A five-judge constitution bench of the Supreme Court today struck down several provisions of the Companies Act 2013, which provides for establishment of the National Company Law Tribunal (NCLT) and its appellate forum.
However, it upheld the law providing for the tribunals and asked the government to set them up without further delay as litigation has stopped their establishment for years.
The court has asked the government to modify the rules according to the recommendations made in the judgment.As per the provisions of the Companies Act, 2013, NCLT will not only replace the Company Law Board (CLB) but also handle various cases of companies currently with the high courts, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR). It will have 63 members and 21 benches.A constitution bench had already examined the Companies Act provisions in 2010 and found several legal hitches. The government then amended those offending provisions and argued this time that the faults have been repaired. However, Madras Bar Association came a second time to challenge the provisions and the court agreed that certain provisions must go.The present judgment, delivered by a bench headed by Chief Justice H L Dattu emphasized on the principles of independence of judiciary and separation of powers underlined in the 2010 judgment.
According to the court, the amended provisions - which were presented by the government - did not meet the conditions set by the earlier judgment. The main illegalities were related to the selection and appointment of members and heads of the tribunals.
One of the provisions found invalid was Section 409 which allowed a joint secretary to be a technical member of the tribunal. The court wanted only secretary or additional secretary to be appointed to the post. Moreover, the provision for cost accountant with 15 years experience has also been held to be invalid. The court held that these provisions went against the "clear and categorical dicta in the 2010 judgment".
"Tinkering with them would evidently have the potential of compromising with standards which 2010 judgment sought to achieve, nay, so zealously sought to secure," the judgment written by Justice A K Sikri said. Another serious illegality has been found regarding the constitution of the selection committee. According to the apex court, the mandate of the 2010 judgment has not been followed in the amended rules even when it comes to the composition of the selection committee.
As per the 2010 judgment, there should have been a four-member committee and the chief justice should have the casting vote in case of differences. Instead of that, the new Companies Act proposed a five-member committee. Another fatal deviation from the rules set by the 2010 judgment has been that one member each from the Ministry of Corporate Affairs as well as Ministry of Finance were proposed for the selection committee. As per the court, the effect of this composition is again to make it a five member body with bureaucrats having upper hand.
"The reason is simple; out of these five members, three are from the administrative branch/bureaucracy as against two from judiciary which will result in predominant say of the members belonging to the administrative branch," the court emphasized while quashing this provision. The 2010 case was also initiated by Madras Bar Association just as the present one and the association had alleged that the tribunals were heavily weighted in favour of bureaucrats, making them sinecure for retired babus. The court had struck down several provisions and asked the government to cure the defects.
However, now, in the new round of litigation, more provisions have been struck down. The present judgment indicated that the legal hurdles for setting up the tribunals are far from over. There is another set of challenges in a 2012 writ petition pending before the Supreme Court which is yet to be heard.While concluding the judgment, the court observed that "the functioning of NCLT and NCLAT has not started so far and it is high time that these tribunals start functioning now. We hope that the government shall take remedial measures as per the directions contained in this judgment at the earliest, so that the NCLT & NCLAT are adequately manned and start functioning in the near future".
