Going by reports across newspapers, it appears that the PMO has taken the initiative of improving India’s ranking in the World Bank’s Ease of Doing Business index quite seriously. The Department of Industrial Policy and Promotion (DIPP) and the economic affairs department have been pushing the corporate affairs ministry to resolve the issues relating to the formation of the National Company Law Tribunal (NCLT) and the notification of a large number of sections under the Companies Act, 2013, which haven’t been notified yet due to delay in setting up the NCLT.
Incidences of corporate failure have adverse implications on economy, emphasising the requirement of an efficient corporate insolvency regime. Recognising the need for reforms in the bankruptcy laws in India as long overdue, the finance minister, in Budget FY16, highlighted the redundancy of the outmoded Sick Industrial Companies Act, 1985, (SICA) and proposed the introduction of a bankruptcy code in FY16.
The bankruptcy code is required to be in line with legislative enactments such as the new Companies Act and is expected to consider the suggestions made by the Bankruptcy Law Reforms Committee chaired by TK Vishwanathan.
The committee, in its report, had pointed out that the delay and backlog at the level of the courts/ tribunals were primarily responsible for the failure of the corporate insolvency regime in India. This was sought to be addressed by providing for the establishment of the NCLT and the National Company Law Appellate Tribunal (NCLAT). NCLT and NCLAT propose to take over the functions performed by company law board (CLB), board for industrial and financial construction (BIFR), and the high courts and, are meant to be overarching bodies for adjudicating matters related to companies’ insolvency.
The constitutional validity for the formation of NCLT under the old Companies Act of 1956 was challenged before the Madras High Court and thereafter, in the Supreme Court. In one of its landmark judgments, the apex court upheld the creation of NCLT; but declared that certain parts of the Companies Act 1956 as unconstitutional. Subsequent to the this judgment, Parliament enacted the new, 2013 Act in which establishment of NCLT and NCLAT was envisaged. The constitutional validity of NCLT was again challenged before the Supreme Court and it was prayed that the recommendations made by the Supreme Court in the NCLT case should be implemented. The Supreme Court, has in one of its recent orders, referred the matter to the constitution bench.
One way to resolve the legal hurdles in the way of operationalising the NCLT and NCLAT will be to accept the recommendations of the Vishwanathan committee, as mentioned by the ministry of corporate affairs in its report. To appreciate this, it will be interesting to understand the significance of the committee’s recommendations.
One of the important recommendations of the committee is that the NCLT, which envisages replacing the jurisdiction of high courts, is required to have a presence in at least those states where the seat of high court is located. The Companies Act, 2013, leaves it to the discretion of the central government to decide on the number of benches. The fact that there is no positive mandate upon the central government to set up benches of the NCLT in all states is likely to affect the efficacy of the NCLT as a forum that replaces the high court. Further, in the context of the NCLAT, which is also replacing the function of the high court, there is no provision that prescribes where the seat of the NCLAT shall be. The new companies law not providing for a seat of the NCLAT or even giving the central government the power to set up more benches of the NCLAT may not withstand judicial scrutiny.
The second important recommendation of the committee is regarding the amendment to the provision for appointment of technical members. As per the committee, the present provision under the new companies law permitting the appointment of joint-secretary level officers as technical members may be struck down since it may have a bearing on the independence of the judiciary.
The committee also recommends that the “five years as a high court judge” requirement for the post of president of the NCLT should be done away with as it may be struck down on the ground of being unconstitutional.
The committee makes certain suggestions about the manner of constitution of the benches of the NCLAT. It recommends that the Companies Act, 2013, should provide clarity on the manner in which the benches of the NCLAT will be constituted and whether there will be a majority of judicial members on such benches—this is very crucial for keeping alive the autonomy and objectivity of the judicial system. The committee also recommends that where an appeal against the order of NCLT does not relate to technical matter, the bench hearing such matter has to be composed only of judicial members or technical members with legal training.
The establishment of the NCLT and NCLAT as specialised, quasi-judicial bodies will have the benefit of reducing the pendency of winding up cases, avoiding multiplicity and levels of litigation before the high courts, BIFR and CLB, thereby speeding up the entire process. Therefore, the recommendations of the panel should be promptly implemented. Since a writ petition challenging the constitutional validity of the NCLT and NCLAT is pending before the Supreme Court, the government should consider making a representation before the apex court stating that it is agreeable to carry out the changes to the Companies Act 2013 in line with the recommendations of the Supreme Court in the NCLT case.
If India continues to wait for resolution of the issues plaguing the setting up of the NCLT, then it may miss yet another chance to significantly improve its ranking in resolving the business insolvency parameter of the “doing business” rankings.
Priyam Singh, associate, J Sagar Associates, Advocates and Solicitors, also contributed to this piece. The author is partner, J Sagar Associates, Advocates and Solicitors. Views are personal.