no. S.O. 1935(E) dated June 1, 2016 (hereinafter referred to as ¨notificationö), has notified the provisions relating to establishment of a National Company Law Tribunal (NCLT) and its Appellate Tribunal (NCLAT) with immediate effect. One of the reasons behind establishing NCLT & NCLAT is to have separate and specialised tribunals to deal with matters and disputes arising out of the Companies Act, Insolvency and Bankruptcy Code, Board for Industrial and Financial Reconstruction (BIFR), Reserve Bank of India (RBI), etc. NCLT shall have jurisdiction to resolve all corporate civil disputes and the NCLAT shall act as its appellate authority. On July 21, 2016, the Ministry of Corporate Affairs also notified the National Company Law Tribunal Rules, 2016 (NCLT Rules), laying down the procedures and functions of the tribunals.

The Establishment of NCLT and NCLAT will provide for an efficient, timely and one stop-shop dispute resolution mechanism, preventing fragmentation of disputes relating to Companies before multiple forums. This is a welcome step towards ease of doing business and will have far reaching impact on foreign investment in the Indian Economy.

What is NCLT?
The National Company Law Tribunal is a single window institution for corporate justice. It´s a separate quasi-judicial body for company law matters. The establishment of NCLT aims to consolidate the corporate jurisdiction of the Company Law Board; Board for Industrial and Financial Reconstruction and its Appellate Authority; High Court or District Court in relation to matters pertaining to arbitration, compromise, arrangements and reconstruction; and the Central government. The NCLT will also have jurisdiction under the Insolvency and Bankruptcy Code, once it is notified. It is also important to note that as the provisions relating to reduction of share capital, winding up and compromise and arrangements under the Companies Act 2013 have not been notified, the jurisdiction of these matters will remain with the High Court until these provisions are made effective. Even though the NCLT has been conferred the power to pass orders where a company has been incorporated by any fraudulent action or by furnishing false information, the power to remove the name of the company from the register of companies would still continue with the Registrar of Companies.

Under the earlier regime, companies used to face the issue of multiple and fragmented proceedings before various courts and tribunals. This issue will surely be resolved by the establishment of NCLT.

The tribunal will not only provide for a simplified dispute resolution procedure, but will also make the procedure timely and cost-effective.

The notification also introduces class action suits for the very first time, giving impetus to shareholder activism. The tribunal shall have the jurisdiction to entertain class action suits, collectively initiated by 100 or more shareholders. Class action suits can be used by minority shareholders to sue directors or auditors of the company for their misconduct or unwarranted acts or when the company´s affairs are not being managed in its best interests. Such a remedy will give rise to better corporate governance practices and curb arbitrary and oppressive decisions of the management.

Vide its notification, the MCA has constituted eleven benches of NCLT, the principal bench being located at New Delhi, and other benches at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. There shall be two benches at New Delhi including the principal bench. The Appellate Tribunal shall have only one bench and shall be located in New Delhi. Under the earlier regime, there were only five benches of the Company Law Board. Thus, 11 benches will provide for greater accessibility and reduce the burden of each bench.

Composition of NCLT and NCLAT
The Tribunal is to be headed by the President who shall be appointed in consultation with the Chief Justice of India. It is also pertinent to note that such a person appointed shall be a person who is a serving Judge of the High Court or has served as a Judge of the High Court, for at least five years.

The Appellate Tribunal is to be headed by the Chairperson who shall be appointed in consultation with the Chief Justice of India. It is also pertinent to note that the person appointed shall be the one who is serving as Chief Justice of the High Court or as a Judge of the Supreme Court or has served as Chief Justice of the High Court or as a Judge of the Supreme Court.

The President of the Tribunal shall hold the office for five years or until he/she attains the age of 67 years, whichever is earlier. Members of the Tribunal shall hold office for five years at or until he/she attains the age of 65 years, whichever is earlier. President and Members of the Tribunal are also eligible for re-appointment.

The chairperson of the Appellate Tribunal shall hold the office for 5 years or until he/she attains the age of 70 years, whichever is earlier. Members of the Tribunal shall hold office for 5 years at or until he/she attains the age of 67 years, whichever is earlier.

No person who is below the age of 50 years shall be eligible for appointment as President of NCLT and/or Chairperson of NCLAT and/or as Member of the Tribunal and/or Appellate Tribunal. Chairperson and Members of the Appellate Tribunal are also eligible for re-appointment. The appointment of technical members along with judicial members will ensure that the disputes are adjudicated by subject experts; thereby increasing the efficiency of dispute resolution.

Adjudication procedure
The President shall constitute the benches for hearing the matter before the Tribunal. The composition of benches of the Tribunal shall be one Judicial Member and one Technical Member. The President may constitute a single Judicial Member bench for adjudication of the specified matters. At any stage, the President may transfer the case to a two-member bench. The President shall constitute one or more benches of a three or more member bench in respect of cases relating rehabilitation, restructure or reviving of companies. The majority of the members of the special bench will be of judicial members.

The Tribunal and the Appellate Tribunal shall have the same powers that of a civil court as under of Code of Civil Procedure, 1908 (CPC). Section 424 of the Companies Act 2013 makes it clear that the Tribunal or the Appellate Tribunal is not bound by the procedures laid down in the CPC, but the working of the Tribunal and the Appellate Tribunal shall be guided by the principles of natural justice and subject to other provisions of the Act and the rules made thereunder. The Tribunal and the Appellate Tribunal shall have powers to prescribe its own procedures. Such a power will provide for flexibility in the dispute resolution process and ensure that disputes are resolved in a simplified manner.

Expeditious disposal
Section 422 of the Companies Act fixes a timeline for the Tribunal and the Appellate Tribunal to dispose applications within three months from the date of presentation of the application before the Tribunal or from the date of filing of appeal before the Appellate Tribunal. Also, even though it has been recommended that the tribunals should settle disputes within a time period of three months, no timeline has been provided for filing of the reply and the rejoinder. The section also provides that if the dispute is not settled within a period of three months, then reasons shall be provided for the same; the time shall be extended not beyond 90 days. It has also been provided under the rules that an order should be pronounced within 30 days from the date of final hearing.

Under the NCLT Rules, it has been provided that the parties will give evidence by affidavit; and where the Tribunal considers it necessary in the interest of justice, it may order cross-examination of any deponent on the points of conflict, through video conferencing or such communication technology facilities. These provisions will surely help in speeding up the dispute resolution process.

Appeals
Appeals from order and judgment passed by the Tribunal shall lie before the Appellate Tribunal, and appeals from order and judgment of the Appellate Tribunal shall lie before the Supreme Court only if relates to question of law. However, no appeal can be made if any order is passed /pronounced by the Tribunal with the consent of the parties. In case of appeal, the same is to be filed before the Appellate Tribunal within 45 days.

Who can practice?
The Companies Act 2013 allows other professionals, such as Charted Accountants, Company Secretaries and Cost Accountants to appear before the Tribunal, in addition to lawyers. Such a provision expands the right to legal representation of the parties. The notification has resulted in dissolution of the Company Law Board (CLB) by virtue of Section 466(1) of the Companies Act 2013 with immediate effect.

All the matters pending before the CLB are now transferred for adjudication by the NCLT. The Central government is yet to notify the date on which the matter pending before the BIFR and its Appellate Tribunal and matters before the High Courts would be transferred to NCLT and the procedure to be followed in the said transfer of cases. The immediate dissolution of the CLB has been much criticised and it has been suggested that the cases should have been transferred to the NCLT only once it would have started functioning. It is also suggested that the cases should have been transferred prospectively as transfer of cases retrospectively would cause more delay in the adjudication process and burden the tribunal with a huge number of cases.

Single-window dispute mechanism
The establishment of NCLT and NCLAT is step towards an efficient and expeditious dispute resolution mechanism for all Company Law related disputes. It will not only provide for a single window for dispute resolution, but will also ensure that the disputes are settled in a time period of three months. The appointment of professionals who have knowledge of the working of the corporate world as members of the Tribunal will ensure that parties reach optimal solutions to their issues. The notification also encourages democracy among the shareholders, by providing the remedy of class action suits. The most important step that has been taken is establishment of 11 benches, thereby bringing justice at the doorstep of the users. The Government of India has for now transferred only the CLB cases to the tribunals and will gradually be shifting cases from BIFR to NCLT and NCLAT.

The only limitation that the notification faces is that it immediately dissolves the CLB and retrospectively transfers its cases to the NCLT. Such a radical transition may lead to further delay and inefficient adjudication. The NCLT rules also do not provide clarity as to the status of the interim orders passed by the CLB before 1st June, 2016. It is also important to note that the provisions relating to winding up and mergers & acquisitions has not been notified, and thus, jurisdiction relating to those matters still lies with the High Court.

The establishment of NCLT and NCLAT is the right step in disposing of corporate litigation and encouraging foreign investment; however, steps need to be taken to ensure smooth transition of cases from CLB and various other forums to the NCLT to encourage foreign investors to come and invest in India.

Key takeaways from the setting up of NCLT and NCLAT

Benefits

  • Single window for resolving corporate law disputes.
  • Greater accessibility with 11 benches.
  • Expeditious disposal of cases: time period of three months provided.
  • Provides for class suit actions.
  • Limitations
  • Retrospective transfer of cases from CLB to NCLT.
  • Winding up and Mergers & Acquisitions still under the jurisdiction of the High Court.
  • Transfer of cases from BIFR to NCLT has not been notified.
  • No clarity on status of interim orders passed by CLB before June 1, 2016.

Scope of activities

  • Power to determine its procedure
  • Compounding of offences
  • Winding up proceedings
  • Corporate Restructing for revival of Sick Companies
  • Arbitration
  • Compromise and Arrangement
  • Reduction of Share Capital
  • Mergers
  • Oppression and Mismanagement
  • Class Action Suits
  • De-Registration of Companies
  • Transfer and Transmission of Securities
  • Deposits-Delay and Defaults
  • Tribunal Convened General Meetings
  • Re-opening Accounts and Revision of Financial Statements
  • Tribunal Directed Investigations and other matters

This article has been written by Krrishan Singhania, Partner; Nishant Upadhyay, Associate; and Ashwin Vasista, Associate, at Singhania & Co, Solicitors & Advocates.

 
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