Powers and Function of NCLT under Companies Act

Powers and Function of National Company Law Tribunal under Companies Act 2013

Powers and Function of NCLT under Companies Act, 2013

Introduction

Development and innovation are stages in various sectors in the social order. The Companies Act, 2013 has undergone many amendments with new policies for good governance in corporate law. The Law Commission of India in its 124th report in the year 1988, pointed out that increase in the different types of litigation coming before courts have to some extent been responsible for backlogs of cases. Thus, the establishment of separate tribunal to deal with the disputes under the Companies Act constituted National Company Law Tribunal and National Company Law Appellate Tribunal.

National Company Law Tribunal (NCLT)

The National Company Law Tribunal is a quasi-judicial authority created under section 408 of the Companies Act, 2013 to deal with the corporate dispute of civil nature arising under the act. All proceedings under the Companies Act, including proceedings relating to arbitration, compromise, arrangements, reconstruction, and the winding up of the companies shall be disposed of by the National Company Law Tribunal. The tribunal has been set up to deal with all company related disputes except any criminal prosecution for offenses under the Companies Act. The Tribunal is not bound by the strict judicial rules of evidence and procedure. It can decide cases by following the principles of natural justice.

The NCLT consists of a President and a such number of other Judicial and Technical Members as prescribed. The President of the Tribunal shall be appointed by the Central Government after consultation with the Chief Justice of India.

The NCLT has been given powers under the Companies Act to adjudicate –

  • Cases initiated before Company Law Board (CLB) under the Companies Act, 1956
  • Proceedings pending before any district court or High Court under the previous act
  • Proceedings pending before the Board for Industrial and Financial Reconstruction (BIFR) and under the Sick Industrial Companies Act, 1985
  • Proceedings pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and
  • Proceedings pertaining to claims of oppression and mismanagement of a company, winding up of companies, and all other powers prescribed under the Companies Act.

Difference between NCLT and NCLAT

  • NCLT has primary jurisdiction whereas NCLAT has appellate jurisdiction.
  • NCLT takes into account the pieces of evidence and witnesses to make decisions whereas NCLAT reviews orders and decisions of NCLT.
  • The primary task of NCLT is to find the facts and admit the evidence with regard to the suit filed whereas NCLAT decides cases based on already collected pieces of evidence and witnesses.

Appeals can be made by an aggrieved party from any decision or order passed by NCLT within the period of forty-five days of the receipt of an order or decision to NCLAT. Further, NCLAT gives its decision within six months from the date of receipt of the appeal.

Background of the Tribunal

The Companies Act, second amendment in 2002 in Companies Act, 1956 provided for the setting up of a National Company Law Tribunal (sec. 408) and National Company Law Appellate Tribunal (sec. 410) to replace the Company Law Board (CLB) and Board for Industrial and Financial Reconstruction (BIFR). It was constituted on 1 June 2016 by the Government of India and was based on the recommendation of V. Balakrishna Eradi Committee in the year 1999 to examine with regard to the desirability of changes in existing law relating to winding up of companies to achieve transparency and avoid delays.

Powers

  1. Class action – Section 245 of Companies Act, 2013 provide remedies where the offender will be punished and the people involved whether it is the company or directors or auditor or experts will be liable for civil action wherein they have to compensate the shareholders and depositors for the losses caused to them on account of the fraudulent practices or improprieties. the company restrains from doing any activities outside the scope of Memorandum of Association (MOA) and Article of Association (AOA). A class action can be filed against any type of companies whether the private or public company.
  2. Deregistration of Companies – In section 7(7) of Companies Act, 2013 where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the document or declaration fields empowers cancellation of the registration and dissolving the company.
  3. Refusal to transfer shares – Complaints of rejection of companies to transfer shares and securities and adaptation of register of members u/s 58 & 59 of the Companies Act, 2013. This section deals with remedies in case of default or fraud by the company to provide acknowledgment of contracts dealing with the transfer of securities.
  4. Annual General Meeting – Under section 97 & 98 of Companies Act, 2013, general meetings are required to assess the opinion of shareholders from time to time. If the embers of the company fail to convene the meeting within a particular time then the member of the company may give an application with a reasonable circumstance to the tribunal to convene such meeting
  5. Conversion of Public Company into Private CompanySection 13, 14, 15 & 18 of the Companies Act, 2013 read with Rule 41 of Companies (Incorporation) Rule, 2014 regulates the conversion of public limited company into a private company. An approval of NCLT has required for such conversion and the tribunal may at its discretion impose certain conditions subject to which approval may be granted under section 459 of the Companies Act, 2013.
  6. Reopening of Accounts and Revision of financial statement – Section 130 and 131 of the Companies Act, 2013 prohibit the company from suo moto opening its accounts or revising its financial statement. Section 130 is mandatory where the tribunal may direct the company to reopen its account when certain circumstances are shown. And section 131 allows the company to revise its financial statement but does not permit the reopening of accounts. The company can suo moto approach the tribunal u/s 131 of the Act via its directors for revising its financial statement.
  7. Change in a financial yearSection 2(41) of the Companies Act, 2013 every company is required to follow a uniform financial year ending on 31st March. It provides an exception where certain companies can apply to the tribunal to have a different financial year.
  8. Order investigationSection 213 of Companies Act, 2013 hands over power to NCLT with respect to the investigation. An investigation into the affairs of the company can be ordered on an application of 100 members. Furthermore, if any person who is not related to the company is able to convince the tribunal about the existence of circumstances to order an investigation then the tribunal has the power to order an investigation. Any investigation ordered by NCLT can be conducted either in India or in any other country. If after investigation it is proved that business is being conducted either for fraudulent or unlawful purposes or intent to defraud the creditors or the member or any other person then every officer of the company engaged either in formation or managing the affairs of the company shall be punished.

Advantages

  • It reduces the multiplicity of litigation before different forums and courts.
  • NCLT is a specialized court only for Corporates i.e., companies registered in India.
  • NCLT consists of both judicial and technical members while deciding on matters.
  • Reduction of cases with speedy disposal.
  • Its branches are spread across India providing justice at a close range.
  • The time taken for winding up a company will be reduced.
  • Both NCLT and NCLAT have exclusive jurisdiction.

Judicial interpretation

In S.P. Sampath Kumar vs Union of India, 1987 it was held that alternative institutional mechanism theory must be adopted and since the population of the country is increasing which leads to the increase in disputes in courts creates a burden on court to take up the matter. This was held after the demand of a specialized tribunal was presented before the Supreme Court of India.

The validity of Chapters 1B & 1C challenged in Union of India vs R. Gandhi, President, Madras Bar Association and Madras Bar Association vs Union of India – The Madras High Court in its judgment held that creation of the tribunal and vesting the powers exercised by High Court and Company Law Board was not unconstitutional. Article 323A and 323B of the Constitution are enabling provisions for setting up of tribunals and the Articles cannot be interpreted to mean that they prohibited the legislature from establishing tribunals. The Madras High Court held that several provisions of chapters 1B & 1C were defective and thus violative of the basic constitutional scheme of separation of power and independence of the judiciary. In 2006, the Union of India went in appeal against the Madras High Court Order before the Supreme Court of India and it was held that NCLT and NCLAT as envisaged by the 1B & 1C of the Companies Act, 1956 and it agreed with the view of Madras High Court that certain provision of 1B & 1C of 1956 Act was defective and required rectification. The Supreme Court of India after referring the provisions as inserted by Companies (second amendment) Act, 2002 and considering as to whether there is a clash between powers of the High Courts of India with such amended provisions finally validated the creation of NCLT and NCALT.

In NUI Pulp and Paper Industries Pvt. Ltd. Vs Ms. Roxcel Trading GMBH, 2019 it was held that a National Company Law Tribunal Is Empowered to pass the ad-interim order under Rule 11 of the National Company Law Tribunal Rules, 2016 before admitting any application filed under section 7,9 & 10 of the Insolvency and Bankruptcy Code, 2016. Rule 11 of the National Company Law Tribunal Rules, 2016 is concerned with the ‘inherent powers’ of the National Company Law Tribunal and reads –
“11. Inherent Powers- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

Conclusion

The establishment of NCLT and NCLAT will reduce delays involved in the disputes regarding company law proceedings. There will be a speedy remedy in resolving the disputes to rationalize the process of appeal and reduce the burden on High Courts and will dispose of cases expeditiously. The amendments made in the Company Act so far has simplified an enhanced way of proceedings for healthier corporate governance practice. It is expected that once all relevant provisions under the Companies Act and the Bankruptcy Code are made effective, these tribunals would provide holistic solutions to issues being faced by companies.

Reference