NCLT = BIFR + CLB + DRT + Lipstick?
“… it is observed that the average time taken in completing winding-up process of a company under courts winding up is more than ten years. The high court judge dealing with company cases is not able to sit on a day-to-day basis and is not in a position to devote the time and energy required for early disposal of winding-up cases.”
“….the suggestion that the jurisdiction of the courts be statutorily conferred on the Company Law Board (CLB) did not find favour at this stage when the CLB does not have adequate members, benches at all the seats of the high courts, and infrastructure to deal with multiplicity of proceedings involved in matters relating to winding up.”
“The problem of endemic delays inherent in SICA (Sick Industrial Companies Act) procedures of revival and reconstruction is to a great extent exacerbated by the large-scale abuse of the provisions relating to suspension of legal proceedings, suits and enforcement of contracts…”
Back in 2000, the Eradi Committee’s response to the lack of time at high courts, infrastructure woes at CLBs and endemic delays at the Board for Industrial and Financial Reconstruction (BIFR) was to propose a National Tribunal.
The Committee’s recommendation became a reality in 2016 in the form of the National Company Law Tribunal (NCLT).
The NCLT will hear all matters pertaining to the Companies Act, 2013. It will also hear cases under the Insolvency and Bankruptcy Code. That means, all pending proceedings from the high courts, the CLB, the Debt Recovery Tribunal (DRT) and the BIFR stand transferred to the new tribunal.
The NCLT is the CLB, BIFR, DRT all rolled into one. But will it deliver? Lawyers and experts Bloomberg Quint spoke with are not exactly optimistic.
Has The Law Set Up The NCLT For Failure?
4000 cases from the CLB. 700 cases from the BIFR. 5,200 cases from high courts. 15,000 cases from DRTs. This is the baggage that the NCLT (11 benches including the principal bench in New Delhi) have to deal with, according to an NCLT Readiness report by consulting firm Alvarez & Marsal.
Murali Neelakantan, an independent lawyer, said the start itself has been ominous.
In an interview with BloombergQuint, Neelakantan said that unfortunately, the NCLT suffers from all the problems that CLB had. He added that, the Companies Act, 2013 and the notification issued thereafter inviting applications for members are unusual.
“There is a minimum age – you have to be at least 50 years old; why? If you can appoint a judge of a high court at 43, why do you need an NCLT member to be 50 years old,” he questioned.
A person shall not be eligible for appointment as Judicial Member unless he/she has completed the age of 50 years as on the date of receipt of application - Section 413(2), Companies Act 2013.
A person shall not be qualified for appointment as a Judicial Member unless he… has, for at least ten years been an advocate of a court - Section 409(2)(c), Companies Act 2013
If you want someone to be at least 50 years old, they will have at least 25 years of practice. So why do say you need only 10 years of practice? Now who are these people who will have 10 years of practice at age 50? They are likely to be public sector employees who’ve passed law without even attending classes. It is unlikely that anyone from the National Law Schools will have only 10 years of experience at age 50. This was exactly the problem at CLB - you would get officers from sales tax department, excise department, commercial tax officer, some public-sector unit officer - and these people are now expected to know company law. There is no chance that such people would’ve even read the Companies Act.Murali Neelakantan, Corporate Lawyer
The Quality Problem
Judges at the NCLT are expected to have both commercial know-how and judicial wisdom, Diwakar Maheshwari, partner at law firm Khaitan & Co. told BloombergQuint.
“ It is expected that judges manning the NCLT ought to have the requisite domain knowledge for dealing with cases under the Companies Act,” he added.
But, some say, reality belies expectations.
Lawyers are struggling to explain the fundamentals of Companies Act, 2013 to the NCLT members, Neelakantan said.
He cited the instance of a case at the NCLT that involved a demerger - in which, as is practice, the shares of the new (demerged) company are not issued to the transferor company itself but to the shareholders of the transferor company. This, as he explained, is a common thing in a demerger.
A question is being asked- you’re looting the company? Selling a valuable asset and not getting any consideration? How do you explain this? The Act says that is how it should be done and that is how it has been done for at least 50 years. Now, I’ve to explain to you how a demerger happens. Other side gets to say - look, how oppressive this is - company is selling off valuable assets and not getting any consideration and the (judicial) Member is saying yes, yes. Similarly, nuances of standing, allotment of shares, holding of meetings - we’re now explaining all this .Murali Neelakantan, Corporate Lawyer
This lack of knowledge and experience is leading to indecision as well. A Bengaluru-based corporate lawyer, speaking on the condition of anonymity, told BloombergQuint that the Bengaluru NCLT bench is trying to follow the practices of the Delhi bench and is not taking decisions independently, thereby further delaying the process.
He explained that no order on mergers, transferred from the high court, have been passed till date, though more than two months have elapsed since the transfers began.
The lawyer added that a government notification designed to clarify the applicability of Companies Act, 1956 to matters pending with a high court - has somehow given several NCLT benches the impression that they should now pass orders only under the Companies Act, 2013. As a result the Bangalore bench is now insisting that for transferred cases, fresh notices be issued to all concerned stakeholders. This has resulted in duplication of effort and delays, he said.
The Quantity Problem
It’s not just the quality of members that the NCLT is struggling with; quantity is a problem too. There are 26 adjudicating members across the 11 NCLT benches. And there is support staff, but highly inadequate in number says an expert.
Nikhil Shah, managing director at Alvarez & Marsal pointed out that U.S. bankruptcy courts have around 4000-5000 assistant personnel that perform judicial, legal and administrative functions. In the U.K., Her Majesty’s Courts and Tribunal Service employs 16,000 full-time staff which includes legal advisers, courtroom staff, administrative staff and court enforcement officers, he added
Maheshwari said according to him this was the biggest challenge facing the NCLT.
Currently the work load in the NCLT is gargantuan as all the disputes have been centralised in NCLT.Diwakar Maheshwari, Partner, Khaitan & Co
There aren’t enough judges at the NCLT currently. A creditor initiating the insolvency resolution proceedings would need to establish there is a debt, a default has occurred and that it has corresponded with the debtor to attempt to recover that debt. In order for the proceeding to be initiated, a person from the NCLT has to review these points within 14 days as per the Insolvency Code. It is difficult to meet this, given there aren’t enough judges or administrative representatives of the NCLT who can perform this taskNikhil Shah, Managing Director, Alvarez & Marsal
NCLT: Making Use Of The Clean Slate
Crippling pendency, weak judicial capability, lack of administrative staff, inconsistent procedures, manual filing- these are some of the challenges that companies and lenders have faced at the CLB, DRT and BIFR. So, what should the NCLT do differenty to avoid falling into the same trap?
Neelakantan recommended fixing the ‘procedures mindset’.
Tribunals were created to get over procedures but they don't seem to be able to do it as there are more and more applications being filed and it takes far too long to reach the main matter, he added.
They have a beautiful chance to start with a clean slate - they can say that may be high courts had a procedure, I don’t care; CLB may have had a procedure, I don’t care. I will give you only so much time to argue, finish your arguments and go home. No reason why they can’t do it. To the credit of the member here in Mumbai, he did try it; he just couldn’t enforce it. If you really want to run a tribunal without the legacy of unnecessary procedures, stop adjournments for a start.Murali Neelakantan, Corporate Lawyer
Shah suggested that a self-sustaining NCLT - one which is not dependent on the government for funds - would a go a long way in addressing infrastructure woes. He said that one of the core issues plaguing the NCLT concept is the lack of funds even at the start-up stage.
For the system to work it should attract the best and brightest minds. And to attract them, adequate infrastructure has to be provided and the judges and administrative staff need to be compensated appropriately, Shah added.
If you told the largest banks that we need to have the Insolvency and Bankruptcy Code started quickly, they would be more than willing to provide a loan to the government to fund the infrastructure set-up costs and to pay a higher compensation to attract quality judges and administrative staff. The government should increase the fee for the insolvency resolution proceedings and then pay back the loan taken from the banks over a period of time; post which the fees could be used to continuously improve the NCLT.Nikhil Shah, Managing Director, Alvarez & Marsal
Experts say if the NCLT doesn’t address the procedure hangover and infrastructure woes in its early days, it’ll just end up being a prettier version of the CLB, BIFR and DRT.