COMPANY LAW I

FIRST INTERNAL ASSESSMENT

NAME: SAMARTH DAHIYA

PRN: 19010126043

COURSE: BBA LLB (HONS)

DIV: A

SEMESTER - V
 Research Paper

Topic - Constitutional Validity of the establishment of NCLT and its role in

dispute resolution

Abstract - Unresolved commercial conflicts have been a key hindrance in India's progress
toward greater ease of doing business. Even if there is a legal deadline for a settlement still
thousands of cases are outstanding. Even domestic firms chose to relocate their headquarters
outside India due to this reason. This situation makes it difficult for fresh investments to come in.
In addition to slowing down new investments, delays in resolving disputes lower the value of
assent and make firms and the market less efficient, to resolve this problem the National
Company Law Tribunal (NCLT) was constituted. Several issues have been raised in this paper
through literature review of already available research papers. The subject matter of this paper is
the constitutionality of the NCLT body in charge of adjudicating and resolving company issues
matters. The paper further discusses the role of NCLT in dispute resolution in detail.

Introduction - The NCLT is a quasi-judicial body that administers the Companies Act's (the
Act) civil dispute resolution procedures.1 It is the most significant jurisdiction of the firm since it
is essential to keeping the company's peace by resolving the conflict. The NCLT was established
by the Central Government in accordance with Section 408 of the Companies Act of 2013 on
June 1st, 2016.2 “This led to the dissolution of the Company Law Board (CLB), Board for
Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial &
Financial Reconstruction (AAIFR).”3 All the pending cases of CLB matters and proceedings
were reallocated to the NCLT in accordance with the permission of the Ministry of Corporate
Affairs (MCA).

Literature Review – The NCLT may reject an Insolvency and Bankruptcy Code (IBC)
application if there is a record of disagreement in the information utility. 4 With the establishment
1
Prachi Manekar-Wazalwar, NCLT – Powers & Functions under Cos. Act, 2013, Law Street India, (June 22, 2016),
http://www.lawstreetindia.com/experts/column?sid=164
2
Dr. G.K. Kapoor & Dr. Sanjay Dhamija, Company Law and Practice - A Comprehensive Text Book on
Companies Act 2013, 1067 (Taxmann, 2019)
3
Mandar D Rane, All about National Company Law Tribunal (NCLT), Taxguru, (Aug 11, 2015),
https://taxguru.in/company-law/national-company-law-tribunal-nclt.html
4
Navin K. Pahwa, Corporate Insolvency: Its Operations and Emerging Problems, 30 National Law School of India
Review 111, (2018)
of NCLT, corporate civil issues have been moved forward more quickly. In addition, it has made
the court system considerably more efficient. There is less time utilized for matters to be heard
and decided now because of the exclusive jurisdiction granted to the NCLT. Instead of CPC and
CrPC, NCLT rather adheres to the principles of natural justice. 5 The NCLT provides benefits like
class-action suits (Investors who have suffered losses as a result of the company's fraudulent and
unlawful actions may be compensated through NCLT), “Reopening of Accounts & Revision of
Financial Statements (Sections 130 and 131 of the Companies Act, 2013, read with Sections 447
and 448, specify the circumstances under which NCLT may review a company's financial
accounts.), Deregistration of Companies (The NCLT has the power to deregister a company if it
was registered illegally or incorrectly.) etc.”6

Gaps in Literature Review

 Amendments to be made in IBC and Company Law under NCLT were not discussed to
increase overseas investment.
 The reasons for preference of NCLT over the previous institutions were not discussed.
 Factors and procedures leading to the creation of NCLT were not debated upon.
 Light has not been shed on the constitutionality of NCLT.

Research Objectives -

a. To debate the constitutional legality in the creation of NCLT.

b. To discuss function of NCLT.

Analysis – The constitutional validity of the NCLT as well as some the Act’s Sections have
been challenged several times. The NCLT's constitutional legitimacy had been maintained, but
particular clauses were found to be in breach of the constitution's principles by the Supreme
Court. The NCLT is based on the Justice Eradi Committee's recommendations on insolvency and

5
Gayathri, U. & Arya, R., A Study on the importance of National Company Law Tribunal in India, 120
International Journal of Pure and Applied Mathematics, 41-55, 2018.
6
Niki Shah, National Company Law Tribunal and Appellate Tribunal: An Analysis, Indian Politics and Law Review
Journal.
bankruptcy of the company. NCLT deals with all procedures under the Act, "including
arbitration, compromise, agreements, and company reconstruction and winding up."7

It is possible to create tribunals under the Constitution's Articles 323A and 323B. As long as
there is legislative competence, the legislature may create a tribunal that is not covered by these
Articles. Article 245 of India's Constitution also paved the way for the establishment of the
NCLT and National Company Law Appellate Tribunal (NCLAT).

Cases on the constitutionality of NCLT

In S.P. Sampath Kumar v. UOI,8 the Supreme Court expressed the need for special tribunals to
ensure the judiciary is not overburdened with cases.

It was established in Rai Sahib Ram Jawaya Kapur v. The State of Punjab, 9 that the legality of
tribunals under the Indian Constitution is in accordance with the concept of separation of power.

It was brought in 2004 by the Madras Bar Council, where “the constitutional legality of the
legislature's incorporation of NCLT and NCLAT in Parts 1B and 1C of the Companies Act, 1956
was challenged.” According to the High Court, the establishment of the NCLT and the transfer
of powers formerly held by the High Court and the CLB to the new tribunal were not in violation
of the Constitution. However, the High Court also found certain flaws in Parts 1B and 1C of the
Act which were asked to be corrected.

In Union of India v. R. Gandhi, President of the Madras Bar Association, 10 the judgment of the
High Court, which found that the establishment of the NCLT and NCLAT and their vesting of
the powers and jurisdiction of the High Court in company law cases were not unconstitutional,
was affirmed by the Supreme Court. After being found to be unconstitutional in their current
form, Parts 1B and 1C of the Act may be rendered operative by making the recommended
changes in the judgment. The legitimacy was approved since NCLT was not violative of
separation of power (so not violative of basic structure doctrine).

7
Ians, Supreme Court bench examines validity of NCLT and NCLAT, CNBC TV, ( Mar 27, 2019, 07:33 PM),
https://www.cnbctv18.com/legal/supreme-court-bench-examines-validity-of-nclt-and-nclat-2745411.htm
8
(1985) 4 SCC 458
9
AIR 1955 (2) SCR 225
10
(2010) 11 SCC 1 (India).
Finally in 2015, in Madras Bar Association v. Union of India, the court held that a legislator may
delegate judicial authority over a topic to a tribunal. Any tribunal to which current court
authority has been transferred should likewise be a Judicial Tribunal. The legislature may
reorganize the jurisdictions of Judicial Tribunals and when constituting Tribunals, it can
prescribe the eligibility criteria but that would be subject to review by the Supreme Court. The
court may intervene to protect the judiciary's independence. These checks and balances will help
preserve the separation of powers and prevent any deliberate or accidental intrusion by the
legislature or the executive. Hence NCLT was held to be constitutionally valid.

NCLT Role in Dispute Resolution

With the creation of the NCLT, resolving all types of business disputes has become easier. The
following topics are covered: “NCLT decides on all procedures under the Act, such as
arbitration, compromise, reconstruction, and winding up.”11 The Insolvency and Bankruptcy
Code of 2016 is used to conduct the procedures. When a business fails to make payments to its
creditors, the Insolvency Resolution Process (IRP) is triggered by NCLT. NCLT deals with
mismanagement and corporate oppression issues. NCLT stops companies from cheating
depositors and shareholders by freezing their funds. Depositors may file a class-action lawsuit in
such cases. Registration errors or fraud may be examined and the company may be deregistered
by NCLT. NCLT may investigate a company's dealings if it thinks they damage the public or the
firm's interests. NCLT can change the fiscal year of the company.

The NCLT operates along the lines of a normal Court and is required to fairly and without bias
and offer conclusions from decisions in the form of orders in the continuation of such
decisions.12 The orders issued by the NCLT may aid in settling a problem, correcting mistake
committed by the corporation, or levying fines and fees, and may change the rights,
responsibilities, duties, or privileges of the persons involved. NCLT listens to cases from both
sides and gives the final judgment like a usual court.

Since this process takes too long, similar to the courts, mediation and arbitration are also an
option. The Companies Act of 2013 included a new clause on the establishment of a mediation
11
Anonymous, NCLT and Must Know Facts, NRI Legal Services, https://www.nrilegalservices.com/nclt-national-
company-law-tribunal/
12
Anonymous, NCLT – Understanding National Company Law Tribunal and its power, Clear Tax, (Jun 07, 2021 -
09:35 PM), https://cleartax.in/s/national-company-law-tribunal
and conciliation panel. According to Section 442 of the Companies Act of 2013, a mediation
panel of specialists may be established for the purpose of mediating disputes.

Conclusion - Having a single venue for all company law issues, such as the NCLT, is an
important step towards enacting institutional changes. By reducing the number of appellate
authority, the Companies Act, 2013 has streamlined the appeals process, guaranteeing fast and
final resolution of disputes. As seen by the cases mentioned above, there is no doubt in the
constitutional validity of NCLT. The Court’s view has always remained the same on this topic.
The NCLT was granted constitutional legitimacy in this instance in order to keep the business
sector tranquil both internally and outside. All of the parties involved hope for a quick resolution
of any issue. With these new provisions in the Companies Act 2013 and developments like
NCLT and NCLAT, India will rise in the World Bank's ease-of-doing-business rankings.

There are several issues with the NCLT, but the most serious is its inability to resolve a business
dispute in a reasonable amount of time despite the purpose for which it was created. Proper
execution by the Government is required for quick resolution of cases. While NCLT's capacity
and facilities are being built over time, the new structure should make the dispute resolution
process for business disputes quicker and easier.