National Company Law Tribunal: An Overview

ABSTRACT: The following essay has been written by Kashni Bathla, Legal Associate at LawDocs and deals with the powers, functions and constitution of the National Company Law Tribunal. It also deals with its working under the provisions of the Insolvency and Bankruptcy Code, 2016.

The need for NCLT has been felt since the formation of the first committee to bring the National Tribunals for corporate jurisdiction in motion. One of the objectives for setting up these National Tribunals was to consolidate the powers and functions of three different bodies, namely Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and, the Courts of Law, into one single institution.

The constitution of National Company Law Tribunal is a major step towards the consolidation of corporate litigation. The idea of establishing NCLT has merged different jurisdictions of corporate law into one platform. NCLT deals with matters relating to the jurisdiction of CLB, High Court, Board of Industrial and Financial Construction and Appellate Authority for Industrial and Financial Construction.

The conceptualization of NCLT came with the logic that there should be a separate tribunal/ judicial authority that specifically deals with corporate jurisdiction so that the benefit of justice can be enjoyed by society. Thus, there was a dire need for a body which could fast track the process of disposing these matters, which were originally scattered into three different institutions.

Concept

The concept of NCLT was first introduced in Companies (Amendment) Act, 2002. But since there were a lot of debates regarding the constitutional validity of setting up of NCLT, these provisions could not clear the legal hurdles, and could not be notified.

Background

“The background of NCLT can be traced back to recommendations of several committees and reports before it finally came into force on June 01, 2016.The concept of having a national tribunal was first given by the Eradi Committee”[1]. A high level committee on Law relating to insolvency of Companies, headed by Shri Justice V. BalakrishnaEradi was formed in 1999. The committee was formed to bring about recent developments in corporate law and governance and to study the existing laws on winding up of companies so as to modify it to the changing circumstances. This committee recommended an amendment to be made in the Companies Act, 1956 to include the provisions regarding setting up of National Tribunals so as to avoid unnecessary delay in the corporate matters in tune with the international practice in this field of law. The committee recommended that this tribunal should have jurisdiction and powers exercised by the then Company Law Board and that of High Court in matters relating to winding up of companies.

The view of Eradi committee was affirmed and supported by the JJ Irani Committee in 2005. The committee was of the view that NCLT be formed with a required expertise and skilled professionals to address the issues referred to it. There should be a minimum required qualification for the members, so that purpose of justice is served while dealing with the matters of corporate world.

The major blow to bring about a change in the corporate jurisdiction was given by the Hon’ble Supreme Court in Union of India v. R. Gandhi, President, Madras Bar Association[2], by upholding the validity of NCLT and NCLAT. The Parliamentary Standing Committee on Finance, in its 21st Report (2009-10), observed that all the legal hurdles relating to the setting up of NCLT and NCLAT have been removed and that it is now crucial for the Government to do the same.

The provisions relating to National Company Law Tribunal were first time incorporated and notified through the Companies Act, 2013. Part XXVII provides for the power to establish national and appellate tribunals. The constitution of the aforesaid Tribunals is in exercise of the powers conferred by Sections 408 and 410 respectively of the new Companies Act, 2013. Thus, a new era for corporate jurisdiction has begun with the making of NCLT.

Need for NCLT

The need for National Company Law Tribunal has been felt since the formation of the first committee to bring the National Tribunals for corporate jurisdiction in motion. One of the objectives for setting up these National Tribunals was to consolidate the powers and functions of three different bodies, namely Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and, the Courts of Law, into one single institution.

For resolving various corporate disputes like merger/amalgamation, reduction of capital and winding up of companies, the parties had to approach the High Courts which were already burdened up with volumes of cases. Naturally, these courts took a lot of time to dispose of these petitions, as a result, the principle of ‘justice delayed is justice denied’ started to hold good in these corporate matters as the intended benefit out of these judgments could not be derived. Similarly, various petitions and matters were pending before the CLB and BIFR too. Thus, to curb this menace of delayed justice, a solution had to be sought, therefore resulting in the formation of NCLT.

Due to stagnation of these petitions before these institutions, many companies died their natural death. Thus, it resulted in a waste of the resources and other options available. Thus, it was a need of the hour to have a body for the fast and effective disposal of all these matters that were then scattered into different institutions.

Powers and Functions

NCLT has been vested with various powers and functions that will help in its smooth functioning. Various remedies lie with the persons who approach these tribunals. One of the striking powers of NCLT is that it is empowered to deregister the companies and dissolve them, if the registration is done in an illegal or wrongful manner. The powers go to the limit of declaring the liability of members, unlimited. Also, the 2013 Act provides the tribunals with wide powers such as refusal to transfer shares in case of all securities.

The nature of remedy of oppression and mismanagement has changed over time, and incorporated into the 2013 Act. This remedy has acquired the widest scope in the present corporate regime. The standard for oppression has been set to a lower level, but that of mismanagement has been set to a little higher level. The higher bar for mismanagement has been set by applying the principle of “winding up on just and equitable grounds”.

To curb the menace of falsification of books of accounts, the Company Act, 2013 prohibits the company from opening the accounts or revising financial statements on its own, i.e. suomoto. The tribunal is vested with such powers that the reopening of revising of financial statements can be done only with the direction of the tribunal and not on company’s own will and accord.

The most important powers conferred on the tribunals by the act are provided under Chapter XIV. Some of them are power to order an investigation, the power to investigate into the ownership of the company, power to impose a restriction on securities, the power to freeze assets of the company etc.

Consolidation of Corporate Jurisdiction

The constitution of National Company Law Tribunal is a major step towards the consolidation of corporate litigation. The idea of establishing NCLT has merged different jurisdictions of corporate law into one platform. NCLT deals with matters relating to the jurisdiction of CLB, High Court, Board of Industrial and Financial Construction and Appellate Authority for Industrial and Financial Construction.

Cases of Fraud

Earlier, in cases of fraud, the depositors had no remedy to speedily and effectively recover their money. They could approach either the civil court or consumer court. Both of these took time and recovery of their deposits wasn’t guaranteed. After the constitution of NCLT, it has been enabled to award compensation or damages in case of any fraudulent activity done by the company. Section 75 of the Companies Act, 2013 provides for the circumstances in which such damages may be awarded and which cases the fraud has been committed by the company.

Mediation and Conciliation

Since many commercial disputes nowadays are resolved through alternative disputeredressal mechanism, Companies Act 2013 has also included section 442. Section 442 provides for maintenance of a panel of experts by the Central Government. Such panel of experts shall be called Mediation and Conciliation Panel consisting of such number of experts having such qualifications as may be prescribed under Companies Act, 2013. This section also provides that in case where a matter pertains to Mediation and Conciliation, any of the parties to the proceedings may apply to the Tribunal or the Appellate Tribunal for referring the matter to the panel.

The Tribunal or the Appellate Tribunal may also refer any matter to Mediation and Conciliation on its own. These powers have also been conferred upon the Central Government.

Class Action Suits

A class action suits enable one or more than one plaintiff to indict a claim in the interest of a large group of people or ‘class’. It makes it easier for courts to handle such complaints rather than dealing with all such cases of similar nature separately. Class Action Suits is the right step in revolutionizing corporate law as it is one of the major components utilized for implementation of the corporate law wherein a shareholder can file a complaint against the company for of their obligations and commitments which are owed to them or to the company.

Section 245 of the Companies Act, 2013 provides for provisions regarding class action suits. Class Action Suit can be filed against any type of company which is registered either under the Companies Act, 1956 or Companies Act, 2013. It can be filed by members, depositors or a person or association representing such members or depositors, provided that they fulfil the eligibility criteria provided in Section 245(3).

There are certain guidelines on the basis of which such suits can be filed before the tribunal. These guidelines are enshrined in Section 254(4). There are no specific grounds on which a class action suit can be filed.

The orders passed by National Company Law Tribunal are b inding on the company and all its members and persons specified in section 245(6) and the reliefs which can be sought from the tribunal are provided in Section 245(1).

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Company Law Board and National Company Law Tribunal

The National Company Law Tribunal was constituted on 1st June, 2016. Section 466(1) of the Companies Act, 2013 provides for the dissolution of Company Law Board. NCLT has been conferred with all the powers that were formerly vested in CLB. Following are the key differences between NCLT and CLB-

S. NoCLBNCLT
1.CLB functioned with five benches. It had regional benches in New Delhi, Kolkata, Chennai and Mumbai. It had its principal bench in New Delhi.NCLT had 11 benches when it commenced and at the present it has 14 benches at 11 locations.
2.CLB dealt with matters relating to Oppression and Management, Compounding, Refusal to transmit shares, Inspection and Investigation, etc.NCLT deals with matters relating to the jurisdiction of CLB, High Court, Board of Industrial and Financial Construction and Appellate Authority for Industrial and Financial Construction.
3.CLB had no provision relating to Amicus Curiae.Draft NCLT rules, 2013 empowers NCLT to appoint Amicus Curiae, who can provide his opinion on various legal issues.
4.CLB had no provision of electronic filing or facility of online portal.NCLT has an online portal and electronic filing has been made compulsory.
5.Class Action Suits could not be filed.Shareholders and creditors can now file a class action suit for breach of any of the provisions of company law.
6.Appeals from CLB went to High Court.Appeals from NCLT will first go to National Company Law Appellate Tribunal (NCLAT) and then to Supreme Court. There is no High Court in the chain now.

NCLT vis-à-vis The Insolvency and Bankruptcy Code, 2016

“The Insolvency and Bankruptcy Code, 2016 (Insolvency Code) has been one of the greatest Indian change of ongoing occasions, which has moved the routine far from one that was profoundly questionable for outside speculators. Among other imperative changes, the Insolvency Code examines change responsible for the organization amid the indebtedness goals procedure to a bankruptcy proficient (IP). The Insolvency Code arrives in a domain where numerous Indian organizations have gone worldwide and have made acquisitions outside India.

India has not embraced the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (UNCITRAL Model Law). It is outstanding that just a couple of nations that have embraced the UNCITRAL Model Law have determined a ‘correspondence’ prerequisite for acknowledgment of bankruptcy procedures. Hence, regardless of whether India has not received the UNCITRAL Model Law, Indian indebtedness procedures might be perceived in a purview that does not have a correspondence prerequisite (this remaining parts untested for Indian bankruptcy judgements). Likewise, Section 234 of the Insolvency Code accommodates the Indian Government to go into two-sided arrangements with different nations for utilization of the Insolvency Code to resources or property outside India of the ruined elements. Notwithstanding, to date, no such reciprocal bargain has been agreed upon.

Landmark Judgments

Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Ltd.[3]

“The NCLAT has ruled that a purchaser of real estate, under an ‘Assured-return’ plan, would be considered as a ‘Financial Creditor’ for the purposes of IBC and is, therefore, entitled to initiate corporate insolvency process against the builder, in case of non-payment of such ‘Assured/Committed return’ and non-delivery of the unit.

The Appellant had booked a residential unit, office space and a shop in a project being developed by AMR. The unit never came to be delivered to the Appellant. The Appellant had an MoU with AMR, whereby AMR had assured ‘Assured/Committed returns’ to him, from the date of execution of the MoU till the handing over of the physical possession of the unit(s). This was ostensibly done in view of the substantial down payment made by the Appellant. The Assured returns were paid for some time, however, the payments dwindled and then stopped altogether. Despite various demands, no further payments were made by the Builder. This constrained the Flat buyer to initiate Insolvency process against the Builder.

The National Company Law Tribunal dismissed the Application on the singular premise that the agreement in question was clearly a ‘pure and simple agreement of sale and purchase of a piece of property and has not acquired the status of a financial debt as the transaction does not have consideration for the time value of money. The NCLT held, that disbursal of monies ‘against the consideration for the time value of money’ was an essential precondition for the debt to qualify as a ‘financial debt’.

At the NCLAT, it was argued that through this mechanism of ‘Assured returns’, a huge amount of money was mobilized by AMR to ensure the development of the project, without any collateral or security. In absence of this scheme, AMR would have been constrained to procure this amount from financial institutions at extremely high interest rates. Instead, this amount was secured from unsuspecting buyers on the guarantee and under the garb of ‘Assured/Committed returns’.

The NCLAT, reversing the decision of the NCLT, ruled in favour of the Flat Buyer and held it to be a ‘Financial Creditor’. The operative part of the decision reads: “It is clear that Appellants are ‘investors’ and has chosen ‘committed return plan. The Respondent in their turn agreed upon to pay monthly committed return to investors.”

NCLAT further went on to rule that the ‘debt’ in this case was disbursed against the consideration for the ‘time value of money’ which is the primary ingredient that is required to be satisfied in order for an arrangement to qualify as ‘Financial Debt’ and for the lender to qualify as a ‘Financial Creditor’, under the scheme of IBC.”[4]

Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private Limited[5]

“The Hyderabad bench of the NCLT, in an insolvency petition against Kamineni Steel & Power India, allowed a resolution plan approved by 66.67% of its committee of creditors (CoC). The Hyderabad NCLT said in its order that Section 30 (4) does not say whether such percentage is out of the total voting share of the financial creditors or those present during meetings of the CoC. Since IBC is a new code and still evolving, the above percentage has to be read with various circulars issued by the Reserve Bank of India.

The National Company Law Appellate Tribunal (NCLAT) has struck down an order passed by the bankruptcy court that approved a resolution plan for Kamineni Steel & Power despite the fact that it failed to receive the mandatory 75 per cent vote share, a pre-requite according to the Insolvency and Bankruptcy Code (IBC) to get the plan endorsed by the court.”[6]

K.S. Rangasamy v. State Bank of India & Anr.[7]

“18. For the reasons aforesaid, we are not inclined to interfere with the impugned order dated 13th June, 2017. However, as we find that the Appellant has taken plea that the ‘Corporate Debtor’ is ready to pay the total amount with 9% interest p.a. in 12 equal monthly instalments, it will be open to the ‘Financial Creditor’ to settle the dispute, if the ‘Resolution Applicant’ proposes ‘lesser amount’ and ‘more time’ than the ‘amount and time’ proposed by the Appellant. In such case, it will be also open to the concerned person to move before an appropriate forum to make the settlement absolute.”

If the offer of the promoters is better than the resolution plan, leeway has been provided to approach the appropriate forum to get the settlement recorded.”[8]

Conclusion

“Justice delayed is justice denied”

The conceptualization of National Company Law Tribunal came with the logic that there should be a separate tribunal/ judicial authority that specifically deals with corporate jurisdiction, so that the benefit of justice can be enjoyed by the society. Thus, there was a dire need for a body which could fast track the process of disposing these matters, which were originally scattered into three different institutions. NCLT is the replacement of Company Law Board and therefore has different powers, functions and scope of working than CLB. A huge amount of effort has been put by the government and a need for the same was realized by the Supreme Court to achieve the goal of formation of NCLT. The effective functioning is as important as the formation was. Thus, just making rules and not proper enforcement of the same, will lead to the misuse of all the resources and also, the real motive of justice will not be achieved. Thus, a big question is posed as to how effective is this substitution from the previous traditional mode of dispute resolution. The scope of this question can be expanded only with the times to come since NCLT is still in its infancy. The major challenge before NCLT is the challenge of time; whether it will be able to stand and fulfill its objectives with the passage of time and increasing complexity of issue. Also, there is a possibility that complications may arise with regard to the practical application of certain provisions, and it may require certain amendments or clarifications.

But beside these doubts, the tribunalisation of justice was the need of the hour and has several advantages, which surely overshadow the possibility of certain challenges. One amongst many is that, it avoids multiplicity of litigation. One of the greatest advantage of NCLT is that multiplicity of litigations will be avoided, thus lessening the burdens of the courts and other institutions. Also, there will be less ambiguity and vagueness since the entire corporate jurisdiction can now be decided under one jurisdiction, and there will be no need to refer to different jurisdictions for different matters. Also, the speedy disposal of cases is another boost to the Indian Adjudicating system. One of the major reason behind coming up with the concept of NCLT was the speedy disposal of the cases. Thus, the motive of justice could be achieved, and there will be no delayed or denied justice. It will also lessen the burden of High Courts, since the appealing authority after NCLT would be NCLAT, and Supreme Court will be the final appellate court after NCLAT.

Whether NCLT will stand true to its worth or not, is a question that only time will tell. But for the present times, formation of national tribunals is a boon for the corporate sector and to the society.

  • References
  1. Companies Act, 1956.
  2. Companies Act, 2013.
  3. The Journal for Corporate Professionals, Vol. 46, Pg. 1-148, July,2016.
  4. clb.nic.in
  5. ichartered.in

[1] The Journal for Corporate Professionals, Vol. 46, July, 2016.

[2]Union of India v. R.Gandhi, President, Madras Bar Association, (2010) 11 SCC  1.

[3] Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Ltd. (NCLT Delhi), C.P NO. (ISB)-03(PB)/2017.

[4] Ibid.

[5] Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private Limited (NCLAT Delhi), Company Appeal (AT) (Insolvency) No. 335 of 2017.

[6] Ibid.

[7] K.S. Rangasamy v. State Bank of India & Anr.(NCLAT Chennai), Company Appeal (AT) (Insolvency) No. 83 of 2017.

[8] Ibid.

Kashni Bathla

Legal Associate at LawDocs

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