The Tribunals: Madras Bar Association v. Union of India (2015) and Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2019)

Chapter XXVII of the Companies Act 2013 replaced the Company Law Board and much of the High Court's company jurisdiction with the National Company Law Tribunal and the National Company Law Appellate Tribunal. Two questions follow, and each of these cases answers one.

Madras Bar Association answers how the Tribunal must be constituted if it is to take over work formerly done by High Court judges. Embassy Property answers what the Tribunal may and may not decide once it is functioning. Between them they define the institution: a body that must be judicially manned because it replaces a court, but which is a creature of statute and therefore has no general supervisory power over the executive.

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# Part I — Madras Bar Association v. Union of India (2015)

This petition was the sequel to earlier litigation that ended in the Constitution Bench judgment in Union of India v. R. Gandhi, President, Madras Bar Association — referred to throughout as the 2010 judgment.

In that earlier round the petitioner had challenged the creation of the NCLT and NCLAT and the provisions inserted as Parts 1B and 1C of the Companies Act, 1956 by the Companies (Second Amendment) Act, 2002. The Madras High Court, by judgment of 30 March 2004, held that creating the NCLT and vesting in it powers previously exercised by the High Court and the Company Law Board was not unconstitutional, but identified defects in several provisions and held that unless those defects were removed it would be unconstitutional to constitute the Tribunals to exercise that jurisdiction. Both sides appealed; the Constitution Bench in 2010 approved the constitutional validity of the NCLT and NCLAT and largely agreed with the High Court's list of defects, tabulating the corrections required in para 120.

The 2015 petition arose because the Companies Act 2013 re-enacted provisions that repeated some of the very defects the 2010 judgment had condemned.

The corrections tabulated there, and reproduced in this judgment, are the substance of the law on tribunal composition and should be learned as a list:

1. Only judges and advocates may be judicial members. High Court judges, judges who have served as a District Judge for at least five years, or a person who has practised as a lawyer for ten years. Persons holding a Group A or equivalent government post with experience in the Indian Company Law Service (Legal Branch) or Indian Legal Service (Grade 1) cannot be judicial members; their expertise "will at best enable them to be considered for appointment as technical members."
2. Members must be of equal standing to High Court judges. Because the NCLT takes over the functions of the High Court, "the members should as nearly as possible have the same position and status as High Court Judges", achieved not by paying them a judge's salary but by appointing persons "as nearly equal in rank, experience or competence to High Court Judges". Only officers holding the rank of Secretary or Additional Secretary could be technical members, and the provisions making Joint Secretaries eligible were invalid.
3. A technical member must actually be an expert. The expression "presupposes an experience in the field to which the Tribunal relates", so a member of the Indian Company Law Service who worked in the Accounts Branch, or an officer who has only incidentally dealt with some aspect of company law, is not qualified.
4. General expertise is not company-law expertise. A provision treating fifteen years' special knowledge in "science, technology, economics, banking, industry" as expertise in company law was invalid; but fifteen years in "industrial finance, industrial management, industrial reconstruction, investment and accountancy" could qualify a person as an expert in the revival of companies.
5. The Selection Committee. A committee chaired by the Chief Justice of India or his nominee, so composed that the judiciary is not outnumbered by the administration.

The reason underlying all of this is stated in para 112, which the 2015 Court reproduced because it "provides a complete answer" to the Government's defence:

"What is a matter of concern is the gradual erosion of the independence of the judiciary, and shrinking of the space occupied by the Judiciary and gradual increase in the number of persons belonging to the civil service discharging functions and exercising jurisdiction which was previously exercised by the High Court. There is also a gradual dilution of the standards and qualification prescribed for persons to decide cases which were earlier being decided by the High Courts."

The Court grouped the challenge into three compartments:

1. the validity of the constitution of the NCLT and NCLAT;
2. the qualifications, term of office, salary and allowances of the President and Members;
3. the structure of the Selection Committee.

Incidental questions were raised about the power to punish for contempt under s. 425 and the power of the Central Government to constitute Benches.

The writ petition was allowed in part.

Issue 1 — constitution. The validity of the NCLT and NCLAT was upheld: this stood concluded by the 2010 judgment, and the Court held "that there is no merit in this issue."

Issue 2 — qualifications. Section 409(3) of the 2013 Act again made a Joint Secretary to the Government of India or equivalent eligible for appointment if he had fifteen years' experience in the Indian Corporate Law Service or Indian Legal Service with at least three years in the pay scale of Joint Secretary. The Court held this "clearly in the teeth of dicta pronounced in 2010 judgment." The Government's justification — a shortage of Additional Secretary level officers, and the functional similarity of the two levels — was rejected as "not legally sustainable, having regard to the clear mandate of 2010 judgment."

The holding: "we hold that Section 409(3)(a) and (c) are invalid as these provisions suffer from same vice. Likewise, Section 411(3) as worded, providing for qualifications of technical Members, is also held to be invalid." For technical members the directions in sub-paras (ii) to (v) of para 120 "will have to be scrupulously followed", and corrections were ordered to s. 409(3).

Issue 3 — the Selection Committee. Section 412(2) created a five-member committee in which three members came from the administrative branch and two from the judiciary, and gave the Chief Justice of India or his nominee no casting vote. The Court identified the vice: this composition "will result in predominant say of the members belonging to the administrative branch". The Government's arguments — that the 2010 recommendation was in broad terms, that the Secretary of the Department of Financial Services had to be included because BIFR and AAIFR were being subsumed, and that selection committees in practice decide unanimously so a casting vote was unnecessary — were all rejected. The ratio of the 2010 judgment was "that it is the Chairperson, viz. Chief Justice of India, or his nominee who is to be given the final say in the matter of selection with right to have a casting vote." Accordingly, "we hold that provisions of Section 412(2) of the Act, 2013 are not valid", with a direction to bring the provision into accord with sub-para (viii) of para 120.

The incidental challenges failed. On the contempt power under s. 425 and the Central Government's power to constitute Benches, the Court found no legal strength in the arguments: these provisions are contained in a statute enacted by Parliament, and the petitioner could not show how they were unconstitutional.

A practical postscript. The affidavit of 7 May 2015 recorded that approval had been obtained for one Chairperson and five Members of the NCLAT, one President and 62 Members of the NCLT, two Registrars, a Secretary and 246 supporting staff, and that draft rules had been prepared. The Court observed that "the only step which is left to make NCLT and NCLAT functional is to appoint President and Members of NCLT and Chairperson and Members of NCLAT", and expressed the hope that remedial measures would be taken so that the Tribunals could begin functioning.

Where a tribunal is created to exercise jurisdiction previously exercised by the High Court, the members must be as nearly as possible of the same position, status, rank, experience and competence as High Court judges; only judges and advocates may be judicial members; a technical member must have expertise in the field to which the tribunal relates; and the committee that selects them must not be so composed that the administrative branch predominates over the judiciary or that the Chief Justice or his nominee lacks the final say. Provisions of the Companies Act 2013 that repeated defects already identified in the corresponding provisions of the 1956 Act are invalid to that extent.

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# Part II — Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2019)

A company claiming to be a financial creditor applied to the NCLT, Chennai under s. 7 of the Insolvency and Bankruptcy Code, 2016 against the corporate debtor. By order of 12 March 2018 the NCLT admitted the application, ordered the commencement of the Corporate Insolvency Resolution Process (CIRP) and appointed an Interim Resolution Professional.

The corporate debtor held a mining lease granted by the Government of Karnataka, due to expire on 25 May 2018. A notice for premature termination had already been issued on 9 August 2017 alleging violation of statutory rules and of the terms of the lease, but no order of termination had been passed before the CIRP began.

The Interim Resolution Professional wrote on 21 April 2018 to the Director of Mines and Geology seeking the benefit of a deemed extension of the lease. By order of 26 September 2018 the Government rejected the proposal, on the ground that the corporate debtor had contravened the terms of the lease deed, Rule 37 of the Mineral Concession Rules, 1960 and Rule 24 of the Minerals Rules, 2016.

The Resolution Professional applied to the NCLT to set that order aside. By order of 11 December 2018 the NCLT allowed the application, set aside the Government's rejection, and directed the Government of Karnataka to execute Supplemental Lease Deeds.

The Government moved the High Court under Article 226 rather than appealing to the NCLAT, and on 12 September 2019 the High Court granted an interim stay. The Resolution Applicant, the Resolution Professional and the Committee of Creditors appealed to the Supreme Court.

1. Whether the High Court ought to interfere under Articles 226/227 with an order of the NCLT in a proceeding under the Code, ignoring the availability of a statutory appeal to the NCLAT, and if so in what circumstances;
2. Whether questions of fraud can be inquired into by the NCLT and NCLAT in proceedings under the Code.

The appeals were dismissed, with no order as to costs. The High Court was justified in entertaining the writ petition.

"The NCLT, being a creature of a special statute to discharge certain specific functions, cannot be elevated to the status of a superior court having the power of judicial review over administrative action."

Question one — jurisdiction

The Attorney General's submission, which the Court accepted in substance, was that where a case falls into the category of inherent lack of jurisdiction, the Tribunal's exercise of jurisdiction is amenable to Article 226. The contours of the NCLT's jurisdiction are defined by s. 60(5) of the Code, and its powers under s. 60(4) are akin to those of the Debts Recovery Tribunal, so its jurisdiction is confined to contractual matters inter partes.

From the statutory scheme the Court drew the general proposition: "wherever the corporate debtor has to exercise a right that falls outside the purview of the IBC, 2016 especially in the realm of the public law, they cannot, through the resolution professional, take a bypass and go before NCLT for the enforcement of such a right."

Applied to the facts: "NCLT did not have jurisdiction to entertain an application against the Government of Karnataka for a direction to execute Supplemental Lease Deeds for the extension of the mining lease. Since NCLT chose to exercise a jurisdiction not vested in it in law, the High Court of Karnataka was justified in entertaining the writ petition, on the basis that NCLT was coram non judice."

Question two — fraud

Here the appellants won the point and still lost the case, which is why the case is a good teaching vehicle.

The Court held their objection "well founded". Section 65 of the Code deals with fraudulent or malicious initiation of proceedings: if a person initiates the insolvency resolution process or liquidation proceedings "fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or liquidation", the adjudicating authority may impose a penalty of not less than one lakh rupees and up to one crore rupees, with a parallel provision in s. 65(2) for voluntary liquidation initiated with intent to defraud. Section 66 allows fraudulent trading during the resolution process to be inquired into, and section 69 makes an officer of the corporate debtor and the corporate debtor liable for transactions intended to defraud creditors.

Therefore the NCLT "is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions", and by corollary so is the NCLAT. If the CIRP had indeed been begun "not for the genuine purpose of resolution of insolvency or liquidation, but for the collateral purpose of cornering the mine and the mining lease", that would fall squarely within s. 65(1). Consequently, fraudulent initiation cannot by itself be a ground for bypassing the statutory appeal under s. 61.

The synthesis

The upshot is the sentence to carry into an answer on the Tribunal's jurisdiction: though the NCLT and NCLAT "would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes such as those arising under MMDR Act, 1957 and the Rules issued thereunder, especially when the disputes revolve around decisions of statutory or quasi-judicial authorities, which can be corrected only by way of judicial review of administrative action."

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1. On the constitution of the Tribunals, use Madras Bar Association as a structured answer: validity upheld; qualifications of judicial and technical members; the Selection Committee; and para 112 on the erosion of judicial independence as the reason behind all three.
2. Name the sections held invalid — ss. 409(3)(a) and (c), 411(3) as worded, and 412(2) — and say what each was about. Precision here separates a good answer from a vague one.
3. Note what survived: the contempt power in s. 425 and the Central Government's power to constitute Benches.
4. On jurisdiction, state the Embassy Property proposition first: a tribunal created by a special statute for specific functions is not a superior court with the power of judicial review of administrative action.
5. Keep the two limbs of Embassy Property apart. Fraud in the initiation of the process is within the Tribunal's competence, so it is no excuse for skipping the appeal; a dispute about a public-law decision of a statutory authority is outside it, and an order made in such a dispute is coram non judice and can be attacked directly under Article 226.

In a problem question about an NCLT order, ask two questions: is the right being enforced one that arises inter partes under the Code and the Companies Act, or is it a right in the realm of public law against a statutory authority; and is there a statutory appeal that ought to have been taken? The first determines jurisdiction; the second determines the forum.