By Ajit Sharma
An important feature of the new Companies Act, 2013 is that it provides, for the first time, a single forum for litigating most disputes governed by company law. Strange as it may sound, until now Indian companies were required to approach multiple forums for resolving their disputes. For instance, to contest insolvency proceedings a Company had to approach the Board of Industrial and Financial Reconstruction (BIFR), whereas for obtaining approval of a scheme of merger with another company, the company had to approach the relevant High Court or the District Court. Similarly, to contest claims of mismanagement of company affairs by a shareholder, the Company had to approach the Company Law Board.
The new Companies Act of 2013 consolidates the jurisdiction of the Company Law Board, the High Court & District Court (for company matters), and the BIFR along with its appellate forum, into one Tribunal with exclusive jurisdiction, the National Company Law Tribunal (NCLT). Prominent exclusions from NCLT jurisdiction include disputes arising out of arbitration proceedings, civil suits filed by or against the company for, say, recovery of money or other civil or criminal disputes that the company may be involved in but which are not essentially commercial in nature. For instance, if a Company were to challenge compulsory acquisition of its land by the government then the challenge would lie before a District court and not the NCLT since this is not a typical commercial dispute covered by the Act.
The creation of the NCLT was much anticipated and something that the government had attempted earlier but without success. In 2002 the Parliament passed by the Companies (Amendment) Act, 2002, which amended the old Companies Act of 1956, and provided for establishment of a tribunal, much similar to the NCLT contemplated under the 2013 Act. However, the tribunal under 2002 amendment never saw light of the day due to a legal challenge to its composition.
The Supreme Court in 2010, in an important judgment, upheld Parliament’s power to create a specialized company tribunal but held certain provisions of the Companies (Amendment) Act, 2002 as unconstitutional on the ground that they provided for under-qualified experts to sit as judges on the tribunal. The tribunal contemplated under the 2002 amendments and the 2013 provision for a NCLT both provide for the appointment of ‘judicial’ and ‘technical’ members as judges.
In its 2010 decision, the Supreme Court held that as the tribunal was intended to replace the High Court’s jurisdiction over certain company law disputes, the “technical” members of the tribunal should be comparable in experience to a High Court judge. Since the clause relating to the qualifications of appointment of a technical member on the tribunal was vaguely worded, the Supreme Court struck it down as unconstitutional. The Parliament never amended the law again and thus the tribunal under the Companies (Amendment) Act, 2002 never saw light of the day.
Perhaps the biggest criticism of the 2013 Act is that it does not fully comply with the 2010 judgment of the Supreme Court in that, as with the Companies (Amendment) Act, 2002, technical members need not be as qualified as High Court judges. Thus the creation of NCLT under the Act has again been challenged in the Indian Supreme Court, where the case remains pending. See Madras Bar Association vs. Union of India [Writ Petition No. 1072 of 2013]. The Supreme Court, by its order of January 13, 2014, agreed to consider the question of the constitutional validity of the NCLT proposed to be created under the 2013 Act on the ground that its composition (i.e. appointment of judicial and technical members) compromises the independence of judiciary and that such appointments also do not comply with an earlier judgment of the Supreme Court announced in Union of India vs. R. Gandhi [Civil Appeal No. 3067 of 2004]). The defects, if any, in the 2013 Act with respect to appointment of members/judges of the NCLT are curable by an amendment if Parliament wishes to have the NCLT established and running at the earliest opportunity. It would thereby avoid a time-consuming case in the Supreme Court.
JURISDICTION OF NCLT
Disputes involving mergers and amalgamations, which were hitherto litigated at the Company Law Board, the BIFR and the High Court/ District Court will now be adjudicated by the NCLT. The 2103 Act provides for class actions law suits and a provision for resolving commercial disputes by mediation and conciliation, both of which are much needed initiatives.
The NCLT, under the 2013 Act, is intended to adjudicate or regulate the following kinds of disputes and/or activities:
- Conversion of a public company into a private company is to be carried out only after obtaining the approval of the NCLT;
- Variation in the rights of a class of shareholders is not to take effect without the NCLT’s approval where an application opposing such variation is made by at least ten percent shareholders holding such class of shares;
- Approval of the NCLT is necessary where a company proposes to issue fresh redeemable preference shares in lieu of payment of a dividend to be paid on existing preference shares;
- A transferee can approach the NCLT against the decision of a company refusing to register a transfer of the company’s securities;
- NCLT’s prior approval is imperative for reduction in share capital by a company;
- Debenture holders or depositors can approach the NCLT in the event the company refuses to redeem the debentures or pay its depositors;
- A shareholder can approach the NCLT seeking a direction by it to the company to call an annual general body meeting where no such meeting has been convened in time;
- Any person may approach the NCLT seeking a change of the company’s auditors where such auditor has been involved with any fraudulent activities – the NCLT can also suo moto order such a change in the company’s auditor;
- Shareholders of a company may approach the NCLT seeking an investigation into the affairs of the Company if there is a reason to believe that the company is being mismanaged or its activities are prejudicial to the interests of its shareholders. Shareholders can also seek a direction from the NCLT prohibiting disposal or transfer or sale of the company’s assets where the affairs of the company are not being managed properly;
- Creditors or the shareholders or the company itself may approach the NCLT with a proposal for a scheme of amalgamation or arrangement or merger with another company. Such a scheme, if approved by the NCLT, would then be binding on all shareholders or creditors of the company.
- Shareholders or depositors of a company may file class action applications before the NCLT on behalf of all shareholders or depositors where affairs of the company are being mismanaged;
- Creditors of a company may approach the NCLT seeking appointment of an administrator to manage the affairs of the company on the ground that the company is unable to pay its debts and merits declaration as a “sick company.” The NCLT may on an application filed by any shareholder or the company itself approve a scheme for revival and rehabilitation of the company; and
- A creditor or shareholder or any other person may approach the NCLT for winding up and dissolution of a company on the ground that the company is unable to pay its debts, or that its activities are against the sovereign interests of the country or that it is conducting its affairs in a fraudulent manner.
It is clear from above that almost all kinds of commercial disputes are required to be resolved by the NCLT when it is formally created by the government. Moreover, a party in any litigation before the NCLT may request the tribunal that the litigation be referred to an expert mediator for resolution. This is an encouraging sign. Often commercial disputes among shareholders or creditors or investors are resolved with the assistance of an expert mediator saving time and costs while keeping the settlement confidential, if the parties so chose. The success of mediation is evident from the fact that in many other courts across India a large number of cases have been resolved using mediation.
WILL THE NCLT CHANGE THE WAY COMMERCIAL DISPUTES ARE RESOLVED IN INDIA?
The advantage of the NCLT is that from the day of its creation all commercial disputes will now be resolved in one forum instead of several. While it will be convenient for parties to be able to approach one tribunal for resolution of all company related disputes, the biggest gain will be consistency in the growth and development of company law jurisprudence in India. A single forum will avoid the current situation where different forums interpret similar cases differently. All of this will change with the creation of NCLT as a single forum which would decide all disputes arising out of the Act. Growth of company law jurisprudence at the level of a court of first instance is important since it not only encourages compliance with the provisions of the Act but makes compliance simpler since company officials will need to update themselves on the latest orders of just one tribunal instead of several.
The growth in India’s economy over the past decade has outpaced much needed change in its corporate laws. Existing infrastructure, practices, laws and thinking continue to impede further growth. The creation of the NCLT may also have symbolic significance since it signals the end of an era where the company law board, courts and other existing forums were only too keen to interfere with the company affairs.
The 2013 Act also provides that the NCLT shall endeavour to resolve all disputes within a period of three months. While it is uncertain whether most disputes before the NCLT could be resolved within this time frame, it would be sufficient if this provision, once implemented, inspires judges and parties to work together to resolve disputes as expeditiously as possible.
Ajit Sharma is a Partner in the Dispute Resolution practice group at J M Sharma & Co., Advocates & Solicitors in New Delhi and may be reached at firstname.lastname@example.org.