SC says company tribunals are Constitutionally valid

The Supreme Court on Thursday upheld the constitutional validity of provisions of the Companies Act of 2013 relating to setting up of National Company Law Tribunal and National Company Law Appellate Tribunal but struck down provisions which permitted inclusion of civil servants of the level of Joint Secretary as technical members.

A five-judge Constitution bench, headed by Chief Justice H L Dattu, quashed Section 409(3)(a) and (c) and Section 411(3) of the Act providing for qualifications of technical members and held them to be invalid saying for appointment of technical members to NCLT, directions contained in 2010 judgment will have to be “scrupulously followed.”

It said the apex court’s 2010 order holding that persons below the rank of a Secretary or Additional Secretary should not be appointed as a technical member to NCLT must not be tinkered with as it would have the potential of compromising with standards which it “so zealously sought to secure”. It also held as invalid Section 412 of the new Act which contemplates selection by a committee consisting of two Judges and three Secretaries, saying this very issue stands concluded by the 2010 judgment which is now a binding precedent.

“We are of the opinion that this again does not constitute any valid or legal justification having regard to the fact that this very issue stands concluded by the 2010 judgment which is now a binding precedent and, thus, binds the respondent equally. “The prime consideration in the mind of the bench was that it is the Chairperson, viz. Chief Justice of India, or his nominee who is to be given the final say in the matter of selection with right to have a casting vote,” it said while maintaining the 2010 verdict which had held that a selection committee must consist of four members.

The court directed the Centre to ensure that the bodies are adequately manned and start functioning at the earliest. “Since, the functioning of NCLT and <g data-gr-id="70">NCLAT</g> has not started so far and it’s high time that these Tribunals start functioning now, we hope that respondents shall take remedial measures as per the directions contained in this judgment at the earliest, so that NCLT and <g data-gr-id="71">NCLAT</g> are adequately manned and start functioning in near future,” the bench, also comprising Justices A K Sikri, Arun Mishra, R F Nariman and Amitava Roy, said. 

The court said the only step which is left to make the Tribunals functional is to appoint NCLT’s President and members and NCLAT’s Chairperson and members. The Madras Bar Association had challenged constitutional validity of provisions in the 2013 Act relating to setting up of NCLT and <g data-gr-id="72">NCLAT</g> alleging that it has proceeded to enact sections which are plainly contrary to requirements laid down by the apex court in 2010. The bench relied on the 2010 verdict of the apex court saying “it had specifically affirmed the decision of Madras High Court which held that <g data-gr-id="63">creation</g> of NCLT and <g data-gr-id="73">NCLAT</g> was not unconstitutional. In view of this, it is not open to the petitioner even to argue this issue as it clearly <g data-gr-id="61">operate</g> as res judicata.”

Rejecting the lawyers body’s argument that the setting up of NCLT and <g data-gr-id="52">NCLAT</g> should be held unconstitutional for the same reasons as was done in the case of National Tax Tribunal (NTT), the bench said the two situations are different. “The NTT was a matter where power of judicial review hitherto exercised by the High Court in deciding the pure substantial question of law was sought to be taken away to be vested in NTT which was held to be impermissible. “In the instant case, there is no such situation. On the contrary, NCLT is the first forum in the hierarchy of quasi- judicial fora set up in the Act, 2013. The NCLT, thus, would not only deal with <g data-gr-id="53">question</g> of law in a given case coming before it but would be called upon to thrash out the factual disputes/aspects as well,” it said.

The bench added that <g data-gr-id="40">NCLAT</g> which is the first appellate forum provided under the Act, 2013 to examine the validity of the orders passed by NCLT, will have to revisit the factual as well as legal issues and “therefore, situation is not akin to NTT”. “We would like to point out that apart from giving other reasons for limiting the consideration for such posts to the Secretary and the Additional Secretary, there was one very compelling factor in the mind of the Court viz. <g data-gr-id="36">gradual</g> erosion of <g data-gr-id="37">independence</g> of judiciary, which was perceived as a matter of concern,” it said.