SC clears NCLAT roadblocks - Can professionals cash in?

The validity of the National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’) was one of the most debated issues in the company law since the introduction of Companies (Second Amendment) Act, 2002 to the Companies Act, 1956. The controversy was put to rest by the Supreme Court in 2010 in the case - Union of India Vs R. Gandhi, President, Madras Bar Association – wherein the constitutional validity of NCLT / NCLAT was upheld. The provisions relating to NCLT / NCLAT were included in the Companies Act, 2013 and such provisions were again challenged by Madras Bar Association. 

Recently, by its order dated 14^th May 2015, the Supreme Court upheld the constitutional validity of the NCLT / NCLAT provisions. This article includes:

(1)          Analysis of the SC Ruling; and

(2)          Opportunities for practicing professionals, post-formation of NCLT & NCLAT.

Brief Analysis of SC Ruling in Madras Bar Association Vs Union of India & Anr.:

On May 14, 2015, the Constitution Bench of the Supreme Court led by Chief Justice HL Dattu partly allowed the writ petition filed by the Madras Bar Association wherein it struck down the validity of Technical Member appointment & Selection Committee constitution but it upheld the validity of the NCLT / NCLAT under the Companies Act, 2013. The provisions relating to NCLT & NCLAT were also challenged under the Companies Act, 1956 (in Union of India Vs R. Gandhi, President, Madras Bar Association), wherein the SC’s Constitution Bench upheld the validity of NCLT / NCLAT and certain provisions relating to constitution of board of company law administration were held as ‘unconstitutional’.

In the present case, the SC’s Constitution Bench rejected Sr. Advocate Arvind Datar’s (representing the writ petitioner, Madras Bar Association) contention that UoI Vs R. Gandhi judgment did not deal with constitution of NCLAT. The SC held that the Constitution Bench categorically dealt with the constitutional validity of NCLT & NCLAT under the caption “Whether the constitution of NCLT and NCLAT under Parts 1B & 1C of Companies Act are valid”.

SC completely dismissed Madras Bar Association’s reliance on 2014 ruling of SC, wherein the constitution of National Tax Tribunal (NTT) was held as ‘unconstitutional’. SC remarked that such ‘adventurism’ on the petitioner’s part is totally unfounded and stated that the earlier ruling in UoI Vs R. Gandhi is of Constitution Bench  is binding on the co-ordinate Bench as well.

Apex court differentiated the NTT ruling from NCLT/NCLAT and held that the NTT was a matter where power of judicial review exercised by the High Court was vested in NTT which was sought to be unconstitutional. SC observed that NCLT is the ‘first forum’ in the hierarchy of quasi-judicial fora set-up under the Companies Act, 2013 and stated that NCLT, would not only deal with question of law but would be called upon to thrash out the factual disputes/aspects as well.

With respect to the issue of constitutionality of provisions for appointment of technical members to NCLT/NCLAT, the constitution bench of SC relied on its earlier ruling in Union of India Vs R. Gandhi and observed that only officers holding ranks of Secretaries or Additional Secretaries can be considered for appointment as Technical members.

The SC held the constitution of Selection Committee (for selecting the Members of NCLT and NCLAT) as invalid and stated that instead of 5 members Selection Committee, it should be 4 members (2 from administrative branch + 2 from judiciary) Selection Committee. The 4-member Selection Committee shall include - Chief Justice, Senior Judge, Secretary in the Finance Ministry and Law Secretary, with the caveat that the Chief Justice will have a casting vote.

Impact of the SC Ruling on constitutional validity of NCLT & NCLAT:

The recent SC ruling on the constitutional validity of NCLT & NCLAT is one of the biggest leaps for the corporate sector and the professional fraternity. The step will have a positive impact on the corporate restructuring (i.e. mergers and acquisitions, capital restructuring, revival of sick companies and dispute related matters) as the NCLT will not just only replace the Company Law Board (CLB), but will also bring under its umbrella cases filed with the High Courts, Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).

It seems that matters pertaining to winding up have been taken out of jurisdiction of NCLT and NCLAT by recent amendment to the Companies Act, 2013 in 2015. However, Section 270 (which are yet to be made effective) onwards still refer to “Tribunal”.  

The NCLT / NCLAT formation is welcome step as it will reduce the burden of the Supreme Court, High Courts and CLBs on the corporate law related matters, which will ultimately help in unlocking the value of distressed assets. NCLT / NCLAT being the ‘specialized benches’ for corporate law related mattes, it is expected that the matters will be listed and heard in an expeditious and time bound manner.

The formation of NCLT / NCLAT will open wide gates  for the practicing Chartered Accountants, practicing Company Secretaries, and practicing Cost Accountants, as they would now be able to represent their client companies in matters requiring Tribunal approval i.e. mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters. Until the formation of the NCLT/NCLAT, the practicing professionals (CA, CS & CWA) could appear only before the CLB and for the matters being heard by the HC and Supreme Court, only Advocates were eligible for arguments and representation. Now all practicing professionals (Advocates, practicing CA, practicing CS & practicing CWA) will be treated at par for representation before NCLT / NCLAT.

For entering / establishing oneself in the field of NCLT / NCLAT, it would be desirable of a practicing professional to take some efforts for enhancing their skill sets, some of which are listed below:

(1)          Thorough study of the provisions of Companies Act, 2013;

(2)          Thorough study of the Secretarial Standards,

(3)          In-depth analysis and study of the provisions of Companies Act, 2013 as well as 1956 relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;

(4)          Thorough knowledge of the case-laws on the topics relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;

(5)          Developing art of advocacy  and soft skill;

(6)          Having basic knowledge relating to Tax Laws, Accounting treatments in matters relating to mergers and amalgamations, capital restructuring, revival of sick companies and shareholders-management dispute matters;

Conclusion:

Now hopefully, the remaining part of the Companies Act, 2013 will be notified and may come into force in next couple of days/ months as SC’s judgment validates the constitutionality of the NCLT / NCLAT. Now, the Govt. needs to take immediate steps for the formation of benches, formation of selection committee, electing Technical Members and Judicial Members etc. In the due course, the Govt. / MCA will notify a cut-off date with respect to filing of petitions with NCLT (instead of CLB & HC). As discussed above, another area of ‘lucrative practice’ has opened up for Practicing Professionals like CA, CS and CWA for which they will be required to take some extra-efforts and ‘invest’ some time for the same.