THE CONSTITUTIONAL VALIDITY OF NCLT AND NCLAT: MADRAS BAR ASSOCIATION CASES

STUTI SRIVASTAVA*

1. INTRODUCTION

Justice Eradi Committee was constituted by the Government of India in the year 1999 for the purpose
of examining the existing laws relating to insolvency of companies and their winding-up. This was
done with the aim of suggesting reforms in the field to avoid any delay in related disputes settlement.
Among many other issues, Eradi Committee had identified the multiplicity of cases before courts as
1
the most contributing factor for massive delay in the dissolution of companies.

The Committee concluded and recommended the constitution of a National Tribunal which should
have the powers and functions akin to High Courts, Company Law Board (CLB), Board for Industrial
Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction
(AAIFR) under the Sick Industrial Companies Act; for the purpose of rehabilitation and revival of sick
2
industrial companies.

To give effect to the recommendations of the Eradi Committee, the Companies Act was amended in
2002 and the Sick Industrial Companies Act was repealed. The amendment combined the powers of
Courts, BIFR and CLB. The Madras Bar Association challenged the validity of certain provisions of
the Amendment in year 2002. Since then, there was a decade long dispute between the Union of
India and the Madras Bar Association which was finally concluded in year 2015.

The 2002 Amendment to the Companies Act brought certain new insertions which were challenged a
number of times. Along with challenging chapters 1B and 1C, Article 323B was also challenged,
altogether challenging the constitutionality of NCLT and NCLAT. The Madras High Court in 2004
upheld the constitutional validity of the Tribunals but held certain specific sections to be defective on
ground of the doctrine of Basic Structure of India. In appeal, the Supreme Court in 2010 agreed with
the view of Madras High Court pertaining to the defective provisions violating doctrine of Basic
Structure and held that NCLT and NCLAT are valid bodies under Companies Act, 1956 with
3
conditions attached of rectifications in the provisions.

The Companies Act 2013 was passed by the Parliament but there was no rectification to the Parts as
was ordered by the Supreme Court, which was challenged by the Madras Bar Association in 2013
4
contending that the identical provisions under the new Act suffered from the same defects.

Though the constitutional validity of the Companies (Second Amendment) Act 2002 was challenged
5
before the Madras High Court, the High Court upheld the creation of the NCLT and the vesting the
powers thereto as being constitutional though it took the view that certain provisions were violative of
the basic constitutional scheme of separation of power and independence of judiciary. In an appeal to
6
the Supreme Court, the State accepted to rectify some of the defects pointed out by the High Court.
7
Thus, the abovementioned trajectory of judicial decisions and disputes, the following questions arise:

i. Whether the proposed provisions in erstwhile Companies Act 1956 were and that of in the
present Companies Act, 2013 are violative of the basic structure doctrine?

ii. Whether the NCLT and NCLAT are constitutionally valid?

*
YEAR III, B.A.LL.B.(HONS.), DHARMASHASTRA NATIONAL LAW UNIVERSITY.
1
Dr. Mamta Biswal, Company Litigation and Jurisdictional Issues: An Incessant Challenge in India, 2 SCC J-19, J 20-J 21
(2017).
2
Id.
3
supra note 1.
4
L. Gopika Murthy, Madras Bar Association- NCLT constitutionality, SPICY IP (Dec. 6, 2020, 9:30 PM),
https://spicyip.com/2015/05/madras-bar-association-nclt-constitutionality.html
5
Union of India v. R Gandhi, President, Madras Bar Association, (2010) 11 SCC 1.
6
Gandhi, R. v. Union of India, 2004 (2) CTC 561.
7
supra note 5.

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The objective of this article is to study the landmark judgment(s) given by the Constitutional Courts
with respect to the validity of NCLT and the provisions related to it therein. The objective is to further
comprehend the composition, qualifications, jurisdiction and other provisions given under the Act
relating to the Tribunal.

2. TRAJECTORY OF JUDICIAL DECISIONS

2.1 Overview

In the writ petition under Article 32 of the Constitution, the Supreme Court had majorly referred to the
judgment given by the co-ordinate bench of Supreme Court in the 2010 judgment and had
substantially upheld the 2004 judgment and followed the 2010 judgment. Partly, allowing the writ
petitions it examined the issues raised earlier again and set out the current stand of law. The
judgment discussed in detail about the defects that had been identified in detail in earlier judgments
as well and ordered the government to rectify them.

2.2 The 2004 & 2010 Judgments

The issue dates back to 2004 when Madras Bar Association had challenged the constitutional validity
of NCLT and NCLAT which were incorporated through the 2002 Companies Amendment Act into the
Companies Act 1956. The Madras High Court had upheld the constitutional validity of the Tribunals
while pointing out certain defects in the provisions which were in contravention with the basic
structure of India i.e. separation of powers. This was appealed by the Union of India as well as
Madras Bar Association which was decided in 2010.

In the appeal before a Constitutional bench in 2010, the Apex Court upheld the constitutional validity
of NCLT and NCLAT in vesting of jurisdiction to them in place of the High Courts in matters related to
companies. However the judgment found certain defects in the provisions of Companies Act 1956
which were added through 2002 amendment. The defects were that the qualifications prescribed for
the members and chairpersons were not adequate. Also, there appeared prima facie, predominance
of Administrative Members over Judicial Members in the Selection Committee which recommends
8
such members and chairperson.

It laid down certain defects which needed to be corrected in order to validate and enforce the
provisions. It laid certain stringent guidelines that needed to be adhered by the government.

i. For the appointment as Judicial Members, only judges and advocates must be considered. As
NCLT replaces High Courts in the company law matters, the members to have same position
and status as the High Court Judges. The term of office of members to be changed from 3 to
5 or 7 subject to reappointment.

ii. Technical Member means the one having experience in company law matters which cannot
be with any person of Indian Company Law Service who worked with Accounts Branch or
other departments. Persons should be experts having ability, integrity, standing and special
knowledge and professional experience of not less than 15 years in related subjects of
company law can be considered eligible to be considered for appointment as Technical
Members.

iii. The constitution of the selection committee must be changed and should include CJI / his or
her nominee as Chairperson with a casting vote and a senior judge of Supreme Court/ Chief
Justice of High Court and Secretary in Ministry of Finance/ Company Affairs and Secretary in
Ministry of Law and Justice.

2.3 The 2015 Judgment

The issues involved in this case were similar to the previous cases which challenged the analogous
provisions. The provisions related to NCLT and NCLAT of the new company law i.e. the Companies
Act 2013 were quite analogous to the Companies Act 1956 and the defects which were observed in

8
supra note 5.

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 9
the 2010 judgment were not rectified. Thus, this petition challenged the new provisions of the 2013
Act which were Sections 408, 409, 411(3), 412, 413, 425, 431, and 432. The court said the issues
related to constitutional validity, qualifications, selection committee and any such incidental issues
have already been dealt by the 2010 co-ordinate bench in its judgment and are the current position of
10
law and thus need not be decided again. It must be noted that the constitutional validity of the
Tribunals was upheld in all three cases and was confirmed in 2010 and finally in 2015. The final
judgment of 2015 laid down that the constitutional validity of the Tribunals was already upheld in the
2010 judgment and hence this stands as the binding law.

The constitutional validity of NCLT and subsequently of NCLAT was affirmed once again in 2015
judgment and that:

i. Parliament is within powers to enact a law transferring jurisdiction in company matters from
High Courts to specialized tribunals.

ii. Such tribunals should have such members as having equal rank and status as Judges of High
Courts to ensure independence and security of tenure.

iii. Parliament can prescribe qualifications/ eligibility criteria of appointment of members but
subject to judicial review.

iv. Such will be done to ensure checks and balances of powers and maintain separation of
powers.

3. CONSTITUTIONAL VALIDITY OF NCLT AND NCLAT

The parliament was within its vires to establish a Tribunal for the purpose of resolving company law
disputes as this function has constitutional backing under Articles 245 – 247 and the Union List i.e.
List I and the Concurrent List i.e. List III. Also it was highlighted by the Court that Article 323B is
merely an enabling provision for the Parliament to provide for tribunals and it does not specify that
tribunals can be created only for those items which are given under the said Article. Thus, the
Parliament is not prohibited from establishing tribunals for any other purpose than the ones given in
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Article 323 B as long as it is competent to legislate on those matters.

The presumption of unconstitutionality of the tribunals is erroneous just because the powers of
constitutional courts have been transferred over to them. It must be noted from the case of L.
12 13
Chandra Kumar which overruled Sampath Kumar case that these tribunals will only exist to
supplement the Courts and not to substitute them. This would mean that the High Courts’ powers of
judicial review cannot be taken away in certain cases. Thus, in any case, the constitution of these
tribunals and the qualifications of their members will be subject to judicial review. Thus, this would not
breach the rule of law and independence of judiciary and merely some function regarding a specific
issue will be granted to the tribunals. As aforementioned, the constitution and the qualification of
members are subject to judicial review and the disputed provisions were notified in 2016 after the
required changed.

4. SUGGESTIONS

The main issues were related to the composition of the selection committee and the qualifications of
the members of the tribunal. There were also related observations made by the Court like the
provision to enable a member from the technical side to hold his or her office in lien for a period of
one year which seemed unjustifiable on their part. One more thing which was observed and ordered
was that the term of appointment of three years is very less for a job of such a kind where it would
take years for a person appointed as member to finally get acquainted with the workings of the

9
supra note 4.
10
Madras Bar Association v. Union of India, (2015) 8 SCC 583.
11
Vyapak Desai & Vivek Kathpalia, Rationale for the constitution of NCLT and NCLAT, INDIA LAW JOURNAL, (Dec 5, 2020, 5:00
PM), https://www.indialawjournal.org/archives/volume3/issue_3/article_by_vyapak_desai.html.
12
L. Chandra Kumar v. Union of India, 1997 (2) SCR 1186.
13
Sampath Kumar v. Union of India, 1987 SCR (3) 233.

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tribunal therefore the term should be increased instead of going through the process of reappointment
again.

It is observed that under S. 409 the qualifications have been amended to a great extent as were
ordered by the Court. However it is unnecessary to provide for the president to necessarily be serving
for at least 5 years as a judge of high court to be eligible because any high court judge from among
the members can become president whoever is senior most. However the provision of having the
previous post as lien for even one year should not be there because it hampers with the
independence and credibility of the tribunal.
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In NGT the members are not eligible for reappointments however hold an office for 5 years. This is
done so that the members do not become committed towards a particular favour or lose their
independency during solving disputes. Similarly the provision of reappointment can be done away in
the present case also because there would be otherwise chances of the member becoming
committed for the aim of securing another term.

As for the selection committee, the Court had ordered that there should be judicial as well as
executive members equally with casting vote given to the chairman who is the CJI or his/her nominee.
Since the main issue was related to the independence and security of the credibility, it was in a sense
solved by providing four-member committee with judicial and technical members with casting vote on
the chairperson. However, the members can be increased to six or eight even members evenly
increasing the members from judicial side and from the executive side with casting vote on the
chairperson. This would increase the scrutiny of a candidate by more people.

5. CONCLUSION

The issue of constitutionality of NCLT and its Appellate forum i.e. NCLAT was finally settled by the
Apex Court in 2015. This long legal battle started since 2004 on the basis of the Amendment of
Companies Act 2002 which had introduced the NCLT and NCLAT replacing the original jurisdiction of
High Courts in the cases. Their constitutionality was in question but it was finally decided that they are
constitutional as the Parliament is within its legislative competency to establish them and also they
are provided for under Article 323 B of the Constitution. However, the main issue still remained with
the judiciary was the composition of the selection committee and the qualifications of eligibility of
members. However, the position was in a way rectified by the Government after repeated orders of
the Court. It is indeed the case that the company disputes were taking very long to be resolved and
often hampered with the ease of doing business. The establishment of these tribunals proved to be
effective and efficient way of resolving of company law and related disputes because unlike in the
High Courts, the tribunals also have members who are expert in the fields related to company law and
since the tribunals specifically dealt with company law matters so it reduced to a great level the
pendency of cases. The establishment of NCLT and NCLAT under the Companies Act for efficacy
and efficiency in settling disputes related to corporate law in timely manner, is a sound exercise of
power of Parliament and is intra-vires of the Constitution. Thus the hypothesis of this research is
proved.

14
National Green Tribunal Act, 2010, § 7, No. 19, Acts of Parliament, 2010.

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