SC clears National Company Law Tribunal

Written by fe Bureaus | New Delhi | Updated: May 12 2010, 05:11am hrs
The National Company Law Tribunal (NCLT) to fast-track company law cases and corporate structuring by replacing the Company Law Board and the BIFR got the approval of the Supreme Court on Tuesday. The tribunal that was proposed in the 2002 amendment to the Companies Act was caught in a major legal wrangle amid fears that its structure as proposed by the government flouted the Constitutional separation of powers by vesting essential functions in the quasi-judicial body.

While giving the nod for the setting up NCLT, the SC, however, underlined the importance of maintaining its judicial flavour, and suggested changes in the structure of the tribunal for this.

NCLT would help expedite the approval process for M&As in the private sector, a function of high courts. The tribunal would also allow timely unlocking of the value of distressed corporate assets, as it would take over the process of liquidation of companies, now performed by official liquidators attached to high courts.

According to World Bank, liquidation of assets in India fetches the investor just 16 cents against a dollar invested, whereas the average return is 65-70 cents in Japan and 35-40 cents in most European countries. Further, it takes about 12 years to liquidate a company in India, via the lengthy and cumbersome process involving the BIFR, the appellate authority over it, and the high courts.

In contrast, most developed countries are able to complete the winding-up of companies 1-3 years.

A five-member Constitutional bench headed by outgoing Chief Justice KG Balakrishnan upheld the validity of the 2002 amendment, but said the proposed tribunal should be headed by a retired high court judge, who and other members would be appointed by a committee headed by the Chief Justice of India. The original proposal was for the government to appoint the chairman -- who need not be a judge -- and other members, from various technical disciplines. In its ruling, the SC has warned against the tribunalisation of justice system and executive and technical members having a dominant role in a quasi-judicial body. The judiciary should be a key part of the process and should be in majority, it said.

The legal fraternity welcomed the SCs balancing act. The community of professionals like chartered accountants and company secretaries who were ardent supporters of the NCLT model too reacted positively. The government, however, responded with caution. Said secretary-corporate affairs, R Bandyopadhyay: We are wary about the Supreme Courts decision. The court has also suggested some changes. We have to study their actual implications and on the basis of that, would adopt the shortest possible legally valid course to set up the NCLT. We need to see if we are required to go back to Parliament or whether the suggestions could be implemented administratively.

The secretary said it is difficult to say how much time it might take to make NCLT fully functional, but expressed confidence that it could happen in less than a year.

Says Preeti Malhotra, former president of ICSI: It is a landmark judgement for corporate India and professionals. It will speed up various corporate processes such as M&As, restructuring, dispute resolution and liquidation. The NCLT framework recognises that speed is of essence. By the time NCLT is set up and becomes functional, which might take a year, the new Companies Bill may also get passed in Parliament. Both will synchronise well.

Senior lawyer Abhishek Manu Singhvi said: We hope and trust that the SC ruling will pave way for expeditious setting up of the tribunal. Said senior corporate lawyer Harish Salve: The SC has done a balancing act by ruling that specialised tribunals should not lose judicial flavour. The members cant be retired civil servants but has to be from the judicial fora.

The apex court said the NCLT chairman and members should have a tenure of 5 to 7 years instead of 3 years proposed earlier. Under the 2002 Act, the members of the tribunal were to be appointed by the central government and the head of the tribunal need not be a judge.

Apprehending that too many technical members would erode the independence of the judiciary, the SC further said that high court or district judges with a minimum experience of 5 years and advocates with 10 years of standing practice only should be appointed as judicial members. Besides, experts from different fields like science and technology, industrial management, etc are eligible to become technical members, it added. The 2002 amendment to the Companies Act had envisaged setting up of NCLT and an appellate tribunal over it.

The NCLT would replace the CLB for resolving corporate disputes, particularly regarding mismanagement and oppression. It would also facilitate speedier resolution of bankruptcy filings by companies. To ensure that restructure and liquidation proceedings are in sync with the times, the government introduced a new bankruptcy and restructuring code in the new Companies Bill 2009, which is now before Parliament. The code would ensure reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate it. The idea is to incentivise genuine restructuring efforts.