Oppression & Mismanagement: Prima facie case required before ordering any interim relief under section 397/398 of Companies Act, 1956?

Once the new Companies Act is enacted, companies are supposed to be more vigilant in complying with the corporate regulations and they may have to very often face litigation by the creditors and members before the National Company Law Tribunal. As per the clauses in the new Companies Bill, 2010, the National Company Law Tribunal can entertain applications from any member/s and creditor/s to order investigation into the affairs of the Company. On the same footing, the National Company Law Tribunal can entertain applications raising the issues of oppression and mismanagement even if the members are not holding a qualified percentage of shareholding to file the application. Now, under section 399 of the Companies Act, 1956, members holding 10% shares or any hundred members can file an application under section 397/398 of Companies Act, 1956 and the Company Law Board can pass any orders under section 397/398 of the Companies Act, 1956 in order to put an end to the matters complained of or in order to regulate the affairs of the Company. Once the new Companies Act comes into existence, then, even the members holding only 5% shares can file an application under section 397/398 of the Companies Act, 1956 along with an application asking for exemption from holding the requisite percentage of shares to seek relief on the ground of oppression and mismanagement. However, when it comes to creditor or creditors right to get a relief against the Company directly without investigation, due care is taken in the Act and the National Company Law Tribunal can only pass certain specific orders like restraining to act based on the resolution etc.

Even now, some complain that the provisions of oppression and mismanagement are getting misused and a frivolous litigation is often filed creating enormous problems to the Company or the majority shareholders in the Company. We all know the legal position under section 397/398 of the Companies Act, 1956 and the changes from to time. The changes in the legal position under section 397/398 of the Companies Act, 1956 are as follows:

1. Initially, the members are supposed to establish a strict case against the Company for getting relief. It is also known that the oppression alleged should be ‘harsh and burdensome etc.’

2. According to me, earlier, the interpretation of section 397/398 of the Companies Act, 1956 was infavour of the majority shareholders in the Company and technicalities were often get emphasized. There are findings that the disputed facts can not be decided by CLB, there is a proposition with regard to ‘consent’ under section 399 and there is so much emphasis on the issue of ‘continuity of the alleged acts’ and also limitations on the powers of CLB has also been frequently highlighted.

3. Now, there is no much emphasis on technicalities under section 397/398 of the Companies Act, 1956 and the majority is asked to reply to the allegations in the Petition even if the majority feels that there is nothing in the Petition and it is motivated one.

4. I have also read a finding that the CLB can pass orders under section 397/398 of the Companies Act, 1956 even when there is no oppression and mismanagement in ‘stricto senso’.

5. When it comes to appeal against the CLB’s order under section 10 (F) of Companies Act, 1956, in the past, much emphasis was laid on ‘substantial question of law’.

6. Now, it is settled that perversity becomes the ‘question of law’ and as such if the order passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is contrary to facts or misinterpretation of law to the facts, then, appeal is very much maintainable under section 10 (F).

There are two views when it comes to interfering with the functioning or internal management of the Company. There is a view that nothing happens if liberal interpretation is placed by the adjudicating authority and if the majority in the Company or the Company is asked to supply the demanded information or the copies of the documents. There is another view that the Company maintains secrecy in view of its business interests or in the interests of the shareholders and as such, there should be a strong prima facie case against the Company or the majority in the Company while passing any interim relief under section 397/398 of Companies Act, 1956. These different views on interpreting section 397/398 of the Companies Act, 1956 continues to be there and it will also be continued even after the new Companies Act is enacted.

What normally now happens is that the CLB may easily entertain an application under section 397/398 of the Companies Act, 1956 and without going into the merits of the case, the CLB may ask the majority to supply the information sought by the minority shareholders or the applicants under section 397/398 of the Companies Act, 1956. Not agreeing with such proceeding and liberal process under section 397/398 of the Companies Act, 1956, the Calcutta High Court in AI Champdany Industries Limited & Others Versus Blancatex A. G. & Others, CDJ 2011 Cal HC 557, was pleased to observe as follows:

“Regulation 24 of the said regulations provide the powers to the board to order production of documents, as enumerated above. The qualification for filing an application under Section 397 and 398 of the Act is one tenth of the number of shareholders or 100 members whichever are less or by shareholders representing not less than one tenth of the issued share capital of the company provided that the applicants have paid the entire call amount. (See Section 399 of the Act). Therefore, a small minority of the shareholders of the company can file an application under those sections. Just because such a minority files such an application, does it follow that the company should provide inspection of their documents and provide copies to them, which they were otherwise not entitled to do under the other provisions of the Act and the Code of Civil Procedure and Evidence Act discussed above? Should the Company Law Board upon mere filing of an application exercise its power under regulation 24 asking the company to disclose the documents and provide copies to the applicants?

It is true, that when such an application is decided and is being heard it assumes the character of a proceeding in rem where creditors contributors, the government, the other statutory authorities may become involved. When the proceedings under these sections become open to the world, the affairs of the company are also open to view by the world and the Company Law Board has to pass orders accordingly. At what point of time, does the Company Law Board proceed to pass orders in the nature of those which are prayed for in this application? Our appeal court in Maharani Lalita Rajya Lakshmi M.P. – v – Indian Motor Co. (Hazaribagh) Ltd. and others, reported in AIR 1962 Calcutta 127 cited by Mr. S. B. Mookerjee, learned Sr. Advocate said that refusal to give access to or inspection of the books of account of the company was not oppression as a shareholder had no such right. Allowing such inspection, would, according to the court, be asking the directors to do something they were not obliged to do in law and granting something to the shareholders which they were not obliged to receive. That exposition of law is, in my opinion, very relevant to adjudge whether a company can be compelled to disclose the documents asked for in this case. A case before the Division Bench of the Delhi High Court in Rajdhani Roller Flour Mills Pvt. Ltd. – v – Mangilal Bagri and others, reported in 70 Company Cases, page 788, was cited by Mr. Sudipto Sarkar, learned Sr. Advocate. From the facts narrated in the decision, inspection of documents at the time of witness examination was in issue. In that context and rightly so the court said:

“The Calcutta case, in our opinion, would not apply in the given situation and we express our disagreement with the view that the right of inspection is limited to the board of directors under section 209(iv) and that right is not available to shareholders for inspection of the books of account of the company in the course of proceedings under sections 397 and 398 of the Act.”

Rightly so, because when a Section 397 and 398 proceeding is admitted and heard by examination of witnesses, it becomes a proceeding in rem, as I have said before. Once the proceedings partake of that character the court or the Company Law Board, after satisfying itself that there is a prima facie case can direct the company or persons in control of it to produce documents mentioned in regulation 24 of the Company Law Board Regulation 1991. It should do so only upon such conviction, because the qualification to file this kind of an application is 10% of the shareholders or 100 members whichever is less and shareholders having 10% of the value of shareholding. Then in that case each and every minority group of shareholders can by filing an application under Section 397, 398 compel the company to disclose its affairs to them, contrary to the other provisions of the Companies Act. Such order in my opinion can only be passed after the prima facie case is established. If the prima-facie case is not established then the principles in the case of Maharani Lalita Rajya Lakshmi M.P. – v – Indian Motor Co. (Hazaribagh) Ltd. and others, reported in AIR 1962 Calcutta 127 have to be followed. Furthermore, in my opinion, no such prima facie case was established by the applicants to warrant passing of an order for disclosure of some very secret internal documents of the company.

The following findings of the Company Law Board in its order dated 17th May, 2010 are reproduced herein below:

“14. On the submissions of either side, this Bench decided these applications as follows:

Though the respondents relied upon Mahatab Brothers case and Maharani Lalitha Rajalaxmi case to state that the shareholders are not entitled to the inspection of the documents, whereas the Hon’ble Delhi High Court, Division Bench, in Rajdhani Roller Flour Mills Pt. Ltd. – vs – Mangilal Bagri and ors. – Delhi High Court – DB (1991) 70 Company Cases Page no. 788, held that whenever any member or members filed petition under Sections 397 & 398 of the Act setting out the facts showing prejudice towards either the share holders or the company, they are entitled to inspect the documents relevant to the material facts mentioned in the petition because the documents are necessary to decide as to whether oppression and mismanagement is there or not. Here, in this case, the petitioners specifically stated that the R – 3 i.e. the director of R – 1 Company is none other than the brother of one of the directors of R-5 Company i.e. Jayanta Pujara, it being not disputed by the respondents, it can not be decided at this juncture whether the dealing done is at arms length distance or not unless and until the documents relevant to the dealings are looked into. Thereby the citations relied upon by the respondents are not applicable to the present case. As per Section 300 of the Companies Act, if any director is directly or indirectly interested in the contract or arrangement or dealings of the Company, his presence shall not be counted for the purpose of forming of quorum at the time of any such discussion, and if he `does vote, his vote shall be void. Indeed the director who knowingly contravene the provisions of this section shall be punishable as well, it being the position, R-3 having not disputed that he is brother of Jayanta Pujara who is one of the directors of R-5 Company, for time being it cannot be assumed that the dealing with R - 5 is at arms length distance. It is also requisite to see the documents concerned as to whether he participated in the resolution passed or contracts entered with R-5 Company. Likewise, it being said that the brother of R-3 is a director of ABLICO Company (UK), the same analogy is applicable in this aspect as well. In this scenario, it can not be said that the disclosure sought by the petitioners is not relevant and it also cannot be said that the disclosure is to collect evidence in favour of one party as long as there is cloud of oppression and mismanagement subsisting by the acts of the directors who were cited as respondents 2 & 3, hence, those material facts are very much required for adjudication of this case. Having the petitioners herein asked for inspection over number of documents, this Bench is of the opinion that some of these documents are not required”.

These findings do not show that any prima facie case under Section 397 and 398 has been appreciated by the Company Law Board. The Board, in my opinion, has adopted a wrong approach. The Board was required to see whether the existing pleadings and materials disclosed any prima facie case. In this type of an application, prima facie case means a case, which on the available evidence, has a reasonable likelihood of success at the trial. If such a case was established then it would have been proper, to exercise its powers under the law, to order disclosure of documents. The approach taken by the Board was that the prima facie case was to be established by ordering disclosure of documents, which was erroneous. I make it absolutely plain that the prima facie case to be determined is the prima facie case in the Section 397, section 398 proceedings. Such case has to be determined after filing of affidavits therein, on the available evidence. The appellants, Blancatex and Aldgate have not filed their reply. Their reply is to be filed within two weeks from date. Moreover, I pass this order assuming that the reasons given subsequent to releasing the operative part of the order dated 17th May, 2010 are reasons in support of the order. In this case, there is no point sending back the matter to the Company Law Board, as I had done in the earlier case because the reasons supplied later are also not adequate. Therefore, for mere absence of reasons there is no point in sending the matter back. But, the matter has to be sent back to the Tribunal, for the said reasons, for appreciating the prima facie case of the parties upon giving them a fresh hearing and to consider passing an order for disclosure of documents in the light of the observations made above.”

Discussion on proposed ‘Class Action’:

The proposed provision for class action litigation against the Companies in the new Companies Act is similar to ‘Public Interest Litigation’ or the class action litigation filed under Consumer Protection Laws. I am sure that there can be lot of litigation before the National Company Law Tribunal under the new Companies Act and especially there will be so much litigation asking for investigation into the affairs of the Company and also there will be definite rise in the applications seeking relief against the majority shareholders in the Company. Under the Companies Act, 1956, there was something wrong in the Company, the Central Government can be approached and they are supposed to deal with the illegality or the irregularity. What happens now with the new Companies Act is that the creditor or the members need not approach the Central Government in most the cases and these interested people can approach National Company Law Tribunal easily asking for investigation into the affairs of the Company or asking for relief against the Company subject to the express limitations.

While it is good to keep the companies under check and to make the companies to strictly comply with the corporate regulations, we must also be vigilant at the frivolous litigation and habitual litigants whose job is to litigate and to trouble their opponents. We can find so much habitual litigants now and as such, the National Company Law Tribunal may have to be very careful in dealing with this ‘Class Actions’. I am sure that there will be lot of discussion on this subject by the Constitutional Courts in the course. The ‘Class Action’ against listed Public Companies will definitely be on rise under the new Companies Act as many feel not satisfied with the functioning of SEBI and everyone knows the difficulties in approaching SEBI raising investor grievances and questioning the malpractices in any listed Company.

Note: the views expressed are my personal and a view point only.

Important issues pertaining to NCLT after the Judgment of Supreme Court?

I am very happy to see the judgment of the Supreme Court on National Company Law Tribunal. I have read the judgment of Justice Jayasimha Babu of Madras High Court regarding the constitution of National Company Law Tribunal and Appellate Tribunal in the Writ Petition preferred by Madras Bar Association many times. It was vehemently argued before the Madras High Court that the powers and jurisdiction of Court is taken away by the executive from time to time by constituting Tribunals. In my opinion, the Madras High Court could have stayed the constitution of National Company Law Tribunal as it takes away a very important jurisdiction of the High Court and the powers exercised by the High Court for years traditionally. I don’t think that giving a reason as to staying the constitution of National Company Law Tribunal is a difficult thing and especially in view of the functioning of the Company Law Board and the experience. Despite all this, laudably, the Madras High Court has upheld the power of executive in constituting National Company Law Tribunal though it stayed the certain provisions of the Companies (Second Amendment) Act, 2002. The Madras High Court has highlighted most important issues like independence, impartiality and quality of presiding officers while delivering the judgment on Constitution of National Company Law Tribunal. As everybody knows, the judgment of Madras High Court is upheld by the Supreme Court with elaborate observations in order preserve the independence and impartiality of an adjudicatory forum like National Company Law Tribunal. Though, we tend study the difference between Tribunals and Courts academically, there is no much difference between Tribunals and the Courts logically. The only difference may be that the Tribunals are constituted by a special enactment which may follow special procedure and need not follow Civil Procedure Code. As such, the basic principles like independence, impartiality and quality of presiding officers is to be preserved at any cost. In my opinion, it is part and parcel of basic structure of Constitution of India.

I am a critic of judiciary to some extent and a person to see the needed legal reforms in India aiming at effective and speedy justice. But, when it comes to exercise of powers by the High Court under Companies Act, 1956, I was of the opinion that the High Court or the Company Court is doing well despite many inevitable complications. Constitutional Courts have laid down wonderful principles regarding interpretation of provisions of Companies Act, 1956. After constitution of Company Law Board, if we see the difference between the powers exercised by the Company Law Board and the High Court, in my opinion, High Court is doing well compared to Company Law Board. High Court faces so much work pressure and had to listen and pass orders in many matters. It is not the case when it comes to Company Law Board. Many feel that the remedy before the Company Law Board was not effective and there are so many reasons as to why the litigation before Company Law Board was not effective and it is also addressed indirectly in the judgment of Madras High Court and the judgment of Supreme Court on constitution of National Company Law Tribunal.

The object behind introducing a Companies Bill is really good and I don’t think that it is a big exercise. What is important is that providing an effective reddressel to the companies or the shareholders when they approach the court or the tribunal for the protection of their corporate rights. With the proposed Companies Bill, most of the powers of High Court are taken away with the constitution of National Company Law Tribunal and the Appellate Tribunal. There is a specific bar on the jurisdiction of Civil Courts in entertaining a company matter. I have read the paper statements that the Ministry of Corporate Affairs is planning to approach the bench of the Supreme Court again asking for a review on the ground that the members of ICLS are not allowed to be presiding officers of the National Company Law Tribunal. As I have read, according to the Ministry of Corporate Affairs, the members of ICLS are most talented and suited to deal with the company related issues. It is emphasized that there is so much procedure to be followed to introduce the Companies Bill again in the Parliament subsequent to the judgment of Supreme Court on NCLT.

I am not on the issue of the intelligence of the members of ICLS at all with due respect to the members of ICLS, but, I have some doubts like:

1. Why the Companies Bill is sought to be introduced in the Parliament knowing fully of the proceeding before Supreme Court?

2. Why Company Law Board could not be effective as opined by many companies and shareholders?

3. Was there any complete assessment as to why the Company Law Board could not provide an effective remedy?

4. Is Ministry of Corporate Affairs convinced that the Company Law Board is successful in achieving its object?

5. How come the Ministry of Corporate Affairs is convinced that the National Company Law Tribunal can effectively exercise most of the powers under the provisions of Companies Act, 1956 where there is no much difference in wording between the provisions dealing with the powers of Company Law Board under Companies Act, 1956 and the powers of National Company Law Tribunal under the proposed Companies Bill barring the bar on Civil Court’s jurisdiction?

6. Was there any thinking as to the implementation of the orders of the Company Law Board or the proposed National Company Law Tribunal as the orders of the Company Law Board were violated directly in many cases?

7. Was there any discussion with the Law Ministry or the concerned people regarding the powers of Contempt of National Company Law Tribunal in view of the general application of provisions of Contempt of Courts Act?

8. Will it not cause a great hardship to the companies or the corporates if only there is one Appellate Tribunal in Delhi?

9. Did the Ministry of Corporate Affairs take note of filing fictitious forms with the ROC under MCA scheme and procedure for removal of those forms?

Constitution of National Company Law Tribunal and its effective functioning is very important for the corporate world. It is not an easy thing for the Ministry of Corporate Affairs to ensure proper functioning of National Company Law Tribunal in view of our experience with Company Law Board as I believe and heard from many shareholders. The judgment of the Madras High Court and the Supreme Court in the Appeal on constitution of National Company Law Tribunal is really laudable; as otherwise, there would have been an irreparable damage to the corporate world. The issue is really challenging for the Ministry of Corporate Affairs and it will be interesting to follow as to when the Companies Bill is introduced, changes are made to the bill subsequent to the judgment of Supreme Court and the finally the functioning of the National Company Law Tribunal.

Note: The views expressed are my personal and I have no intention to insult any profession or institution.

397/398 - CLB/NCLT - concerns of various shareholders?

The Companies Act, 1956, though it requires some reforms as mooted through Companies Bill, 2009, is one of the finest legislations. Each provision or the section under the Companies Act, 1956 has a sound logic though there exist very few sections which are to be deleted or modified suitably. The shareholders may not participate in day-to-day affairs of the Company, but, still, their rights are protected as every Company is supposed to maintain books of accounts, conduct the required Board meetings, file the statutory returns and inform the shareholders of the Company about its functioning and the development in a particular year through annual returns and annual accounts which are also accompanied by the Director's report and the Auditor's report. When we think as to how a concern, as an incorporated company functions, the entire legal frame-work is interesting and appears to be logically sound. It is also true that many listed public companies follow the regulatory framework of Company Law in India scrupulously. Many shareholders of a listed company may not even look at the affairs of the Company in detail though they receive documents and communications from the Company very often. Listed public Companies are well regulated in view of SEBI regulations, listing agreement with Stock Exchanges and the continuous supervision of SEBI and the Stock Exchanges.

Contrary to the functioning of listed public companies, private companies or the closely held companies ignore the regulatory framework of Company Law and they think that they are the proprietors of the Company. Though, we very frequently use the word "family company", there is no such description of a Company under the provisions of Companies Act, 1956. It is also true that the private companies are given liberty to have their own internal regulations through Articles of Association and Share Transfers are regulated. While there is no problem with a private company where the entire shareholding is held by a family or a group of persons without any difference of opinion, practically, every company tends to think about expansion of the Company and attraction of more investment into the Company which results in the change in the shareholding pattern of a private company very frequently. In many cases, the change in the shareholding pattern of a company is preceded by an agreement between the Company and the investors. As everybody is a human being with natural emotions and greed, there tend to be some difference of opinion among the members which will end up with drastic consequences. When the trust is lost among the shareholders or between two groups in the Company, then, the consequences of breach of trust would be disastrous. With the disbelief, one group tries to dominate the affairs in the Company and serious differences thus erupt. It is a reality in corporate sector that there tend to be some business secrets, and concealment etc.

Though there is no oppression or mismanagement in the Company, taking advantage of the knowledge of business secrets and concealment, a group of shareholders who qualify under section 399 of the Companies Act, 1956 approach the Company Law Board under section 397/398 of the Companies Act, 1956. As everybody knows, section 397/398 of the Companies Act, 1956 meant to provide a preventive measure for the protection of the rights of the minority shareholders. Company Law Board has been conferred with elaborate powers under section 397/398 of the Companies Act, 1956 in order to put an end to the matters complained of while it is also true that there are express limitations on the powers of Company Law Board under section 397/398 of the Act. There are so many lengthy judgments on section 397/398 of the Companies Act, 1956 in view of complications and the stakes involved. It will never be an easy task to understand a company dispute and pass orders and naturally there will be delay in getting the required orders under section 397/398 of the Companies Act, 1956. The general opinion of shareholders in a private company when they approach the Company Law Board under section 397/398 of the Companies Act, 1956 is that the protection to their rights as envisaged under section 397/398 is not effective.

Few concerns of various shareholders who approach the Company Law Board and who require a remedial measure, as I perceive, are as follows.

Concerns or the feelings of Majority Shareholders or group:

1. Majority tends to rely on majority rule and they will never be happy when a minority tries to trouble the majority by leveling allegations.

2. Majority feels that though they have not committed any act of oppression and mismanagement, the minority shareholders who were privy to business secrets take advantage of those things and tries to trouble the majority.

3. Majority feels that they never want a minority group who intends to trouble the Company; however, acquiring the shares of the minority will be a difficult exercise as there will be unreasonable bargaining and financial difficulties.

4. Majority feels that it has become so easy for a group of shareholders or a minority group in the Company to trouble the majority as a mere allegation can do all the damage.

5. Majority truly feels that they are not provided with any remedy under the provisions of the Companies Act, 1956 thinking that majority rule prevails in the Company and the majority can take any decision in the AGM.

6. Majority never wants to expose themselves as powerless and a group which is not able to deal with the minority and as such they may have to face the obstructions by the minority continually.

7. Though the majority in a Company too can approach the Company Law Board under section 397/398 of the Companies Act, 1956, they may not be able to do so when already a minority group has approached the Board seeking some measures under section 397/398 of the Act. When both the majority and the minority allege something, naturally, the conclusion will be that there exist a deadlock in the Company and consequences will follow. Majority never wants such a situation.

8. Majority group always gets troubled with the filing of fictitious forms with the Registrar of Companies (ROC) and they are still not aware of the remedies to get the fictitious forms removed from the MCA portal. This has become a serious issue in most of the Companies and the issue requires a careful consideration for suitable reforms in law and the practice.

9. Majority feels that the applications under section 397/398 of the Act are loosely entertained and pendency of a petition under section 397/398 of the Act has its own consequences on the functioning of the Company.

Concerns or the feelings of minority:

1. Minority shareholders too have many grievances at the preventive and remedial measures available to them when they are oppressed and the company is mismanaged.

2. Minority shareholders were of the opinion that the remedial and preventive measures provided under section 397/398 of the Companies Act, 1956 are not effective.

3. Minority shareholders feel that there is so much delay in getting the required orders from the Board under section 397/398 of the Act.

4. Minority shareholders feel that the orders of the Company Law Board are read between lines by the majority and getting the orders implemented has become a bigger issue.

5. Minority shareholders feel that there are express limitations on the powers of the Company Law Board under section 397/398 and as such they have to approach many forums on the same issue simultaneously.

6. Minority shareholders are scared to approach the Civil Court as they feel that the procedure before civil court is hectic and prolonged.

7. Minority shareholders feel that though they were willing to disassociate from the Company, the exist option is not reasonable with all undervaluation in most of the cases.

Reforms required:

Than ever before, the issue of filing fictitious forms or uploading fictitious forms with MCA portal has become a very serious issue now. The ROC is advising the Company to approach the Company Law Board or the Court and get an order even when an apparent illegality with regard to filing is pointed-out. The majority is hesitant to say that they are being oppressed by the minority though it can happen practically. With the existing legal position, in many cases, the shareholders are forced to approach simultaneous forums and the issue needs to be effectively addressed. The issue of simultaneous proceedings is sought to be addressed in the proposed Companies Bill which contain a specific bar on the Civil Courts to entertain company disputes or matters. There are complications in course even with the specific bar on the jurisdiction of Civil Courts. Such a bar under other special legislations like SARFAECI Act, 2002 can be effective, but, I don’t think that the bar on Civil Courts can be effective under the proposed Companies Bill. The issue of removing fictitious forms is to be addressed on urgent basis. The proceedings of the Company Law Board now and the National Company Law Tribunal in future should be really effective. With many directives of the Supreme Court now on the constitution of National Company Law Tribunal, we hope that the situation will change. We need to have active and knowledgeable presiding officers who are independent in discharge of their functions. A difference between the proceedings of the Company Law Board and the High Court is apparent now and we can see shouting in Company Law Board and it is very rare to see shouting before the High Court. All these issues appear to be very small, but, a lot to convey. The proposed National Company Law Tribunal can never be a High Court, but, in reality, the National Company Law Tribunal discharges the functions of High Court as most of the powers now exercised by the High Court under the Companies Act, 1956 are sought to be transferred to the proposed National Company Law Tribunal.

Note: the views expressed are my personal and I have no intention to insult any institution.

Why the functioning of NCLT and NCLAT is interesting to follow?

Everybody knows that the legislature has proposed to constitute a special tribunal to deal with the issues under the Companies Act, 1956 through Companies (Second Amendment) Act, 2002. The constitution of National Company Law Tribunal and Appellate Tribunal is challenged by the Madras Bar before the High Court of Madras. Justice Jayasimha Babu of Madras High Court has passed a considered and laudable judgment while disposing of the Writ Petition filed by the Madras Bar challenging Companies (Second Amendment) Act, 2002. Senior Advocate Sri Aravind P.Datar has appeared for the Petitioner before Madras High Court in the Writ Petition referred to and placed all the material and the history of constituting Special Tribunals in India. Though, there was lot of discussion on tribunalization as the High Court has referred, the validity of the constitution of National Company Law Tribunal has not been declared illegal by the Madras High Court as such, but, has pointed-out vital defects in appointing of presiding officers to the Tribunal etc. Every effort has been made by the Madras High Court to preserve the independence and efficiency of the Tribunal laudably. The order passed by the Madras High Court challenging the Companies (Second Amendment) Act, 2002 and especially the constitution of National Company Law Tribunal and the Appellate Tribunal, went to Supreme Court and the Supreme Court has upheld the order of the Madras High Court and declared that the constitution of NCLT and NCLAT is legal. The order of the Apex Court is on expected lines and there should not be any compromise with the independence and efficiently of the Dispute Redressel Mechanism. Before the proposed amendment to the Companies Act, 1956 proposing to constitute National Company Law Tribunal, the High Court and the Company Law Board used to entertain Company Petitions under the Companies Act, 1956.

Constituting Tribunals with the intention of providing a specialist mechanism aiming at speedier justice is not a new phenomenon in India and it has started even before independence as pointed out in the Judgment of Madras High Court while disposing of the Writ Petition filed by the Madras Bar.

All issues connected to constitution of Tribunals were looked into and the constitution and functioning of Tax Tribunals and Debt Recovery Tribunals etc. have also been discussed at length by the Constitutional Courts while looking into the issue of validity of constitution of National Company Law Tribunal and Appellate Tribunal.

I am of the strong opinion that the functioning of the proposed NCLT and NCLAT can not be seen at par with other Tribunals like Tax Tribunals and the Debt Recovery Tribunals. Tax law and interpretation of provisions dealing with payment of tax are always complicated and there are many authorities to look into the challenge by the assesses and we are also observing the functioning and the aim of Settlement Commission now. A finding on a Tax dispute may not, in many cases, threaten the functioning of the Company or the assesses. When it comes to the adjudication by the Debt Recovery Tribunals, Banks are supposed to be very careful while granting loans and they will get all the required documents and security from the borrower. Usually, the borrower tries to prolong a dispute before the Debt Recovery Tribunal while it is also true that there can be a genuine litigation before the Debt Recovery Tribunals at times.

When it comes to the functioning of the NCLT and NCLAT under the Companies Act, 1956, the proposed Tribunal discharges very complicated responsibilities. Despite the Complications, the High Court while exercising Company Jurisdiction could deal with the Winding-up Petitions and the Petitions for grant of sanction under section 391 and 394 of the Companies Act etc. well. The Company Law Board too discharges very complicated responsibilities under the Companies Act, 1956 and especially the Petitions under section 397/398 of the Companies Act, 1956.

A Company dispute can not be seen at par with a civil dispute and Company Law is very complicated. Many corporates feel that they lack an effective redressel mechanism to get their corporate rights protected under the Companies Act, 1956. When we look at the functioning of the Company Law Board and especially the proceedings under section 397/398 of the Companies Act, 1956, we can find lot of interesting things. There are propositions like “disputed facts can not be decided by the Company Law Board” and the Company Law Board has certain limitations on its power under section 397/398 of the Act and it makes a corporate or a shareholders to be in dilemma as to where they should go to get their corporate rights protected. The corporates really scare to approach a Civil Court for getting their corporate rights protected as it will take lot of time and also as the Civil Court lacks the needed expertise in understanding the complications and the subject of Company Law. These are all practical problems and the proposed NCLT and NCLAT should address all these issues, as otherwise, the object constituting a single specialistic forum under the Companies Act, 1956 will get defeated and turning the clock back will definitely be a difficult thing to think of.

With a logical analysis, we can find the glaring difference between the functioning of Company Court and the Company Law Board now. While the litigants or the corporates effectively implement the orders of the Company Court, the Company Law Board is taken for granted and the power of contempt of the orders of the Board has been a complicated issue to deal with. Again, High Court, while exercising the powers under the Companies Act, 1956, used to be very effective and speedy given the complications and I am not exaggerating the situation and my opinion is based on my personal observation and facts which can not be denied as I feel.

But, it can be seen from the express bar on the jurisdiction of the Company Law Board in the proposed Companies Bill, that the legislature is committed to establish a single and effective forum to deal with all issues under the Companies Act, 1956 and we are also aware of the background of constituting a special tribunal called National Company Law Tribunal and everyone is aware of the report of the Committees.

Nobody can deny the merits of the constitution of National Company Law Tribunal provided that it functions well as intended by the legislature.

I am of the view that the proposed National Company Law Tribunal and Appellate Tribunal can not be seen at par with other Tribunals and it would be really interesting to look into the functioning of the National Company Law Tribunal and the Appellate Tribunal. The constitution of National Company Law Tribunal and the Appellate Tribunal should provide speedy and effective redressel to the corporates under the Companies Act, 1956 as otherwise, turning the clock back will definitely be difficult and it will also affect the corporate growth to a great extent.

Note: The views expressed are my personal and I have dealtwith the issue in brief and I am aware of many other issues touching the subject.

Supreme Court on NCLT & NCLAT?

The Challenge to the NCLT & NCALT:

The five-judge Constitution Bench of the Supreme Court of India Justice KG Balakrishnan, Justice RV Raveendran, Justice DK Jain, Justice P Sathasivam and Justice JM Panchal has delivered its judgment on the legality of the constitution of National Company Law Tribunal and National Company Law Appellate Tribunal under the Companies Act, 1956 through Companies (Second Amendment) Act, 2002.

With the intention of establishing a Separate Tribunal to deal with all issues or disputes under the Companies Act, 1956, a Special Tribunal and Appellate Tribunal called National Company Law Tribunal and National Company Law Appellate Tribunal were sought to be established through the Companies (Second Amendment) Act, 2002. As per the said amendment, as soon as the Tribunal and the Appellate Tribunal is constituted, almost all powers exercised by the High Court under the Companies Act, 1956 sought to be transferred to the NCLT and NCLAT except the judicial review powers exercised under Article 226 and 227 of Constitution of India.

Sri R.Gandhi of Madras Bar Association has challenged the Companies (Second Amendment) Act, 2002 and especially the constitution of National Company Law Tribunal and National Company Appellate Tribunal.

The conclusion of Madras High Court:

Justice Jayasimha Babu of Madras High Court has delivered a considered and landmark judgment on the issue of legality of constitution of National Company Law Tribunal and National Company Law Appellate Tribunal. The background of the constitution of Tribunal in India as referred in the Judgment is as follows:

“The Tribunals which are largely a twentieth century phenomenon existed in this country even before the Constitution was framed. The oldest and best known Tribunal is the Income-tax Appellate Tribunal which had been functioning from the year 1941. Industrial Tribunals had also been established prior to 1950. Articles 136 and 227 of the Constitution refer to Tribunals, and make their orders subject to judicial review by the High Court, and with leave, to the Appellate jurisdiction of the Supreme Court. Numerous Tribunals have been created subsequent to 1950 by Parliamentary as well as State legislation. Their exact number however is not easily ascertainable. The Law Commission of India in its 162^nd Report submitted in 1998 reviewed the working of the major tribunals in the country – the Income-tax Appellate Tribunal, Customs, Central Excise and Gold (Control) Appellate Tribunal and the Administrative Tribunals, and suggested certain changes to improve their functioning.

The object of constituting Tribunals is to provide a simpler, speedier and more accessible justice than ordinary courts are able to provide, as stated in Wade on Administrative Law. Yet another object of constituting Tribunals is to create specialist Tribunals which would include specialists in the filed, to adjudicate more efficiently and speedily the matters requiring adjudication in that field, and thus command the confidence of all concerned in the quality and reliability of the result of such adjudication.”

The Operative portion of the Judgment of the Madras High Court is as follows:

“In the light of foregoing discussions it is declared that until the provisions in Parts 1B and 1C of the Companies Act introduced by the Companies (Amendment) Act, 2002, which have been found to be defective in as much as they are in breach of the basic constitutional scheme of separation of powers and independence of the judicial function, are duly amended, by removing the defects that have been pointed out, it would be unconstitutional to constitute a Tribunal and Appellate Tribunal exercise the jurisdiction now exercised by the High Courts or the Company Law Board.

The petitioners have also challenged the validity of certain provisions of the Companies (Amendment) Act, 2002, whereby certain powers currently exercised by the Company Law Board, some of which were earlier exercised by the court, were transferred to the Central Government. Most of those powers are only tangentially judicial and are primarily administrative. There is no illegality in such transfer.”

The Judgment of the Madras High Court was a very detailed, considered and reasoned judgment. The Apprehension of the Petitioners who challenged the Companies (Second Amendment) Act, 2002 and the conclusion of the Court on the issue is summed up in one para of the Judgment as follows:

“The constitution of the National Company Law Tribunal and the Appellate Tribunal in the manner now provided, when considered along with the provisions concerning the Competition Commission under the Competition Act 2002, seems to indicate a pattern of an aggressive executive seeking to take over gradually the judicial power traditionally exercised by the courts under safeguards which ensure the competence, independence and impartiality of the judges, and replacing them by persons who have neither a judicial background nor specialized knowledge of the subject for which the Tribunal is created, and by persons now serving the executive who will continue to retain their lien and loyalty to the executive branch, and be amenable to the influence of executive superiors and their political masters.”

The doyens of the Madras Bar Association Shri Aravind P.Datar, Senior Advocate and Shri V.T.Gopalan, the then Additional Solicitor-General has rendered exceptional assistance to the Court in the matter before Madras High Court and the same is acknowledged by the Madras High Court in its judgment as follows:

“We place on record our appreciation to Mr.Arvind Datar, learned senior counsel of petitioner, whose research and cogent presentation has helped to clarify and bring out the significance of the issues involved, and to Mr.V.T.Gopalan, learned Additional Solicitor-General who, with his usual fairness presented the case for the respondent with great vigour, and also placed before the court all the relevant materials.”

Appeal to the Supreme Court:

The Judgment of the Madras High Court on the issue of constitution of National Company Law Tribunal and National Company Law Appellate Tribunal was appealed before the Supreme Court and the Supreme Court has now appears to have confirmed the judgment of the Madras High Court. The Madras High Court has never questioned the legislative competency in establishing National Company Law Tribunal, but, expressed its concern over the independence of the mechanism and its effectiveness. It’s really laudable.

Further process:

Now, the entire Companies Act, 1956 sought to be reorganized with some inclusions and deletions through Companies Bill, 2009. I don’t know as to how the Government has proceeded with the Companies Bill when an important issue on the Constitution of National Company Law Tribunal and National Company Law Appellate Tribunal was pending before the Apex Court. Now, the concerned ministry has to take note of the judgment of the Apex Court and should make needed changes to the proposed bill and then, the Companies Bill can be introduced in the Parliament and it needs to be passed. It will take some time, but, the entire issue can be quicken as the needed infrastructure for the establishment of National Company Law Tribunal and National Company Law Appellate Tribunal was already in place as I believe.

My opinion on the Tribunal:

Many feel that there is lot of difference between a Tribunal and the Court, but, I disagree with the notion. The Tribunal is also a Court intended to resolve the disputes, but, it is constituted under a special enactment and may follow different procedure as enshrined in the enactment.

A constitution Bench of the Supreme Court in the case of Associated Cement Companies Ltd. V. P.N.Sharma, AIR 1965SC1595, speaking through our great justice Gajendragadkar, C.J., while holding that the appellate authority under the Punjab Welfare Officers Recruitment and Conditions of Service Rules, 1952, is a Tribunal, observed:

“…Special matter and questions re entrusted to them for their decision and in that sense, they share with the courts one common characteristic; both the courts and the Tribunals are ‘constituted by the State and are invested with judicial as distinguished from purely administrative or executive functions…’ They are both adjudicated bodies and they deal with and finally determine disputes between parties which are entrusted to the jurisdiction….As in the case of courts, so in the case of Tribunals, it is the State’s inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial function which hey discharge. Judicial functions and judicial powers are one of the essential attributes of a sovereign State, and on considerations of policy, the state transfers its judicial functions and powers mainly to the courts established by the Constitution; but that does not affect the competence of the State, by appropriate measures, to transfer a part of its judicial powers and functions to Tribunals by entrusting tot hem the task of adjudicated upon special matters and disputes between parties. It is really not possible or even expedient to attempt to describe exhaustively the features which are common to the Tribunals and the courts, and features which are distinct and separate. The basis and the fundamental feature which is common to both the courts and the Tribunals is that they discharge judicial functions and exercise judicial powers which inherently vest in a sovereign state.”

The observations of Justice Gajedragadkar were also referred in the Judgment of Madras High Court.

Thus, there is no much difference logically between the Court and the Tribunal and both are meant to resolve the disputes.

My apprehension:

I have the privilege of observing the proceedings of High Court in a Company matter and also the proceedings of Company Law Board. At present, the High Court discharges very complicated functions under Companies Act, 1956 like entertaining winding-up petitions and entertaining applications seeking sanction of the Court for a scheme of amalgamation etc. The Company Law Board also discharges complicated responsibilities under section 397/398 of the Companies Act, 1956 and other provisions.

There are many limitations and we know the functioning of the office of the Official Liquidator at present and we also aware of the proposed move to get the services of Advocates and Experts as liquidators. It’s a serious issue to deal with and requires serious consideration by the Government and also Courts. In my personal opinion, the High Court was able to discharge its functions under Companies Act, 1956 very well and the proceedings of Company Court were effective to a great extent. Instant orders were passed if the situation demands and most of the orders passed by the High Court while exercising Company Jurisdiction were obeyed and implemented by the parties concerned.

But, when it comes to the proceedings of the Company Law Board, many express their dissatisfaction that they are being unnecessarily troubled and many feel that they are not able to get justice though they could establish a clear case before the Board. It is also frequently seen as to the respect given to the orders of the Company Law Board. Again, the powers of the Company Law Board were limited by the express language used in the Act and also due to the ruling on its own competence and jurisdiction. These issues are taken note of by the Legislature and sought to be addressed in the proposed Companies Bill, 2009.

We have seen tremendous corporate growth in the recent past and with the technological revolution and its adoption in governance like MCA scheme, the incorporation and management of Companies have become so easy though there are complications in the Course.

We need to provide an effective and speedy redressel to the Corporate and they can not be waiting for months and years for a redressel. Handling a Company dispute is a complicated thing and requires lot of care, concentration and specialization. It is to be seen as to how the proposed National Company Law Tribunal and the National Company Law Appellate Tribunal functions in future.

Note: I have only given a brief of the issue and I am aware of the fact that a lot can be said on the issue.

Challenges before the National Company Law Tribunal?

We all know about the dispute resolution mechanism under the provisions of Companies Act, 1956. Till 2002 amendments to the Companies Act, 1956, significantly, the dispute resolution mechanism was vested with the Company Court and the Company Law Board. Company Court is nothing but High Court having jurisdiction to entertain certain company matters like winding-up and amalgamation petitions etc. Again, a Company Law Board is a dispute resolution mechanism constituted under section 10E of the Companies Act, 1956 and it is regulated by Company Law Board Regulations, 1991.

With the object of establishing a specialized dispute resolution mechanism at one place and without running to various forums for various issues, a National Company Law Tribunal was proposed to be constituted under section 10FB of the Companies Act, 1956. Part-1B and Part-1C of Preliminary Chapter are sought to be incorporated in the Companies Act, 1956 and the parts specifically deals with the issue of incorporation of National Company Law Tribunal, National Company Law Appellate Tribunal and other connected issues.

There are very interesting and complicated issues in the process of corporate adjudication in India. First, let us look at the powers of the Company Law Board and the powers of the proposed National Company Law Tribunal and National Company Law Appellate Tribunal. The Company Law Board Regulations, 1991 regulates the business of Company Law Board and deal with the issue like filing procedures, powers, rights etc. The important regulations in the Company Law Board Regulations, 1991, are as follows:

“Reg.11. Petitions etc. to be in writing.

Reg.12. Application, reference or petition to be divided into paragraphs.

Reg.13. General heading to be in Form No.1 in Annexure II.

Reg.14. Procedure for filing petition.

Reg.15. Presentation and scrutiny of the Petition.

Reg.16. Contents of the Petition.

Reg.17. Contents of Interlocutory application.

Reg.18. Documents to accompany the Petition.

Reg.19. Right of a Party to appear before the Bench.

Reg.20. Plural Remedies.

Reg.21. Service of notice and process issued by the Bench.

Reg.22. Filing of reply and other documents by the Respondents.

Reg.23. Filing of the Counter reply by the Petitioner.

Reg.24. Power of Bench to call for further information/evidence.

Reg.25. Hearing the Petition.

Reg.26. Procedure to be followed where any party does not appear.”

The regulations referred to above summarizes the procedure to be followed before the Company Law Board. Among the regulations referred to above, two regulations deserve specific reading. Regulations 24 and 25 of Company Law Board Regulations, 1991 are extracted hereunder.

“Reg.24. Power of Bench to call for further information/evidence. – The Bench may, before passing orders on the petition, require the parties or any one or more of them, to produce such further documentary or other evidence as the Bench may consider necessary –

(a)for the purpose of satisfying itself as to the truth of the allegations made in the petition; or

(b)for ascertaining any information which, in the opinion of the Bench, is necessary for the purpose of enabling it to pass orders on the Petition.”

Reg.25. Hearing of Petition. – The Bench may, if sufficient cause is shown at any stage of the proceeding, grant time to the parties or any of them and adjourn the hearing of the petition or the application. The Bench may make such order as it thinks fit with respect to the costs occasioned by such adjournments.”

If we look at the two regulations extracted above, it is very clear that there is no specific reference for oral evidence before the Board though one can assume that the Company Law Board is conferred with extraordinary powers under Regulation 24 itself.

Company Law Board might have been facing difficulties in the process of adjudication as it will not normally conduct any trial for deciding disputed facts and with the presence of assumed legal principle that the disputed facts can not be decided with a summary procedure. Again, there was no specific bar before the 2002 amendments on the Civil Court’s Jurisdiction in respect of company matters and we used to see many simultaneous proceedings. I used to think that we need lot more clarity and reforms in company dispute resolution mechanism in India.

Now, let us look at the powers and procedure before the proposed National Company Law Tribunal. Sections 10E and 10FZA of the Companies Act, 1956 specifically deal with the powers of the proposed National Company Law Tribunal and those are extracted hereunder.

“10E. (4C) Every Bench referred to in sub-section (4B) shall have powers which are vested in a Court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:-

(a) discovery and inspection of documents or to other material objects producible as evidence;

(b) enforcing the attendance of witnesses and requiring the deposit of their expenses;

(c)compelling the production of documents or other material objects producible as evidence and impounding the same;

(d) examining witnesses on oath;

(e) granting adjournments;

(f) reception of evidence on affidavits.”

10FZA. (1) The Tribunal and the Appellate Tribunals shall not be bound by the procedure laid down in the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and, subject to other provisions of this Act and of any rules made by the Central Government, the Tribunal and the Appellate Tribunals hall have power to regulate their own procedure.

(2) The Tribunal and the Appellate Tribunal shall have, for he purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit in respect of the following mattes, namely:-

(a) summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872 (1 of 1872), requisitioning any public record or documents or copy of such record or document from any office;

(e) issuing commissions of reexamination of witness or documents;

(f) reviewing its decisions;

(g) dismissing a representation for default or deciding it ex parte;

(h) setting aside any order of dismissal of any representation of default or any order passed by it ex parte; and

(f) any other matter which maybe prescribed by the Central Government.

(3) Any order made by the Tribunal or the Appellate Tribunal maybe enforced by that Tribunal in the same manner as if it were a decree made by a court in a suit pending therein, and it shall be lawful for the Tribunal or the Appellate Tribunal to send in case of its inability to execute such order, to the court within the local limits of whose jurisdiction, -

(a) in the case of an order against a company, the registered office of the company is situate; or

(b) in the case of an order against any other persons, the person concerned voluntarily resides or carries on business or personally works for gain.

(4) All proceedings before the Tribunal or the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193 and 228, and for the purpose of the section 196, of the Indian Penal Code (45 of 1860) and the Tribunal and the Appellate Tribunals hall be deemed to be a civil court for the purpose of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).”

If we compare the powers of the Company Law Board and the proposed National Company Law Tribunal, we can find lot of difference and the provisions conferring powers on the National Company Law Tribunal are detailed and specific. On the issue of Civil Court’s jurisdiction, section 10GB deals with the issue and the same is extracted hereunder.

“10GB. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force.”

Thus, the issue of simultaneous proceedings is sought to be addressed in the 2002 amendments to the Companies Act, 1956 and an honest effort has been made to give clarity on company dispute adjudication forums under the provisions of Companies Act, 1956.

If we ask a legal expert as to what is the difference between a Tribunal and the Court, we can hear lot of explanation with specific reference to Code of Civil Procedure. We were of the settled opinion that the Code of Civil Procedure is the cause for delay before the Traditional Courts. But, logically, there can not be any difference between Courts or the Tribunal and we can consider Tribunal as a Special Court. The issue is summarized by Hon’ble Justice Gajendragatkar in Associated Cement Companies Ltd. V. P.B.Sharma, AIR 1965 SC 1595 and the relevant paragraph is extracted hereunder.

“…..Special matters and questions are entrusted to them for their decision and in that sense, they share with the courts one common characterizing; both the courts and the Tribunals are ‘constituted by the State and are invested with the judicial as distinguished from purely administrative or executive functions….’ They are both adjudicating bodies and they deal with and finally determine disputes between parties which are entrusted to the jurisdiction….As in the case of courts, so in the case of Tribunals, it is the State’s Inherent judicial power which has been transferred and by virtue of the said power, it is the State’s inherent judicial function which they discharge. Judicial functions and judicial powers are one of the essential attributes of a sovereign State, and on considerations of policy, the /State transfers its judicial functions and powers mainly to the courts established by the Constitution; but that does not affect the competence of the State, by appropriate measures, to transfer a part of its judicial powers and functions to Tribunals by entrusting to them the task of adjudicating upon special matters and disputes between parties. It is really not possible or even expedient to attempt to describe exhaustively the features which are common to the Tribunals and the courts, and feature which are distinct and separate. The basis and the fundamental feature which is common to both the courts and the Tribunals is that they discharge judicial functions and exercise judicial powers which inherently vest in a sovereign state”.

Now, let us look at the style of functioning of the Company Court and the Company Law Board. High Court is conferred with jurisdiction to entertain certain company matters like winding-up etc. under the provisions of Companies Act, 1956. We know the power of High Court being a Constitutional Court. High Court enjoys extraordinary power under Article 226 of Constitution of India. We can see many orders by the High Court ignoring the technicalities and directing towards effective adjudication or settlement of the dispute. Many gives so much respect to High Court and an order of High Court is adhered to in most of the cases and we will be seeing contempt issues etc. when the order is directed against the Government or Governmental organs. That is a different issue altogether.

But, if we look at the procedure before the Board and style of functioning of Company Law Board and the manner in which the adjudication is being done, we can very clearly see the difference between the High Court and the Company Law Board barring the issue that the Company Law Board is a specific forum. The Company Law Board which is conferred with the powers to entertain applications under section 397/398 excises very important functions having impact on the corporate world. Winding-up is the last stage of the Company and represents a bad state of affairs of the Company though the issue should not be taken lightly. But, regulating the affairs of the Company or preventing the illegal actions by a group in the Company, are very vital functions discharged by the Company Law Board and the proposed National Company Law Tribunal. Companies or the shareholders approaching the Company Law Board or the proposed National Company Law Tribunal may require emergent relief even ex-parte in many cases and the Board or the National Company Law Tribunal should be prepared to passed ex-parte orders and orders without insisting on technicalities. I strongly feel that the High Court functions like an Arbitrator where technicalities are ignored and the dispute resolution is directed towards doing justice. We need a powerful dispute resolution mechanism to resolve the company matters under the provisions of Companies Act, 1956.

I am of the strong opinion that the purpose may not be solved with the constitution of special tribunals like National Company Law Tribunal and it is very difficult to create an atmosphere present in the High Court anywhere else. I am sure on that.

We all know that the constitution of National Company Law Tribunal is stayed by Madras High Court in R.Gandhi Vs. Union of India. Senior Advocate Shri Aravind P.Datar has appeared for the Madras Bar which is the Petitioner in the case referred to seeking stay of constitution of National Company Law Tribunal. The discussion in the case dealwith by Justice Jyasimha Babu gives a complete idea on constitution of special tribunals like National Company Law Tribunal.

If we look at the powers conferred on the proposed National Company Law Tribunal and especially section 10FZA, it is very much similar to section 22 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Section 22 as referred to is extracted hereunder.

“Section 22. Procedure and Powers of the Tribunal and the Appellate Tribunal.-

(1) The Tribunal and the Appellate Tribunal shall not be bound the procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and, subject to other provisions of this Act and of any rules, the Tribunal and the Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.

(2) The Tribunal and the Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:-

(a) summoning and enforcing the attendance of any person and examining him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) issuing commissions for the examination of witnesses or documents;

(e) reviewing its decisions;

(f) dismissing an application for default or deciding it ex-parte;

(g) setting aside any order of dismissal of any publication for default or any order passed by it ex-parte;

(h) any other matter which may be prescribed.

(3) Any proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purpose of section 196, of the Indian Penal Code (45 of 1860) and the Tribunal or the Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974)”

Thus, the Debt Recovery Tribunal can conduct a Trial, but, practice differs and it is very rare to see a Trial before the Debt Recovery Tribunal.

Section 385 of the Companies Bill, 2009 deals with the powers of the National Company Law Tribunal and it is similar to section 10FZA incorporated pursuant to 2002 amendments to the Act.

I strongly feel that there will be challenges for the National Company Law Tribunal like:

1. How will the Tribunal deal with the issue of examining a person on oath or conducting a trial when there was a demand for trial?

2. Will the National Company Law Tribunal be able to discharge the functions like Company Court?

3. Will the National Company Law Tribunal be able to provide speedy relief to the needy corporates without laying so much emphasis on technicalities?

I don’t, for sure, think that the Debt Recovery Tribunals and Company Law Board be able to prove as best alternative to the adjudication by Courts though we can agree that we need many Judicial reforms.

The issue of establishing an effective adjudication mechanism under the provisions of Companies Act, 1956 is very important as it can directly impact the corporate growth. We need an effective mechanism for sure and I am sure that the issue remains complicated even in future.

Note:

1. I have just expressed my view on the subject with my practice exposure.

2. I have just analyzed various issues and not supporting any forum not opposing.

3. My intention is to focus on the significance of having an effective adjudication mechanism to adjudicate the disputes arising under the provisions of Companies Act, 1956.