Role Of National Company Law Tribunal & Its Formation

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Backdrop

Central government on 1st June 2016 constituted National Company Law Appellate Tribunal and National Company Law Tribunal. NCLT had started its functioning in the month of June in Delhi and other benches metro cities in the month of July. The 1st class action suit has been filed in Mumbai and therefore, the functioning of NCLT has begun. The Authors via the means of this Document review try to probe into the notion, nature and scope of powers of National Company Law Tribunal.

Specialized tribunal and its genesis.

The demand of a specialized tribunal was presented by the Hon’ble Supreme Court of India in the judgement of S.P. Sampath Kumar v. Union of India[1] where Hon’ble court adopted the alternative institutional mechanism theory and held that since independence the population of the country is constantly increasing and because of which disputes before the courts are also increasing which creates a burden on court to take up the matters. Furthermore, the report presented by Shah Committee[2] in relation of specialized tribunal said that there is an urgent need of reform the laws in relation to setting up of independent tribunal because of backlogs of cases before the courts[3].

The 124th Report presented by the Law Commission of India in year 1988, presented its point of view that as the time progressed different fields of laws are being made and because of which different kinds of disputes has also been there which is the main cause of backlogs of cases therefore on the urgent bases there is a need to establishment of independent tribunal. Therefore, the need of establishment of specialized tribunal has now been taken seriously by the legislature because of which National Green Tribunal for dealing with the cases of environment , Central Administrative Tribunal to deal with the service matters were constituted. Further, now legislature by passing the Companies Amendment Act, 2015 constituted a specialized tribunal for dealing with corporate cases[4].

Meaning of NCLT & NCLAT

The NCLT is a quasi-judicial authority incorporated by the virtue of the Companies Act, 2013 to deal with corporate disputes of civil nature arising under the Act.[5] NCLT has powers and procedures similar to a court of law. NCLT functions on the lines of any normal Court of law in India and is obliged to impartially determine facts of the case and decide matters in harmony with the principles of natural justice and in furtherance of such decisions, draw conclusions from the decisions so reached by it in the form of orders.[6] The orders so formed can help in remedying a situation, correcting a wrong by corporate or imposing penalties/costs and may alter or better the rights, duties, obligations or privileges of the parties concerned. The Tribunal need not adhere with the strict rules with regard to procedural law and appreciation of any evidence.[7]

NCLAT is an Appellate Tribunal and an appellate authority which deals with the appeals arising out of the decisions of the NCLT. It is formed for maintaining check and balance mechanism and to   correct the errors made by the Tribunal if any. It is a transitional appellate forum like a High Court where the appeals go after order or decision of the NCLT.[8] The decisions of NCLAT are further subject to challenge in the Supreme Court of India. The NCLAT reviews the decisions and orders of NCLT and has authority to upheld..

Difference between NCLT and NCLAT

The NCLT has ground level jurisdiction and NCLAT has appellate jurisdiction like that of a High Court. NCLT takes in account the evidences and witnesses to reach up to the conclusion and take decisions and NCLAT usually reviews orders and decisions of NCLT and considers only point of law or fact. Primary task of NCLT is to find the facts and admit the evidence with regard to the suit filed whereas the NCLAT decides matters on the grounds of witnesses and evidences collected.[9]

Background of NCLT

NCLT is the off spring of Eradi Committee. NCLT was planned to be introduced in Indian legal system in the year of 2002 under the Companies Act, 1956 but since the litigation regarding the constitutional validity of NCLT went on for more than 10 years hence it was later notified under the 2013 Act. However, a variance can be witnessed in the functions and powers of NCLT under Companies Act, 1956 Act and 2013 Act respectively. The constitutional validity of NCLT and certain allied provisions were re-challenged and this matter was decided in May 2015. The Hob’ble Supreme Court had maintained the constitutional validity of NCLT but certain provisions were rendered violative of constitutional principles.[10]

Notification of NCLT

Provisions dealing with foundation of NCLT and NCLAT were notified by the central government on 1st June 2016. Initially the powers of Company Law Board have been transferred to NCLT. Further the Center has planned to inject second set of notifications through which the NCLT would be on a equal footing with High Courts and BIFR. NCLT now has the powers of the CLB and the newly injected powers via the Act of 2013.[11]

Transition from CLB to NCLT

There is a change in a method and procedure to approach the cases which are pending u/s 434 before various forums nationwide. The notification of transfer of cases from CLB to NCLT was notified on. On 1st June 2016, all the proceedings which were pending before CLB were handed over to NCLT and Tribunal will now decide all these matters as per the provisions of law. NCLT has been granted a discretionary power to take up the pending cases of CLB from any stage they want to.

Important Laws came into Force

Following sections have been notified by MCA which will come into force after the formation of National Company Law Tribunal

  1. Section 7(7) except clauses (c) and (d) of Companies Act which talks about the warrants given by the tribunal against the declaration filed for incorporation when, company has been formed by presenting false information, hiding any important material facts. This clause has been come into force now because of which rights of shareholders will be protected[12].
  2. Section proviso to Section 14(1) and Section 14(2) which talks about the alteration of the nature of the company. After implementation of NCLT, now if a company by passing a special resolution wants to alter the article because of which conversion of public company into a private company takes place then, there would be a need of approval from NCLT. Furthermore, the approval letter presenting the change should be filed together with the printed copy of altered articles within the period of 15 days[13].
  3. Under Section 55(3) now approval of NCLT would be needed in issue of new redeemable preference shares against unredeemed preference shares, when situation of company is not good and they are not in a position to redeem such preference shares. Furthermore, this can only happen when the company has taken the consent of three-forth holder of these preference shares[14].
  4. Under Section 61 (1) (b) NCLT has the power to approve consolidation and division of share capital because of which the voting percentage of different shareholders will change[15].
  5. Section 62(4), (5), (6) talks about further issue of share capital where company has to appeal to the National Company Law Tribunal, where conversion of debentures or loan obtained through a government is needed into shares of the company, where the terms issued are not satisfactory & acceptable for the company[16].
  6. Under Section 71(9), (10), (11) the Debenture holders can file a petition before the tribunal when company fails to redeem debentures of pay interest thereon, or when the debenture holder has suspicion that the company doesn’t have sufficient balance.[17] It grants the company to redeem the debentures and forthwith payment of principle and interest amount to the debenture holder should be given.
  7. Section 97, 98, 99 of The Companies Act, 2013 deals with the power of Tribunal to call up annual general meeting of the members & if these general meeting are not taken place or company doesn’t comply with the directions of NCLT then each and every officer responsible for the omission would be held liable for the fine as prescribed under the provision[18].
  8. Section 119(4) deals with inspection of minute – books of general meeting which means that each and every important statement in general meeting should be written down and stored as a document. So that when members of company are in need of these documents for inspection then they should be provided to them & if company refused to provide these documents then NCLT can order immediate inspection of minute – books or direct them to send the copy to the required party.
  9. Under Sec. 130 & 131 NCLT can inspect in case if it is informed by certain member of company or statuary that the previous accounts are having fraud or certain affairs which are compulsory for them are not followed properly, casting a doubt on the reliability of financial statements[19]. NCLT has given the powers till the extent in order to ask for reviewing the books of accounts of previous year.
  10. NCLT suo moto, or by the application of central government or any other person can remove the auditor of the company if he had committed any fraud. This will go to an extent of canceling the eligibility of appointment of auditor for any other company for certain period of time.
  11. Section 169(4) is a provision under which NCLT has provided power of restricting the representation of director of the company as mentioned under this section because the director has abused this option.[20]
  12. Furthermore, there are certain other powers which came into existence after the implementation of NCLT, these powers are mentioned under Sec. 213, 206(2), 218, 221 , 224(5), 245 & etc. Previously out of 470 section of Companies Act, 2013 284 were in force but now after implementation of NCLT by the amendment act, most of the remaining 186 sections of the Act shall also be brought into force[21].

Powers vested in NCLT

Some of the significant powers that are currently vested with NCLT are:

  1. Class Action:Fortification of the interest and rights of numerous stakeholders, particularly non-promoter shareholders has always been the apprehension of company law from inception. There have been various improprieties that were identified, where the key scum were the shareholders.[22] The investors found out themselves to be losing on their hard earned money into the investments made in various listed companies they had invested in and such companies later on ended up cheating the stakeholders and shareholders.[23]

The Companies Act, 2013 has a good mix of remedies available for the shareholders in case of any cheating done with the. Shareholders now have a remedy of punishment for the offender along with making other parties involved liable for a civil suit more precisely class action suit.[24] Therefore the offenders and ancillaries will now have to reimburse the shareholders and depositors for the losses suffered by them because of the fraudulent practices of the company.

A class action suit is a technical mechanism that allows plaintiff(s) to file a lawsuit representing a larger group, defined as class. The nature of a class action suit Is similar to that of a representative suit where the interest including rights and obligations of a group of people is represented by a only some of them. A class action suit is useful for the shareholders who are geographically dispersed and are affected from the wrong doings of the company. It can be a handy tool where a few may take legal action for the interest of the large. Section 245 has been incorporated in the Companies Act, 2013 to provide respite to the investors from wrongful actions of the company management or other institutions and consultants who are linked with the body corporate.

Both private sector and public sector companies are the subject to the class action suit.[25] It can be instituted in opposition to any company which is included under the Companies Act, 2013 or any previous Companies Act, 1956. The only exceptions to class action suit are the banking companies.[26]

  1. Registration of Companies: The Companies Act, 2013 now allows to question the legitimacy of any company because of certain procedural errors at the time of registration and incorporation. NCLT is empowered to take a number of steps, ranging from canceling the registration to dissolving the company. The Tribunal can even render the charge or liability of members unlimited. This new approach for de- registration of a company in certain special situations when the is registration certificate is obtained by illegal means or wrongful manner has been provided u/s 7(7) of the Act of 2013.
  2. Refusal to Transfer shares:NCLT also has power to hear complaints of rejection of companies to transfer shares and securities and adaptation of register of members u/s 58 and 59 of the Companies Act, 2013 which were initially were under the ambit of the CLB. Going back to the act of 1956 the remedies available for denial of transfer or transmission were constrained only to shares and debentures of the company but now the horizon of the same has been increased under the 2013 Act and the umbrella now cover all the securities issued by a company. The sections dealing with remedies in case of default or fraud by the company provide express acknowledgment to contracts dealing with transfer of securities; the said contract is signed between 2 or more persons w.r.t. the shares of a public company.
  3. Deposits:Chapter V of the Companies Act, 2013 deals with deposits and the same was notified in varying time periods in the year of 2014 and CLB was the authority to take up cases under this chapter. Now, these powers under chapter V have been transferred from CLB to NCLT with its birth.[27] A clear variation could be seen on the face of it with regards to law on deposits under the act of 1956 and the act of 2013. The provisions with regard to deposits under Companies Act, 2013 were already notified prior to the formation of the NCLT. Distressed depositors now, also have a remedy of class actions suits in order to seek remedy for the acts and omissions on the part of the company which affects their rights in the shoes of the depositors.
  4. Reopening and Revision of Financial Accounts:Prior to the incorporation of the Companies Act, 2013 many instances of falsification were witnessed under the Act of 1956. Hence keeping in mind such instances and to counter and void similar menaces in future, quite a few measures have been incorporated in theAct of 2013. For Example Section 130 r/w 447 and 131 r/w 448 in the new Act provide for prohibiting the company from suomotu starting or opening its bank accounts or auditing its financial accounts. The above said can be only done as per the manner prescribed by the 2013 Act.[28] Section 130 and 131 deal with the situations where in the financial statements in question of the company can be revised and reopened respectively. Section 130 is mandatory provision, where in the Tribunal or Court trying the matter has the power to instruct the company to reopen its financial accounts when some predefined criteria were satisfied or violated by the company and the same is shown before the court of law.[29] Section 131 permits a company to revise its financial accounts but does not speak anything with regard to reopening of accounts of the company. The company can suo moto approach the Tribunal (NCLT) under sec 131 of the new Act, via its director(s) for revising its financial statement.
  5. Tribunal Ordered Investigations:Chapter XIV of the Companies Act, 2013 hands over various powers to NCLT with respect to investigations. Some of the most important powers that rest with the Tribunal are:
  6. a) Power to order investigation[30]:According to the provision of Companies Act, 2013 investigation into the affairs of the company can be ordered on an application of 100 members whereas prior to the 2013 act, 200 members were required for same. Furthermore, if any person who is not related to the company is able to convince NCLT about the existence of circumstances to order a investigation then the tribunal has the power to order an investigation. Any investigation ordered by the NCLT can be conducted either in India or in any other part of the world. Provisions have been drafted for providing and seeking help from investigation agencies and the courts of foreign countries.
  7. b) Power to freeze assets of the company[31]:The NCLT has not only been given the power to congeal the assets of the company so as to use them later when the company comes under scrutiny or investigation, the said investigation can also be initiated on the request of other people in certain circumstances.
  8. Conversion of public company into private company: Sections 13 to 18 of theCompanies Act, 2013 r/w rules regulate the transformation of a Public ltd. Co. into Private ltd. Co. the said conversion requires  a prior confirmation of the NCLT. The Tribunal has the power u/s 459 of the Companies Act, 2013 to impose certain restrictions or conditions and may subject the grant of approval to such conditions.
  9. Tribunal Convened AGM:Shareholders opinion is assessed by the company time to time in its General meetings. The Companies Act, 2013 makes it a mandate for very company to call a “annual general meeting” or ‘AGM’ per year. All the other general meeting(s) are classified as “extra ordinary general meeting”.[32] If the company fails to organize or convene an AGM or an EOGM according to the procedure provided under the Companies Act, 2013, then the NCLT is empowered u/s 97 and 98 of the Act of 2013 to direct the companies or in its own capacity organize general meetings of the defaulter company.There is no difference in provisions under both the Companies Act’s with regard to the AGM and EOGM.[33]
  10. Change in Financial Year:Section 2 (41) was notified on April 1 2014. The Act demands uniformity with regard to the financial year of every company or the body corporate under it and the said financial year must end on 31st March of the year. The only exception to this provision is the application by the companies to the NCLT for the choice of a different financial year. Since NCLT was not in force when Sec. 2(41) was notified hence the powers to regulate and alter the dates of the financial year of a company were rested with the CLB. Thus, all the applications which have been in CLB and are yet to be disposed after the formation of NCLT have now been transferred to the Tribunal.[34]
  11. Auditors Certificate:According to the draft rules presented by MCA, not a company listed or unlisted have to submit an auditor’s certificate to NCLT. This auditor’s certificate is necessary for ensuring conformity with the prescribed accounting standard by MCA. Previously, this certification was mandatory for only listed companies under the guidelines of SEBI. This step will help in reducing the accounting flexibility for unlisted companies & further will deal with the capital reduction process.[35]
  12. Corporate Debt Restructuring(CDR):According to the draft rules of NCLT if more than seventy- five percent of the secured creditors thinks that there is a need of Corporate debt restructuring then they can approach the NCLT. This kind of facility was not provided to the creditors previously under The Companies’ Act, 1956. Furthermore, the applicant is also required to disclose through an affidavit other matters like, auditors report conforming the liquidity test post CDR, safeguards for protection of the creditors, Creditors responsibility statement and valuation report evaluated by registered valuer representing the shares and all the assets of the company.

Conclusion

The present paper reviewed the role of National Companies Law Tribunal under different laws after its implementation this law provided great support to corporate field now after its implementation certain judges who are expert in this field only will judge the cases and provide justice as early as possible. The forming of NCLT/NCLAT is a long overdue reform which has been welcomed by everyone. Tribunal will also have the power to make its own procedures, there will be speedy remedy and matters will be disposed of expeditiously.[36] Now the tribunal have the power to hear class action suits which will give birth to a new and different kind of shareholder democracy in India, which has been followed in different western countries[37].  This will help Indian companies in implementinghealthier corporate governance practices and will expand the worth to the shareholders. Now MCA’s hurdle would be to deal with the period of shifting from CLB to NCLT which should be carefully handled by them, furthermore this could not have taken place if CLB should be dissolved when NCLT would have been formed this would ease the process. Be that as it may, we, as professionals see this as a very welcome step in Indian Corporate Law History and one that will have far reaching effects[38].

[1] (1987) 1 S.C.C. 12.

[2] Chaired by Justice A P Shah, Former Chief Justice, Delhi High Court, Report of the Group of Experts on Privacy, Law Commission of India., http://planningcommission.nic.in/reports/genrep/rep_privacy.pdf (last updated Sep. 10, 2016).

[3] K.J. Vibhute., Administrative Tribunals and the High Courts: a plea for Judicial Review, 29 Indian Law Institute L.J 529,  524-546(1987).

[4] P. Grover, National Company Law Tribunal — A single window institution for Corporate Justice, 7 National Conference of Practicing Company Secretaries. 69, 67-72(2016).

[5] Anonymous, NCLT & NCLAT under Companies Act, 2013, http://taxguru.in/company-law/nclt-nclat-companies-act-2013.html. (last updated Jun. 02, 2016).

[6] V.D. Rao, Challenges before the National Company Law Tribunal?, http://indiancorporatelaws.blogspot.in/2010/05/supreme-court-on-nclt-nclat.html.  (last updated Sep. 5, 2016).

[7]PrachiManekarWazalwar., NCLT – Powers & Functions under Cos. Act, 2013.,http://lawstreetindia.com/experts/column?sid=164  (last updated Sep. 04, 2016).

[8] K.P.M.G, MCA releases draft rules on NCLT, Schemes of compromises arrangements and prevention of oppression and mismanagement, for public comments.,  https://www.kpmg.com/IN/en/services/Tax/FlashNews/KPMG-Flash-News-MCA-draft-rules-on-NCLT-1.pdf. (last updated Feb. 12, 2016).

[9]Supra note 3.

[10] Madras Bar Association v. Union of India, (2014) 10 S.C.C. 1.

[11]Supra note 4.

[12]Kumar Deep., Constitution Of National Company Law Tribunal (NCLT) And National Company Law Appellate Tribunal (NCLAT): Comprehensive Analysis., http://www.mondaq.com/india/x/518892/Corporate+Commercial+Law/INDIA+NOW+TO+BE+FAMOUS+ECONOMIC+DESTINATION+FOR+FDI+INVESTMENT  (last updated Aug. 15, 2016).

[13] § 14, Companies Act, 2013.

[14] K.P.M.G., The central government constitutes NCLT and NCALT and notifies the related sections of the Companies Act, 2013., https://assets.kpmg.com/content/dam/kpmg/pdf/2016/06/firstnotes-22june2016.pdf  (last updated Jun. 22, 2016).

[15]Supra note 12.

[16] Anonymous, Constitution of National Company Law Tribunal (NCLT).,http://blog.ipleaders.in/constitution-national-company-law-tribunal-nclt/ (last updated Jun. 02, 2016).

[17] Anonymous, Power and functions of Registrar etc – NCLT/NCLAT., https://aishmghrana.me/2016/09/02/power-and-functions-of-registrar-nclt-nclat/   (last updated Sep. 04, 2016).

[18]Id.

[19]Supra note 14.

[20]Supra note 7.

[21] Government of India, Proposed amendment and its reasons. http://www.mca.gov.in/Ministry/pdf/Company_AmendentBill_2016.pdf   (last updated Jun. 15, 2016).

[22] S.N. Gupta, National Company Law Tribunal – The Company Court of Tomorrow., www.icsi.edu/docs/…/NATIONALCOMPANYLAWTRIBUNAL-SMGUPTA.doc. (last updated Sep. 02, 2016).

[23]Id.

[24]Shreeja Sen, Class action suits in Indian company law, explained.,http://www.livemint.com/Companies/OhvhdZ4oAPmUCy5Ji9bWjM/Class-action-suits-in-company-law-explained.html.   (last updated Jun. 10, 2016).

[25]Supra note 3.

[26]Anonymous, What is a class action lawsuit, and who can file it?, http://www.business-standard.com/article/opinion/class-action-lawsuit-explained-115081600603_1.html.   (last updated Sep. 03, 2016).

[27]Supra note 3.

[28]Supra note 1.

[29]Id.

[30] P.W.C., MCA constitutes NCLT and NCLAT and notifies certain provisions of Companies Act, 2013 to make them operative.,https://www.pwc.in/assets/pdfs/news-alert-tax/2016/pwc_news_alert_2_june_2016_mca_constitutes_nclt_and_nclat_and_notifies_certain_provisions_of_companies_act_2013.pdf.    (last updated Sep. 02, 2016).

[31]Id.

[32] Supra note 26.

[33] §97 & §98, The Companies Act, 2013.

[34]Supra note 3.

[35]Supra note 8.

[36] Anonymous, National Company Law Tribunal Constituted – New Perspectives for Dispute Resolution., http://blog.scconline.com/post/2016/06/04/national-company-law-tribunal-constituted-new-perspectives-for-dispute-resolution/     (last updated Sep. 01, 2016).

[37]Supra note 7.

[38]Supra note 30.

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