NCLT/NCLAT constitution & CLB dissolution – Critical issues in transition

Much to the relief of the litigants and professionals, especially those falling under the jurisdiction of the Company Law Board (‘CLB’), Mumbai, the notification about the constitution of the National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’) was issued on 1^st June 2016.  Since May 20, 2015, the Mumbai Bench of the CLB was vacant and the parties were required to approach other Benches / Principal Bench for any urgent matters.

Background:

The Companies (Amendment) Act 2002 introduced the NCLT as a dedicated Tribunal to handle certain matters under the Cos. Act 1956 and allied laws which were being handled by BIFR, CLB and HCs.  The formation of NCLT got entangled in a long litigation going up to the SC [LSI-486-SC-2015-(NDEL)]. After marathon litigations, NCLT is finally a reality in 2016 – a long journey of 14 years after it was conceived!

Transitional Issues:

While the move to notify the NCLT with effect from June 1, 2016 is a very welcome move, certain questions arise which do not seem to have any immediate solution.

First and foremost, the immediate dissolution of the CLB is something that is difficult to understand.  Except the Mumbai Bench, all other Benches were operational till  June 1, 2016.  In fact, in the Mumbai Bench also, the Hon’ble Member was appointed with effect from May 30, 2016, only for the Bench to be dissolved two days later. 

The Rules prescribing procedures before NCLT and NCLAT are not yet notified, hence the manner in which proceedings would take place is not clear.  The notification states that the matters pending before CLB shall be transferred to NCLT at the same stage as they were before the CLB.  There is no clarity, however, about matters which are in different stages in appeal before the High Courts of respective statesu/s 10F of the Cos. Act, 1956.   Whether these matters would also stand transferred to the NCLAT is not clear.  Also, there is no clarity about the interim orders granted by the CLB prior toJune 1, 2016. There is also no clarity on the matters for revival of sick companies.

As per the notification forming NCLT, various sections of the Companies Act 2013 (which have reference to ‘Tribunal’) are made effective.  However, Rules for these are yet to be prescribed. Therefore, if a public company proposes to convert itself into a private company, there is no prescribed procedure to be followed.  Interestingly, the clause (b) of Sec. 242(1) of Companies Act 2013 (relating to powers of Tribunal) is not notified. It seems that since the clause contains a reference to winding-up on just and equitable grounds, the said clause is not yet notified.  Now imagine a situation where a petitioner intends to file petition against oppression/mismanagement before the NCLT.

The basic issue that the professional will face is – under which Act and provision, the petition will be filed – u/s 397-398 of Cos. Act, 1956 or u/s 241-242 of Cos. Act, 2013? If its filed under Cos. Act, 2013, since section 242(1)(b) is not notified, then the petitioner need not prove that there is sufficient cause to order winding-up of the Company.  However, under the Cos. Act, 1956 (Sec. 397-398), the compliance of such condition was necessary.  However, once the said clause (b)is notified, the Petitioner will have to prove that there is a sufficient case to order winding-up of the company. The question remains, whether the petitioner is required to amend his petition, where the petition was already filed before clause (b) was notified.

Sec. 434 of Cos. Act, 2013, (relating to transfer of proceedings) states that only the proceedings pending before the CLB will be transferred to the NCLT.  There is no communication / order/ notification about matters presently lying in appeal u/s 10F of Cos. Act 1956 before HCs.  Further, the proceedings relating to restructuring, arbitration, winding-up, BIFR, appeal therefrom are all yet to be transferred. There remains an ambiguity about the matters relating to compounding of offences.

The notification relating to NCLT constitution was followed by the notification regarding vacation of NCLT till 30 June 2016 with provision for mentioning of urgent matters at the Principal Bench.The cause list on portal of the Mumbai Bench of the CLB(www.mumbaiclb.com),is not updated since June 2, 2016 and there is no mention about the matters which fall in the month of June 2016.All in all, there seems to be a very confusing situation which is likely to prevail at least over next few days.

Proposed Action Plan:

It is desirable that swift actions are taken by the MCA,which includes allocation of members to each of the Benches.  As is understood, requisite number of Members for each of the Benches of the NCLT and NCLAT has been shortlisted/ appointed. The Rules relating to the manner of transfer of cases from CLB to NCLT and from High Courts to NCLAT needs to be notified.  These Rules also need to clarify about the status of interim orders granted by the CLB, as the CLB is now dissolved.  The rules relating to the manner of operation / administration of NCLT and NCLAT also need to be notified.

It is learnt that the matters falling in the month of June 2016 at the Mumbai Bench of erstwhile CLB, are being adjourned and next dates of September 2016 are being assigned, although the fresh dates are not being updated on the CLB website. It is proposed that the Mumbai Bench of NCLT will have brand new premises at MTNL building, near Bombay HC. .  In all likelihood, some employees and officers of CLB will be joining NCLT.  The matters which now fall outside the jurisdiction of Mumbai NCLT (matters from Gujarat and Madhya Pradesh)are being dispatched to the respective new Bench at Ahmedabad.  And subject to the Members taking charge of the post. Considering the administration/management related issues, NCLT Mumbai will be fully operational from July 1, 2016.

Conclusion:

NCLT/NCLAT formation is indeed a very welcome long overdue reform.  It will help reduce the burden on the HCs and all matters under Cos. Act and allied laws will be handled by a separate expert body.  Since the Tribunal has the power to make its own procedures, there will be speedy remedy and matters will be disposed of expeditiously.  Giving power to the Tribunal to hear class action suits will give birth to a new and different kind of shareholder democracy in India, much like the Western countries.  This will lead to Indian companies adopting better corporate governance practices and will improve the value to the shareholders.

The transition period of shifting from CLB to NCLT will be one that is crucial and needs to be carefully handled by the MCA.  In my personal view, CLB dissolution could have been done once the NCLT actually started functioning for avoiding the extant ambiguity and chaos.  Be that as it may, we, as professionals see this as a very welcome step in Indian Corporate Law History and one that will have far reaching effects.