INDEX

1. INTRODUCTION………………………………………………………..
2. BACKGROUND OF THE CASE…………………………………….
3. FACTS…………………………………………………………………
4. ISSUES………………………………………………………………
5. DECISSION OF THE SUPREME COURT…………………………….
6. CONSTITUTION OF NCLT AND NCLAT PERMANENTLY………….
7. DEVELOPMENT AFTER R, GANDHI CASE………………………….
8. CONCLUSION……………………………………………………………….

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 Union of India v. R. Gandhi, President, Madras Bar Association
(2010) (5) SCALE 514

 INTRODUCTION:

The 42nd amendment of the constitution introduced Part XIV-A which included Article 323A
323B providing for constitution of tribunals dealing with administrative issues and other matters.
Tribunals are adjudicating bodies have been recognized in the constitution under Article 136 and
227. The introduction of Article 323A and 323B was done with the primary objective of
excluding the jurisdiction of the High Court under Article 226 and 227, except the jurisdiction of
the Supreme Court under Article 136 and for creating an effective alternative institutional
mechanism or authority for judicial review. The purpose for establishment of tribunals to the
exclusion of the jurisdiction of the High Court was done to reduce the pendency and lower the
burden of case load.1

 R. Gandhi Case:

This case is for and against the Tribunalisation of company law in India. The following
discussion culminates from the Constitutional Bench Judgment of the Supreme Court that upheld
the establishment of the National Company Law Tribunal (NCLT) and the National Company
Law Appellate Tribunal (NCLAT), in an appeal filed by the Union of India against a Madras
High Court judgment. The case in discussion is Union of India v. R. Gandhi / Madras Bar
Association v UOI. What was effectively held in the judgment was to uphold the legislative
competence of the Parliament to create the NCLT and NCLAT. In the present case, Parliament
passed Companies (Second amendment) Act, 2002 establishing NCLT and NCLAT. The
committee mentioned multiple proceedings to be the main cause for vexatious litigation and thus
recommend establishing tribunals to deal with matters pertaining to common law and to transfer
the jurisdiction of High Courts and other boards to these tribunals. This step of Government was
challenged by Madras Bar Association.

1
I. P. Massey, Administrative Law 181, Eastern Book Company (9 th ed., 2017)

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 BACKGROUND OF THE CASE:

The idea of setting up NCLT was proposed for the first time by the Justice Eradi Committee
constituted in 1999 to examine the laws relating to Insolvency and Winding up of Companies.
The committee recommended the setting up of a national tribunal.

In furtherance to the recommendations of Justice Eradi Committee, the Companies (Second

Amendment) Act, 2002 (2002 Amendment Act) vide insertion of new Parts IB and IC provided
the provisions for setting up of NCLT and NCLAT to replace the existing CLB and for transfer
of all matters or proceedings or cases pending before the CLB to the NCLT and to dispose of
such cases in accordance with the provisions of the Companies Act, 1956 and this 2002
Amendment Act.

The said 2002 Amendment Act was never notified as it was challenged in the High Court at
Madras by the Madras Bar Association.

 FACTS:

The Government of India constituted a High Level Committee in 1999 under the Chairmanship
of Justice V. Balakrishna Eradi to examine the existing laws on insolvency of companies and
winding-up proceedings and suggest reforms to avoid delay involved. The Committee inter alia
identified multiplicity of court proceedings as the most significant reason for the critical delay in
dissolution of companies. In line with the laws on corporate insolvency prevailing in industrially
advanced countries, the Committee recommended the constitution of NCLT and NCLAT
combining the powers of the Company Law Board ("CLB") under the Companies Act. Board for
Industrial & Financial Reconstruction ("BIFR") and Appellate Authority for Industrial &
Financial Reconstruction ("AAIFR") under the Sick Industrial Companies (Special Provisions)
Act, 1985 and the jurisdiction and powers relating to winding up presently vested in the High
Courts. Pursuant to the recommendations of the Committee, the Company (Second Amendment)
Act, 2002 was enacted to introduce parts IB and 1C in the Companies Act, providing for the
establishment of NCLT and NCLAT.") The constitutionality of the Company (Second

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Amendment) Act, 2002 was challenged in the Madras High Court on various grounds. The
Madras High Court by its order dated March 30, 2004 held that establishment of NCLT and
NCLAT and vesting in them the powers hitherto exercised by the High Courts and CLB was not
unconstitutional. Nevertheless, the Madras High Court concluded that various provisions of Parts
IB and 1C suffered from constitutional infirmities which had to be sufficiently amended to
establish NCLT and NCLAT.2 Thereafter, the order of the Madras High Court was challenged in
the Court on the following grounds:

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 NCLT and transferring the entire company jurisdiction of the High
Court to the tribunal are violative of the doctrine of Rule of Law, Separation of Powers
and Independence of the Judiciary;
iii. The various provisions of Parts IB and 1C of the Companies Act are defective and
unconstitutional, being in breach of constitutional principles of Rule of Law, Separation
of Powers and Independence of Judiciary.

 ISSUES:

1) Validity of the constitution of NCLT and NCLAT

2) Qualifications and Other Terms of the President and Members of the NCLT as well as
Chairman and Members of NCLAT

3) Structure of the Selection Committee for appointment of President /Chairperson /Members.

2
Union of India v. R. Gandhi, President of Madras Bar Association (2010)

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 DECISION OF THE SUPREME COURT:

(K.G. Balakrishnan, CJI; R.V. Raveendran; D. K. Jain; P. Sathasivam And J.M. Panchal, JJ.
Five judges constitutional bench)

The Supreme Court upheld the constitutionality of NCLT and NCLAT in exercising the powers
and jurisdiction of the High Court subject to the necessary changes to be made in the Companies
Act, 1952 as amended in 2002, through suitable amendments Court acknowledged and upheld
the constitutional power of the parliament to constitute tribunals for adjudication of disputes. The
legislative competence of the Parliament to provide for creation of courts and tribunals can be
traced to Articles 245, 246 and 247 of the Constitution read with various entries in the Union List
(List I of Seventh Schedule) and the Concurrent List III of Seventh Schedule) which is in no way
affected or controlled by Articles 323A or 323B of the Constitution.

Articles 323A and 323B are enabling provisions which permit the Parliament to provide for
adjudication or trial by tribunals of the matters specified therein. However the Articles cannot be
interpreted to mean that the Parliament is prohibited from establishing tribunals not provided
specifically under those Articles, as long as there is legislative competence under the appropriate
entry in the Union List or the Concurrent List. Therefore, even though
revival/rehabilitation/regulation/winding up of companies are not matters which are mentioned in
Articles 323A and 323B, the Parliament has the legislative competence to constitute NCLT and
NCLAT to deal with matters arising out of the Companies Act.

Court held that it cannot be assumed that constitution of tribunals and transferring judicial
functions per se breach Rule of Law, Independence of Judiciary and Separation of Powers as the
Constitution contemplates judicial power being exercised by both courts and tribunals What is
crucial is to ascertain whether the constituted tribunals respect and maintain the principles of
Independence and Separation of Powers. The constitution of NCLT and NCLAT and the
eligibility criteria of its members shall be subject to judicial review If the court in exercise of
judicial review is of the view that the Rule of Law Independence of Judiciary and Separation of
Powers are compromise by such tribunalisation, the court may interfere to preserve the same.
Such an exercise will be part of the checks and balances to maintain the Separation of powers
and to prevent any encroachment, by other organs of the State.

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In this light, the Court pronounced its ruling on three principal issues:

1) Validity of the constitution of NCLT and NCLAT (Issue 1)

On this issue, the Court essentially reverberates its decision on the ground that all arguments
pertaining to constitutionality were already addressed by the Court in that case and it
"specifically rejected the contention that transferring judicial function, traditionally performed by
the Courts, to the Tribunals offended the basic structure of the Constitution".

2) Qualifications and Other Terms of the President and Members of the NCLT as well as
Chairman and Members of NCLAT (Issue 2)

In order to empower CJ H. L. Dattu's emphasis on the principles of independence of judiciary

and separation of powers, the following order was passed with respect to Principal issues. The
first order was to hold Section 409(3) (a) and (c) of the Companies Act, 2013 as invalid, since
these provisions suffered from unconstitutionality. Likewise, Section 411(3), which provided for
qualifications of Technical Members, was also held invalid.

Also, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can
be considered for appointment as Technical members of the National Company Law Tribunal
and only persons having ability, integrity, standing and special knowledge and professional
experience of not less than fifteen years in industrial finance, industrial management, industrial
reconstruction, investment and accountancy, may however be considered as persons having
expertise in rehabilitation/ revival of Companies and therefore, eligible for being considered for
appointment as Technical Members.

3) Structure of the Selection Committee for appointment of President /Chairperson

/Members. (Issue 3)

The 2013 Act provided for a 5-member committee without a casting vote to the Chief Justice of
India (or nominee) which was found at fault by the Constitution Bench in 2010 judgment. The
Court specifically remarked that instead of 5 member Selection Committee, it should be 4
member Selection Committee.

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Hence, with the new insertions and directions provided by the Court, it is observed that the
Selection Committee shall broadly be on the following lines:

a) Chief Justice of India or his nominee Chairperson (with casting vote) ;

b) A Senior Judge of the Supreme Court or Chief Justice of High Court-Member;
c) Secretary in the Ministry of Finance and Company Affairs Member; and
d) Secretary in the Ministry of Law and Justice-Member.

 Constitution of NCLT and NCLAT permanently:

Even after passing of Supreme Court judgment with respect to constitutional validity of setting
up of NCLT and NCLAT, the same could not be established. Time passed and the Parliament of
India notified the Companies Act, 2013 ("2013 Act") which replaced the (1956 Act) and
included substantial provisions with respect to the establishment, powers, operations and
jurisdiction of the NCLT and NCLAT in line with the necessary changes required by the
Supreme Court judgment.

However, the corresponding provisions relating to NCLT and NCLAT prescribed under 2013
Act was again challenged by the Madras Bar Association with respect to inconsistency in the
provisions of the 2013 Act with the directions of the Supreme Court in the previous judgment in
R. Gandhi case. The issue has finally been decided by the Constitution Bench of the Apex Court
in Madras Bar Association v. Union of India (2015) 8 SCC 583 whereby the Apex Court held
that constitution of both NCLT and NCLAT is constitutionally valid, as has been held in the
Supreme Court judgment R. Gandhi case. The Apex Court further held that, in Indian
Constitution, it is open for the legislature to provide for set up of tribunals as alternatives to the
Courts as a forum for adjudication on specialized matters, provided the tribunal in question has
all qualitative trappings and competence of the Court sought to be replaced. However, the
Supreme Court had ordered some corrections to be made with respect to the eligibility of

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technical members in consonance with the previous judgment. Thus, the Supreme Court paved
the way for the constitution of the NCLT and NCLAT under the 2013 Act.3

By this Judgment, the Supreme Court has not only paved the way for the establishment of the
NCLT, but it may also potentially lead to the notification of the remaining sections of the 2013
Act so as to make the entire legislation effective.

At a broader level, this development is significant as it might likely alter the face of corporate
litigation in India. While matters such as amalgamations, winding-up, and similar cases being
taken out of the regular Court system, one can expect greater efficiency in resolution of corporate
disputes. Similarly, the most-discussed class action mechanism could potentially alter corporate
behavior. The establishment and constitution of NCLT and NCLAT as exclusive Tribunals for
the administration of all matters arising out of the Companies Act will definitely reduce, if not
wipe out the grave delay involved in the company law proceedings, avoid multiplicity of
litigation before various forums, streamline the process of appeal and reduce the burden on High
Courts.

The constitution of the NCLT and NCLAT is a long awaited requirement of the Companies law
which has been materialized now to deal with company law matters. It is a welcome move to
various stakeholders in the industry. The industry expects a speedy and efficient disposal of the
company law matters through NCLT and NCLAT. In addition, it will also relive the various
High Courts from burden of dealing with company law matters once the NCLT will be fully
operational. Most likely on the notification of the provisions of Bankruptcy and Insolvency Code
which is on the cards, the corporate insolvency matters will be shifted from Courts/DRTs to the
NCLT. Although some provisions of the Companies Act, 2013 relating to the NCLT have not
been notified yet, it is expected that the MCA will expand the NCLT to its full capacity at the
earliest over a period of time.

3
Madras Bar Association v. Union of India (2015) 8 SCC 583

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 DEVOPMENT AFTER R. GANDHI CASE:

The National Company Law Tribunal established as a quasi-judicial body in India that
adjudicates issues relating to Indian companies. The tribunal was established under
the Companies Act 2013 and was constituted on 1 June 2016 by the government of India and is
based on the recommendation of the Justice Eradi committee on law relating to insolvency and
winding up of companies. All proceedings under the Companies Act, including proceedings
relating to arbitration, compromise, arrangements and reconstruction and winding up of
companies shall be disposed of by the National Company Law Tribunal. The National Company
Law Tribunal is the adjudicating authority for insolvency resolution process of companies
and limited liability partnerships under the Insolvency and Bankruptcy Code, 2016. 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, by the Tribunal or the Appellate Tribunal.

The tribunal has thirteen benches, two at New Delhi (one being the principal bench) and one
each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur,

Kochi, Kolkata, Mumbai. And two new benches are approved to be set up in one each in Indore
and Amaravathi.

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 CONCLUSION:

The establishment and constitution of NCLT and NCLAT as exclusive tribunals for the
administration of all matters arising out of the Companies Act will definitely reduce, if not
negate the fatal delay involved in the company law proceedings, avoid multiplicity of litigation
before various form, streamline the process of appeal and reduce the burden on High Courts. All
this was make India, a more attractive destination for investment. As the Court has rightly
highlighted, NCLT and NCLAT should be judicial tribunals par excellence which is possible
only if the members are adequately qualified and confirm to the prescribed standards. Parts 1B
and IC, as presently structured severely dilute the constitutional principles of Rule of Law,
Separation of Powers and Independence of Judiciary. Such a structure the members of the
Executive are entrusted judicial functions would res NCLT and NCLAT. Hence necessary and
consequential loss of confidence in NCI amendments are to be made to Parts 1B and 1C of the
Co prerequisite to the establishment of NCLT and NCLAT.

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