Civil Appeal Nos. 3067 of 2004 and 3717 of 2005. Case: 1. Union of India, 2. Madras Bar Association Vs 1. R. Gandhi, President, Madras Bar Association (with Civil Appeal No.3717 of 2005), 2. Union of India. Supreme Court

Case Number:Civil Appeal Nos. 3067 of 2004 and 3717 of 2005
Party Name:1. Union of India, 2. Madras Bar Association Vs 1. R. Gandhi, President, Madras Bar Association (with Civil Appeal No.3717 of 2005), 2. Union of India
Judges:K.G. Balakrishnan, C.J.I., R.V. Raveendran, D.K. Jain, P. Sathasivam and J.M. Panchal, JJ.
Issue:Constitution (Forty-second Amendment) Act, 1976
Citation:2010 (261) ELT 3 (SC)
Judgement Date:May 11, 2010
Court:Supreme Court


R.V.Raveendran, J.

1. These appeals arise from the order dated 30.3.2004 of the Madras High Court in WP No. 2198/2003 filed by the President of Madras Bar Association (MBA for short) challenging the constitutional validity of Chapters 1B and 1C of the Companies Act, 1956(`Act' for short) inserted by Companies (Second Amendment) Act 2002 (`Amendment Act' for short) providing for the constitution of National Company Law Tribunal (`NCLT' or `Tribunal') and National Company Law Appellate Tribunal (`NCLAT' or `Appellate Tribunal').

  1. In the said writ petition, Madras Bar Association (`MBA') raised the following contentions:

    (i) Parliament does not have the legislative competence to vest intrinsic judicial functions that have been traditionally performed by the High Courts for nearly a century in any Tribunal outside the Judiciary.

    (ii) The constitution of the National Company Law Tribunal and transferring the entire company jurisdiction of the High Court to the Tribunal which is not under the control of the Judiciary, is violative of the doctrine of separation of powers and independence of the Judiciary which are parts of the basic structure of the Constitution.

    (iii) Article 323B of the Constitution enables the appropriate Legislature to provide for adjudication or trial by Tribunals of disputes, complaints or offences with respect to all or any of the matters specified in clause (2).

    Clause (2) enumerate the matters in regard to which Tribunals can be constituted. The said list is exhaustive and not illustrative. The list does not provide for constitution of Tribunal for insolvency, revival and restructuring of the company. In the absence of any amendment to Article 323B providing for a National Tribunal for revival of companies and winding up companies, there is no legislative competence to provide for constitution of NCLT and NCLAT.

    (iv) The various provisions of Chapters IB and IC of the Act (sections 10FB, 10FD, 10FE, 10FF, 10FL(2), 10FO, 10FR(3), 10FT and 10FX) are defective and unconstitutional, being in breach of basic principles of Rule of Law, Separation of Powers and Independence of the Judiciary.

  2. The Union of India submitted that it had constituted a High Level Committee on Law relating to Insolvency of Companies under the Chairmanship of Justice V. Balakrishna Eradi, a retired Judge of this Court, with other experts to examine the existing laws relating to winding-up proceedings of the company in order to remodel it in line with the latest developments and innovations in corporate laws and governance and to suggest reforms to the procedures at various stages followed in insolvency proceedings of the company in order to avoid unnecessary delay, in tune with international practices in the field. The said Committee identified the following areas which contributed to inordinate delay in finalisation of winding-up/dissolution of companies: (a) filing statement of affairs; (b) handing over of updated books of accounts; (c) realization of debts; (d) taking over possession of the assets of the company and sale of assets; (e) non-availability of funds for the Official Liquidator to discharge his duties and functions (f) settlement of the list of creditors; (g) settlement of list of contributories and payment of calls; (h) finalisation of income-tax proceedings; and (i) disposal of misfeasance proceedings. The Committee found that multiplicity of court proceedings is the main reason for the abnormal delay in dissolution of companies. It also found that different agencies dealt with different areas relating to companies, that Board for Industrial & Financial Reconstruction (BIFR) and Appellate Authority for Industrial & Financial Reconstruction (AAIFR) dealt with references relating to rehabilitation and revival of companies, High Courts dealt with winding-up of companies and Company Law Board (CLB) dealt with matters relating to prevention of oppression and mismanagement etc. Considering the laws on corporate insolvency prevailing in industrially advanced countries, the Committee recommended various amendments in regard to the provisions of Companies Act, 1956 for setting-up of a National Company Law Tribunal which will combine the powers of the CLB under the Companies Act, 1956, BIFR and AAIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 as also the jurisdiction and powers relating to winding-up presently vested in the High Courts.

  3. It is stated that the recommendations of the Eradi Committee were accepted by the Government and Company (Second Amendment) Act, 2002 was passed providing for establishment of NCLT and NCLAT to take-over the functions which are being performed by CLB, BIFR, AAIFR and the High Courts. It is submitted that the establishment of NCLT and NCLAT will have the following beneficial effects: (i) reduce the pendency of cases and reduce the period of winding-up process from 20 to 25 years to about two years; (ii) avoid multiplicity of litigation before various fora (High Courts and quasi-judicial Authorities like CLB, BIFR and AAIFR) as all can be heard and decided by NCLT; (iii) the appeals will be streamlined with an appeal provided against the order of the NCLT to an appellate Tribunal (NCLAT) exclusively dedicated to matters arising from NCLT, with a further appeal to the Supreme Court only on points of law, thereby reducing the delay in appeals; and (iv) with the pending cases before the Company Law Board and all winding-up cases pending before the High Courts being transferred to NCLT, the burden on High Courts will be reduced and BIFR and AAIFR could be abolished.

  4. It was contended that the power to provide for establishment of NCLT and NCLAT was derived from Article 245 read with several entries in List I of the Seventh Schedule and did not originate from Article 323B. It was submitted that various provisions in Parts IB and IC of the Act relating to the constitution of NCLT and NCLAT were intended to provide for selection of proper persons to be their President/Chairperson/members and for their proper functioning. It was submitted that similar provisions relating to establishment of other alternative institutional mechanisms such as Administrative Tribunals, Debt Recovery Tribunals and Consumer fora, had the seal of approval of this Court in S. P. Sampath Kumar vs. Union of India - 1987 (1) SCC 124, L. Chandrakumar v. Union of India (1997) 3 SCC 261; Union of India v. Delhi High Court Bar Association (2002) 4 SCC 275 and State of Karnataka v. Vishwabharathi House Building Co-operative Society 2003(2) SCC 412.

  5. The Madras High Court by its order dated 30.3.2004 held that creation of the NCLT and vesting the powers hitherto exercised by the High Courts and CLB in the Tribunal was not unconstitutional. It referred to and listed the defects in several provisions (that is mainly sections 10FD(3)(f)(g)(h), 10FE, 10FF, 10FL(2), 10FR(3), 10FT) in Parts IB and IC of the Act. It therefore declared that until the provisions of Part IB and IC of the Act, introduced by the Amendment Act which were defective being violative of basic constitutional scheme (of separation of judicial power from the Executive and Legislative power and independence of judiciary enabling impartial exercise of judicial power) are duly amended by removing the defects that were pointed out; it will be unconstitutional to constitute a Tribunal and Appellate Tribunal to exercise the jurisdiction now exercised by the High Court or the Company Law Board.

  6. The Union of India has accepted that several of the defects pointed out by the High Court in Parts IB and IC of the Act, require to be corrected and has stated that those provisions will be suitably amended to remove the defects. It has not however accepted the decision of the High Court that some other provisions of Parts IB and IC are also defective. To narrow down the controversy in regard to the appeal by the Union, we note below the defects pointed out by the High Court in regard to various provisions in Parts IB and IC of the Act and the stand of Union of India in respect of each of them.

    Sections 10FE and 10FT: Tenure of President/Chairman and Members of NCLT and NCLAT fixed as three years with eligibility for re-appointment

    7.1) The High Court held that unless the term of office is fixed as at least five years with a provision for renewal, except in cases of incapacity, misconduct and the like, the constitution of the Tribunal cannot be regarded as satisfying the essential requirements of an independent and impartial body exercising judicial functions of the state.

    The Union Government has accepted the finding and agreed to amend section 10FE and 10FT of the Act to provide for a five year term for the Chairman/President/Members. However, the Government proposes to retain the provision for reappointment instead of `renewal', as the reappointments would be considered by a Selection Committee which would be headed by the Chief Justice of India or his nominee. As the Government proposes to have minimum eligibility of 50 years for first appointment as a Member of the Tribunal, a Member will have to undergo the process of re-appointment only once or twice.

    Section 10FE - second proviso: Enabling the President/Members of NCLT to retain their lien with their parent cadre/Ministry/Department while holding office

    7.2) The High Court held that in so far as the President is concerned, there is no question of holding a lien and the reference to President must be deleted from the second proviso to section 10FE.

    The Union Government has accepted the decision and has stated that it proposes to amend the proviso and delete the reference to the President in the second proviso.

    7.3) The High Court also held that the period of lien in regard to the members of NCLT should be restricted to only one year instead of the entire period of service as a Member of NCLT.

    The Union Government has submitted that in view...

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