National Company Law Tribunal (NCLT)

In this article, Ashish Agarwal discusses the formation and functioning of the National Company Law Tribunal (NCLT).

I. Background & Importance

The Company Law Boards (CLB) were replaced finally with the new, powerful National Company Law Tribunal (NCLT) or "The Tribunal" by passing a government notification under Section 408 of the Companies Act, 2013 on 1^st June 2016 to that effect. This was done years after the recommendation of the Justice Eradi Committee in 2002 to include it in the Companies Act, 1956 itself.

However, as lawsuits were filed challenging the NCLT's constitutionality even before it was notified, it never came to be, until three years after the Companies Act, 2013 ("the Act") was passed retaining the vision. The body is a quasi-judicial authority on all legal matters relating to companies. It hears and decides cases following the principles of natural justice and bears the exceptional powers of hearing class action suits, deregistering companies, etc.

Under Section 434 of the Act, the powers and pending cases of the CLB were transferred to the NCLT. Further in this regard, powers and functions of the Board of Industrial and Financial Reconstruction (BIFR), Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and the High Court were also laid on the new authority, making it the supreme authority in all company law matters. The NCLT presently has one Principal Bench at New Delhi and 10 subsidiary benches.

II. Composition and Rules of Procedure

The Tribunal is headed by a President, appointed by the Central Government in consultation with the Chief Justice of India. In addition, it has such other number of judicial and technical members as may be prescribed by the government.

The Tribunal is a quasi-judicial body which acts as a court of law in corporate disputes. It objectively hears disputes, examines facts and pieces of evidence, and gives orders to remedy the situation. The Tribunal is not bound by the stringent rules of the Evidence Act and other procedural codes. It has a vast arena to render justice as long as it adheres to the principles of natural justice.

The Constitution of the NCLT was challenged as unconstitutional numerous times. In the last landmark pronouncement of 2015 in the Madras Bar Association Case [1] the Court settled it that notwithstanding the fact that certain principles laid in the 2010 judgment were not adhered to, the Tribunal still stands constitutionally valid on all grounds.

III. Powers and Functions

The following are the major powers of the Tribunal under the Act:

• Class Action Lawsuits

A Class Action lawsuit is a representative suit where few people represent the homogenous injury and demands of a larger group before the court. It is an effective remedy for a large group of people scattered geographically. This makes it ideal for protecting the shareholders, and other depositors in a company that wrongfully usurps their invested money.

This power has been laid down in much detail under Section 245 of the Act where it states the orders that may be sought, the people that may be held culpable, and the requirements to be met.

• Requirements

The requirements are simple. If the members, depositors feel that the company's affairs are prejudicial to their interests, an application is to be filed with the Tribunal stating the details of the complaint and the order that is sought against the company.

In a company limited by shares, the application should be filed by a minimum of 100 depositors or one-tenth of the total number of members or a number of members who hold one-tenth of the issued share capital of the company on which all calls have been paid. In a company limited by guarantee, at least one-fifth of the total number of members in the company should file the application. These requirements may be waived by the Tribunal.

• People that Can Be Held Liable

The remedy, be it compensation, or any other action may be sought not only from the Company as a legal entity but also the following persons:

1. Directors of the Company
2. Auditor(s) or the Auditing Firm
3. Experts/Consultant/Advisors to the Company

• Orders that May Be Sought

1. Order to restrain the company from acting ultra vires or in breach of the memorandum, the articles, the Act or any other law in force.
2. If a resolution which has the effect of altering the memorandum or articles was passed by misleading the members, an order to declare such resolution void
3. Further order to restrain the Company with its representatives from acting on such resolution
4. Order to restrain the company from acting in breach of any resolution that was passed by the members.
5. Order with respect to compensation and damages
6. And any other order it may deem necessary.

• Deregistration

The Tribunal has the power to order the deregistration of companies on any ground mentioned in Section 7(7) of the Act. A company may be deregistered if, at the time of incorporation, the incorporation was sought by:

1. Furnishing false information
2. Furnishing false representation
3. Suppression of material fact in the filed documents and declarations
4. Any other fraudulent action

The Tribunal has the power to order the removal of the company's name from the Register of Companies, i.e., deregistration; and further powers to:

1. Make any orders toward management of the Company including alterations in its MoA and Articles
2. Direct that the members shall have unlimited liability
3. Order winding up of the company
4. Any other orders

• Oppression and Mismanagement

Detailed remedy against oppression and mismanagement of affairs by the Company exists with the NCLT under the Act of 2013. Section 241 provides that an application may be filed by such members of a company who feel that:

1. The affairs of the company are being conducted in a manner that is prejudicial to their, the company's, or any other member(s) interests or is oppressive to them or
2. A material change has occurred in the company's management, be it a change in Managing Director, ownership of shares, membership or otherwise, and this change makes it likely that the affairs of the company will be conducted prejudicial to them, the company or anybody else.

It is further stated that the Central Government may itself apply to the Tribunal if it becomes aware of the above-stated events with regard to any company.

Based on such application, and after giving reasonable opportunity of being heard to the company, the Tribunal may pass any orders it deemed fit to remedy the matter.

It can be said that in comparison to the Act of 1956, the provisions have set the bar for oppression a little lower, while that of mismanagement a little higher.

• Powers of Investigation

Under Section 213, the NCLT has the power to investigate companies on an application filed by its members or even an outsider if it is shown that there is sufficient evidence for doing so. The application may be filed by:

1. At least One hundred members holding at least one-tenth of the voting rights if the company has a share capital
2. One-fifth of the total number of registered members if it does not
3. Any other person may also file an application

In case of an application filed by the members, it must be accompanied by some evidence showing that the investigation is necessary.

In case of an application filed by an outsider, the Tribunal must be satisfied that circumstances exist where–

1. It is shown that the company is operating to defraud its investors, or in the oppression of a member, or was incorporated for fraudulent purposes.
2. It is shown that the Director(s) or any person concerned with the management of the company or its formation has been found guilty of misconduct, malfeasance or fraud against the company or its members.
3. It is shown that the members have not been given all such information regarding the company's affairs as they might have expected.

After giving reasonable opportunity to be heard, the inspectors appointed by the Central Government for this purpose investigate the company and if the above grounds are found to be present, each officer of the company who is in default, and the persons concerned with the formation and management of the company become liable to be punished under Section 447.

• Reopening of Accounts

The Tribunal has the power under Section 130 to order a company to reopen its book of accounts or recast its financial statements if it is satisfied on an application made in this regard by the Central Government, the SEBI, the Income Tax Authorities, or any other statutory body. The grounds are twofold –

1. That the relevant accounts were fraudulent in nature
2. That the company was mismanaged in the relevant period, and hence the financial statements are not credible.

The order is to be passed after any representation made by the statutory body or the government is heard.

• Refusal to Transfer Shares

Under Section 58, members are entitled to an appeal to the Tribunal if a private or public company refuses to register a transfer of shares or any other securities. All such refusals are to be followed by a notice from the company to the person within 30 days, stating the reasons for refusal.

In case of a private company, a person may appeal within 30 days of receipt of the notice, and within 60 days if no notice was received. In a public company, one may appeal in 60 days of notice, or 90 days if no notice was received.

The Tribunal may dismiss the appeal, or allow it directing the company to register the transfer within 10 days time, or direct rectification in the register. It may award damages.

• Conversion of Public to Private Company

Under Sections 13 to 18 of the Act, approval by the Tribunal is required for a public company to convert into a private company. The Tribunal may impose such terms as it deems fit.

• Annual General Meeting

In case the annual general meeting is not organised in a particular required time under Section 97 and 98, a member may file an application to the Tribunal to convene such meeting.

• Winding Up of Company

If the Tribunal is satisfied on any grounds mentioned in Section 242, it may direct that a company be wound up.

• Freeze Assets

Section 221 allows the Tribunal to freeze the assets of a company if necessary.

---

References

[1] Madras Bas Association v. Union of India, 2015 SCC Online SC 1094

---

1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
2. Online Exam Preparation – The Prep Destination