2010 (5) TMI 393 - SC - Companies Law

Tribunal system for company law upheld, but Parts 1B and 1C struck down pending independence and tenure safeguards

Union of India Versus R. Gandhi President Madras Bar Association

The SC upheld the High Court's core finding that transferring company-law jurisdiction to a National Company Law Tribunal and Appellate Tribunal is ... Legislative competence of Parliament to provide for the creation of courts and Tribunals - Constitutional validity of Chapters 1B and 1C of the Companies Act, 1956 (‘Act’) inserted by Companies (Second Amendment) Act, 2002 (‘Amendment Act’) - providing for the constitution of National Company Law Tribunal (‘NCLT’ or ‘Tribunal’) and National Company Law Appellate Tribunal (‘NCLAT’ or ‘Appellate Tribunal’) - Whether the Government can transfer the judicial functions traditionally performed by courts to Tribunals? - Whether the constitution of NCLT and NCLAT under Parts 1B & 1C of Companies Act are valid? HELD THAT:- When the Tribunals are formed, they are mostly dependant on their sponsoring department for funding, infrastructure and even space for functioning. The statutes constituting Tribunals routinely provide for members of civil services from the sponsoring departments becoming members of the Tribunal and continuing their lien with their parent cadre. Unless wide ranging reforms as were implemented in United Kingdom and as were suggested by Chandra Kumar are brought about, Tribunals in India will not be considered as independent. We may summarize the position as follows : (a)A Legislature can enact a law transferring the jurisdiction exercised by courts in regard to any specified subject (other than those which are vested in courts by express provisions of the Constitution) to any Tribunal. (b)All courts are Tribunals. Any Tribunal to which any existing jurisdiction of courts is transferred should also be a Judicial Tribunal. This means that such Tribunal should have as members, persons of a rank, capacity and status as nearly as possible equal to the rank, status and capacity of the court which was till then dealing with such matters and the members of the Tribunal should have the independence and security of tenure associated with Judicial Tribunals. (c)Whenever there is need for ‘Tribunals’, there is no presumption that there should be technical members in the Tribunals. When any jurisdiction is shifted from courts to Tribunals, on the ground of pendency and delay in courts, and the jurisdiction so transferred does not involve any technical aspects requiring the assistance of experts, the Tribunals should normally have only Judicial Members. Only where the exercise of jurisdiction involves inquiry and decisions into technical or special aspects, where presence of Technical Members will be useful and necessary, Tribunals should have Technical Members. Indiscriminate appointment of Technical Members in all Tribunals will dilute and adversely affect the independence of the Judiciary. (d)The Legislature can re-organize the jurisdictions of Judicial Tribunals. For example, it can provide that a specified category of cases tried by a higher court can be tried by a lower court or vice versa (A standard example is the variation of pecuniary limits of courts). Similarly while constituting Tribunals, the Legislature can prescribe the qualifications/eligibility criteria. The same is however subject to Judicial Review. If the court in exercise of judicial review is of the view that such tribunalisation would adversely affect the independence of judiciary or the standards of judiciary, the court may interfere to preserve the independence and standards of judiciary. Such an exercise will be part of the checks and balances measures to maintain the separation of powers and to prevent any encroachment, intentional or unintentional, by either the Legislature or by the executive. Parts 1C and 1D of the Companies Act proposes to shift the company matters from the courts to Tribunals, where a ‘Judicial Member’ and a ‘Technical Member’ will decide the disputes. If the members are selected as contemplated in section 10FD, there is every likelihood of most of the members, including the so called ‘Judicial Members’ not having any judicial experience or company law experience and such members being required to deal with and decide complex issues of fact and law. Whether the Tribunals should have only Judicial Members or a combination of Judicial and Technical Members is for the Legislature to decide. But if there should be Technical Members, they should be persons with expertise in company law or allied subjects and mere experience in civil service cannot be treated as Technical Expertise in company law. The candidates falling under sub-sections 2(c) and (d ) and sub-sections 3(a) and (b ) of section 10FD have no experience or expertise in deciding company matters. There is an erroneous assumption that company law matters require certain specialized skills which are lacking in Judges. There is also an equally erroneous assumption that members of the civil services, (either a Group-A officer or Joint Secretary level civil servant who had never handled any company disputes) will have the judicial experience or expertise in company law to be appointed either as Judicial Member or Technical Member. Nor can persons having experience of fifteen years in science, technology, medicines, banking, industry can be termed as experts in Company Law for being appointed as Technical Members. The practice of having experts as Technical Members is suited to areas which require the assistance of professional experts, qualified in medicine, engineering, and architecture etc. We uphold the decision of the High Court that the creation of National Company Law Tribunal and National Company Law Appellate Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, are not unconstitutional. We declare that Parts 1B and 1C of the Act as presently structured, are unconstitutional for the reasons stated in the preceding para. However, Parts 1B and 1C of the Act, may be made operational by making suitable amendments, as indicated above, in addition to what the Union Government has already agreed in pursuance of the impugned order of the High Court. Issues Involved:1. Legislative competence to vest judicial functions in Tribunals.2. Doctrine of separation of powers and independence of the judiciary.3. Legislative competence under Article 323B.4. Constitutionality of various provisions of Chapters 1B and 1C of the Companies Act, 1956.5. Validity of the establishment of NCLT and NCLAT.Issue-wise Detailed Analysis:1. Legislative Competence to Vest Judicial Functions in Tribunals:The Madras Bar Association (MBA) contended that Parliament does not have the legislative competence to vest intrinsic judicial functions traditionally performed by the High Courts in any Tribunal outside the Judiciary. The Supreme Court held that the Parliament has the legislative competence to make a law providing for the constitution of Tribunals to deal with disputes and matters arising out of the Companies Act. The legislative competence of Parliament to provide for the creation of courts and Tribunals can be traced to Entries 77, 78, 79, and Entries 43, 44 read with Entry 95 of List I, Item 11A read with Entry 46 of List III of the Seventh Schedule.2. Doctrine of Separation of Powers and Independence of the Judiciary:MBA argued that the constitution of the National Company Law Tribunal (NCLT) and transferring the entire company jurisdiction of the High Court to the Tribunal, which is not under the control of the Judiciary, violates the doctrine of separation of powers and independence of the Judiciary. The Supreme Court emphasized that Tribunals should possess the independence, security, and capacity associated with courts. If Tribunals are to be vested with judicial power hitherto exercised by courts, such Tribunals should have as members, persons of a rank, capacity, and status as nearly as possible equal to the rank, status, and capacity of the court which was till then dealing with such matters.3. Legislative Competence under Article 323B:MBA contended that Article 323B of the Constitution does not provide for the constitution of Tribunals for insolvency, revival, and restructuring of companies, and hence there is no legislative competence to provide for the constitution of NCLT and NCLAT. The Supreme Court held that Articles 323A and 323B are enabling provisions that allow the setting up of Tribunals and do not prohibit the Legislature from establishing Tribunals not covered by those Articles, as long as there is legislative competence under the appropriate Entry in the Seventh Schedule.4. Constitutionality of Various Provisions of Chapters 1B and 1C of the Companies Act, 1956:The Supreme Court identified several defects in the provisions of Chapters 1B and 1C of the Companies Act, 1956, and declared them unconstitutional. The Court emphasized that only Judges and Advocates can be considered for appointment as Judicial Members of the Tribunal. Persons who have held a Group A or equivalent post under the Central or State Government with experience in the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for appointment as Judicial Members. The Court also held that only officers holding the ranks of Secretaries or Additional Secretaries can be considered for appointment as Technical Members of the National Company Law Tribunal.5. Validity of the Establishment of NCLT and NCLAT:The Supreme Court upheld the decision of the High Court that the creation of NCLT and NCLAT and vesting in them the powers and jurisdiction exercised by the High Court in regard to company law matters are not unconstitutional. However, it declared that Parts 1B and 1C of the Companies Act, 1956, as presently structured, are unconstitutional. The Court suggested several amendments to make Parts 1B and 1C operational, including changes in the qualifications for appointment as Judicial and Technical Members, the term of office, and the composition of the Selection Committee.Conclusion:The Supreme Court disposed of the appeals, partly allowing them, and upheld the creation of NCLT and NCLAT while declaring certain provisions of Parts 1B and 1C of the Companies Act, 1956, unconstitutional. The Court suggested amendments to make the provisions operational and ensure the independence and competence of the Tribunals.