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“The Approach Of NCLT And NCLAT Is More Bureaucratic” U.K. Chaudhary, Senior Advocate

Dr. Annurag Batra Nov 25, 2020

Is the National Company Law Tribunal functioning to the satisfaction of all stakeholders?

It’s a big question. The National Company Law Tribunal (NCLT) was established on June 1, 2016 after the Supreme Court cleared the decks vide its judgement in the case titled Madras Bar Association Vs Union of India and Others (2015), which challenged the constitutional vires of certain provisions of the Companies Act, 2013.

In the earlier case titled Union of India Vs R. Gandhi, President, Madras Bar Association (2010), raising similar issues regarding provisions of the Companies Act, 1956, the Constitutional Bench of the Supreme Court held that:

If the tribunals are to be vested with judicial power, hitherto vested in or exercised by courts, such tribunals should possess the independence, security and capacity associated with courts.
An independent judiciary can exist only when persons with competence, ability, and independence and with impeccable character man the judicial institutions
If there should be technical members, they should be persons with expertise in Company Law or allied subjects and mere experience in civil service cannot be treated as technical expertise in Company Law. The tribunals cannot become providers of sinecure to members of civil service by appointing them as technical members, even though they may not have technical expertise in the field to which the tribunals relate or worse where purely judicial functions are involved.
If these tribunals are to function effectively and efficiently, they should be able to attract younger members who will have a reasonable period of service. The term of service shall be changed from three years to seven years or five years subject to eligibility for appointment of one or more terms.
The administrative support for all tribunals should be from Ministry of Law and Justice.
As tribunals are free from shackles of procedural laws and evidence law, they can provide easy access to speedy justice in a ‘cost affordable’ and user friendly manner.
When the legislature proposes to substitute a tribunal in place of the High Court to exercise the jurisdiction which the High Court is exercising, it goes without saying that the standards expected from the judicial members of the tribunal and standards applied for appointing such members should be as nearly as possible as applicable to High Court judges, which are apart from a basic degree in law, rich experience in the practice of law, independent outlook, integrity, character and good reputation. Therefore, only persons with judicial background, i.e. who have been or are judges of the High Court and lawyers with prescribed experience, who are eligible for appointment as High Court judges can be considered for appointment as judicial members. The second judgement reiterated most of the findings of the earlier judgement and thus held:

(i) The National Company Law Tribunal, thus, would not only deal with questions of law but would be called upon to thrash out the factual disputes as well. In this scenario the National Company Law Appellate Tribunal, which is the first appellate forum, provided under the Companies Act, 2013, will have to revisit, the factual as well as legal issues.

(ii) The technical members in the National Company Law Tribunal shall be only persons holding rank of a Secretary or Additional Secretary only to avoid gradual erosion of independence of judiciary.

Looking at the present structure of the National Company Law Tribunal and the National Company Law Appellate Tribunal, in the light of above observations of the Supreme Court, much is left to be desired in terms of appointments, tenure, skills, expertise and infrastructure, in comparison to the High Courts, whose jurisdiction the tribunal and its appellate authority are exercising now.

At present, how many National Company Law Tribunal and National Company Law Appellate Tribunal benches have been established and are working?

As on 1 October 2020, there are 27 benches of the National Company Law Tribunal at 15 locations namely New Delhi, Mumbai, Kolkata, Chennai, Ahmedabad, Allahabad, Hyderabad, Bengaluru, Chandigarh, Cuttack, Guwahati, Jaipur, Kochi, Amrawati, Indore. In places like New Delhi,

Mumbai, Hyderabad, Ahmedabad, Chennai, Kolkata, etc. more than one bench has been constituted by the President of NCLT. Similarly, there are five courts of the National Company Law Appellate Tribunal, which are based in New Delhi. However, due to the pandemic, since May 2020 only a few of the benches are regularly holding court in respect of urgent matters only through video conferences.

How many members are appointed in the National Company Law Tribunal and the National Company Law Appellate Tribunal?

As on 1 October 2010, there are 42 members in the National Company Law Tribunal including 20 judicial members and 22 technical members. In the National Company Law Appellate Tribunal there are 10 members including 6 technical members and 4 judicial members. However, for over six months now, there is no President of the National Company Law Tribunal and no Chairperson in the National Company Law Appellate Tribunal. Both institutions are headed by an acting President and an acting Chairperson, respectively.

This alone reflects the apathy of the Central government towards tribunals. It is not understood as to why the Central government cannot treat the tribunals seriously and take timely measures to ensure the smooth working of such important institutions dealing with high-stake matters of trade and industry, under the Companies Act and the Insolvency and Bankruptcy Code. The appointment of most of the members in one way or other violates the mandate of the Supreme Court spelt out in the first and second cases mentioned above. Hence the approach of the National Company Law Tribunal and the National Company Law Appellate Tribunal, barring few exceptions, is more bureaucratic and not as prominent judicial tribunals dealing with extremely important judicial issues of law and finance.

What sort of cases do the National Company Law Tribunal and the National Company Law Appellate Tribunal deal with?

The National Company Law Tribunal deals with all cases under the provisions of the Companies Act, 1956 after transfer from the erstwhile Company Law Board and High Courts, and all new cases under the provisions of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. However, the cases under IBC have taken primacy over company matters in view of the strict timelines laid down in the code.

Hence, there is general grievance among the litigating public that company cases have taken a backseat, as most of the time all the benches of the National Company Law Tribunal are dealing with cases under IBC. This has led to undue delay in disposal of important cases of mergers, amalgamations, demergers, reduction of capital, oppression and mismanagement and other miscellaneous company petitions.

In this regard some balancing act is required in the National Company Law Tribunal, where there could be some dedicated benches dealing with only company cases, while other benches can deal with IBC cases as ‘Adjudicating Authority’. Or there may be division of time and schedule in such a way that IBC cases can be taken up in the morning session and company cases in the afternoon session. Or even the roaster may be divided on the basis of certain days being fixed for IBC cases and some days for company matters.

It is well known that delay in disposal of cases leads to denial of justice and may defeat the very purpose for which the National Company Law Tribunal was established as a substitute for the High Courts. The approach of the National Company Law Appellate Tribunal in this regard is more balanced as it has certain dedicated benches for hearing company appeals and other benches for hearing appeals under IBC or benches dealing with a certain number of appeals under IBC as well as the Companies Act, 2013.

What is the role of the National Company Law Tribunal and the National Company Law Appellate Tribunal under the provision of the Insolvency and Bankruptcy Code, 2016?

The National Company Law Tribunal and the National Company Law Appellate Tribunal are playing a very important and constructive role in implementing the provisions of IBC as ‘Adjudicating Authority’. All the benches of the National Company Law Tribunal are dealing with applications of financial creditors under Section 7, operational creditors under Section 9 and corporate debtors under Section 10 of IBC and expeditiously deciding the applications within the time prescribed by law.

As of 1 April 2019, the National Company Law Tribunal has disposed of more than 6,000 cases under IBC and is also dealing with 9,000 cases which are pending at various stages along with allied and connecting multiple applications in the pending cases.

It is responsible for recovery of over Rs 2 lakh crore through Corporate Insolvency Resolution Process (CIRP) under IBC.

The banks and financial institutions have now an effective and quick remedy to address their NPAs (nonperforming assets), and trade and Industry is also now awakening to a new realty where bankers and other financial creditors cannot be taken for a ride anymore. However, a careful monitoring system is necessary for banks also to eliminate fraudulent lending and fraudulent transactions in order to stem the rot in the banking sector.

How has the Insolvency and Bankruptcy Code 2016 impacted SMEs and the role of the National Company Law Tribunal and the National Company Law Appellate Tribunal?

To begin with, the Insolvency and Bankruptcy Code did not differentiate between a large corporate debtor and other companies in the MSME sector. All companies except financial services providers were treated as corporate debtor and liable for being proceeded with under Section 7, 9 or 10 as the case may be with fault restrictions of Section 29A of IBC.

However, Section 240A was insert ed in IBC effective 6 June 2018 by the Insolvency and Bankruptcy (seemed Amendment) Act, 2018, whereby it was stated that clauses (c) and (h) of Section 29A shall not apply to a resolution applicant in respect of CIRP of micro, small and medium enterprises and the Central government in the public interest was empowered by notification to direct that any of the provisions of IBC shall not apply to MSMEs or apply with such modifications as may be specified in the notification. The net effect of this amendment was that promoters and guarantors of MSMEs became entitled to give resolution plan for their own companies under CIRP but in the MSME sector.

The National Company Law Tribunal as adjudicating authority and the National Company Law Appellate Tribunal as its appellate authority can now ensure that promoters / guarantors are given fair opportunity to participate in the resolution process by not just participating in the meetings of Committee of Creditors (CoC) but also engaging in the process as resolution applicants in respect of their own company as a corporate debtor.

Even the Insolvency and Bankruptcy Board of India (IBBI) can play a very constructive role in educating the promoters of lakhs of MSMEs as companies likely to face CIR process under IBC and frame necessary rules and regulations in this regard. MSMEs for the purposes of Section 240A is clarified in the explanation, which means any class or classes of enterprises classified as such under Section 7 of Micro, Small and Medium Enterprises Development Act, 2006.