Constitution Bench on Company Law Tribunal

Madras Bar Association v. Union of India & Anr.(II)


The writ petition was sequel to the earlier proceedings which culminated in the judgment rendered by the Constitution Bench of the Supreme Court in Union of India v. R. Gandhi, President, Madras Bar Association where the petitioner had challenged the constitutional validity of creation of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), along with certain other provisions pertaining thereto which were incorporated by the Legislature in Parts 1B and 1C of the Companies Act, 1956 by Companies (Second Amendment) Act, 2002. The Constitution Bench vide the said judgment put its stamp of approval insofar as constitutional validity of NCLT and NCLAT was concerned whereas Parts 1B and 1C of the Act as then structured, were held unconstitutional. However, Parts IB and IC of the Act, might be made operational by making suitable amendments, as suggested, in addition to what the Union Government had already agreed in pursuance of the impugned order of the High Court. The Parliament passed new company law in the form of Indian Companies Act, 2013 which replaced the earlier Act of 1956. In the new Act, again substantive provisions have been made with regard to the establishment of NCLT and NCLAT alongwith various related provisions similar to that of 2002 Amendment Act.


The petitioner alleged that notwithstanding various directions given in the 2010 judgment, the new provisions in the 2013 Act were almost on the same lines as were incorporated in the 1956 Act and, therefore, the provisions suffered from the vice of unconstitutionality as well on the application of the ratio in 2010 judgment. It was, thus, emphasized by the petitioner that these provisions which are contained in Sections 408, 409, 411(3), 412, 413, 425, 431 and 434 of the 2013 Act are ultra vires and, therefore, warrant to be struck down as unconstitutional.


Constitutional validity of NCT and NCLAT

The creation of constitution of NCLAT has been specifically upheld in 2010 judgment. The Court specifically rejected the contention that transferring judicial function, traditionally performed by the Courts, to the Tribunals offended the basic structure of the Constitution. Reading of the Constitution Bench judgment in the matter of National Tax Tribunal would manifest that not only 2010 judgment was taken note of but followed as well. The Court spelled out the distinguishing features between NCLT/NCLAT on the one hand and NTT on the other hand in arriving at a different conclusion. Providing one right to appeal before an appellate forum is a well accepted norm which is perceived as a healthy tradition. Hence the contention was rejected.


Qualifications of President and Members of NCLT were mentioned in Section 409 of the Act and that of Chairperson and Members of NCLAT were stipulated in Section 411 of the 2013 Act. It was argued that insofar as technical Members of NCLT/NCLAT were concerned, the provision was almost the same which was inserted by way of an amendment in the 1956 Act and challenge to those provisions was specifically upheld finding fault therewith. In the 2010 judgment, the Constitution Bench took the view that since the NCLT would now be undertaking the work which was being performed, inter alia, by High Court, the technical Members of the NCLT/NCLAT should be selected from amongst only those officers who hold rank of Secretaries or Additional Secretaries and have technical expertise. Parts 1C and 1D of the 1956 Act, as they existed, were treated as invalid, and in order to bring those provisions within the realm of Constitutionality, the Court pointed out the corrections which were required to be made to remove those anamolies. The Supreme Court thus in consonance with the 2010 judgment held that Section 409(3)(a) and (c) were invalid as these provisions suffered from same vice. Section 411(3), providing for qualifications of technical Members, was also held to be invalid. It was directed that for appointment of technical Members to the NCLT, directions contained in 2010 judgment would have to be scrupulously followed and those corrections were required to be made in Section 409(3) to set right the defects contained therein.


The issue pertained to the constitution of Selection Committee for selecting the Members of NCLT and NCLAT as contained in Section 412 of the 2013 Act. The structure of the Selection Committee was faulted by the Constitution Bench in the 2010 judgment. The Court specifically remarked that instead of 5 members Selection Committee, it should be 4 members Selection Committee and even the composition of such a Selection Committee was directed to be done as per the judgment. Notwithstanding the above, there was a deviation in the composition of Selection Committee that is prescribed under Section 412 (2) of the 2013 Act. The Supreme Court opined that this again did not constitute any valid or legal justification, having regard to the fact that this very issue stood concluded by the 2010 judgment which was now a binding precedent. The prime consideration in the mind of the Bench was that it is the Chairperson, viz. Chief Justice of India, or his nominee who was to be given the final say in the matter of selection with right to have a casting vote. Provisions of Section 412(2) of the Act were held to be not valid.


Partly allowing the writ petition, the Constitution Bench of the Supreme Court observed that it seemed the only step which is left to make NCLT and NCLAT functional was to appoint President and Members of NCLT and Chairperson and Members of NCLAT. Since, the functioning of NCLT and NCLAT had not started it was directed that the  respondents should take remedial measures as per the directions contained in the judgment at the earliest, so that the NCLT & NCLAT are adequately manned and start functioning in near future.