Tribunal members’ quality affecting decisions: Experts
New Delhi, Dec 25, 2023
The Supreme Court's criticism of the National Company Law Appellate Tribunal (NCLAT) and National Company Law Tribunal (NCLT) has raised concerns about the quality of members and their impact on the resolution of cases under the Insolvency and Bankruptcy Code (IBC).
After the Supreme Court summoned two members of the National Company Law Appellate Tribunal (NCLAT) in October for contempt, legal experts said the quality of members at the NCLAT and also the National Company Law Tribunal (NCLT) has been a factor in the quality of orders and the slow resolution of cases under the Insolvency and Bankruptcy Code (IBC).
Experts also suggested that bureaucrats appointed as technical members must undergo judicial training before being appointed to NCLT.
“The Supreme Court questioned the practice of appointing bureaucrats as members of quasi-judicial tribunals. It highlighted the need to keep the tribunal immune from executive interference by stopping the appointment of bureaucrats to such bodies. It is always felt that the NCLT is a weak link in the IBC due to the lack of manpower, infrastructure and domain expertise," said Nitin Potdar, M&A Partner at J Sagar Associates.
“At the outset, reform should be undertaken to ensure that all the benches are constituted, and the required number of judges are appointed without further delay,"said Kumar Saurabh Singh, partner-banking and finance, restructuring and insolvency, Khaitan & Co. “Instances of some judges sitting and adjudicating matters for two to three jurisdictions are not uncommon. Establishing adequate bench strength will ensure that delays are curtailed, and the time-bound nature of the corporate insolvency resolution process is adhered to."
However, Potdar said that merely increasing the number of members or benches won’t resolve the issue. “We will need to (a) give away ceremonial processes that would cut down time in matters like M&A or IBC; (b) embrace the transformative power of cutting-edge information technology to track, analyze and cross-reference jurisprudence to expedite decision-making processes; and (c) impart regular training to the members."
In the Finolex Cables case, the NCLAT imposed a status quo on the AGM held on 26 September, leading Prakash Chhabria to challenge it in the Supreme Court. The apex court overturned the decision, instructing the release of AGM results before any further NCLAT orders. However, the NCLAT defied this and issued an order on 13 October, prompting a Supreme Court inquiry into their action. NCLAT chairperson Ashok Bhushan was tasked with investigating members’ awareness of the Supreme Court’s order. The NCLAT then suspended its order on 16 October.
On 18 October, a three-judge bench of the Supreme Court issued show-cause notices to NCLAT members Rakesh Kumar and Alok Srivastava for disregarding its order. Dissatisfied with their explanations, the court, led by CJI D.Y. Chandrachud, set aside the NCLAT’s 13 October order, citing Article 142. The court criticized the NCLAT’s decline and established that members were aware of the Supreme Court’s judgment. On 30 October, Rakesh Kumar resigned following the Supreme Court’s decision and Alok Srivastava submitted an unconditional apology for non-compliance.
Anoj Menon, a Partner at Desai & Diwanji, notes, “While the Supreme Court has previously initiated contempt proceedings against a sitting high court judge, the Finolex case appears to mark the first instance where the Supreme Court has expressed its frustration and anger by initiating contempt proceedings against members of the NCLAT."
The quality of members and the recent appointment of members, according to experts, can be reflected in the increased average resolution time, which is the highest in 2023 as compared to previous financial years. India Ratings and Research (Ind-Ra) notes a prolonged trend in recovery timelines through the IBC route.
In the second quarter of FY24, the resolution period reached an all-time high of 662 days for financial creditors (FCs), consistently extending across all creditor classes over the past three years. However, recoveries for FCs remain stable at 33-35%, while operational creditors (OCs) have seen an uptick in the recovery rate from from 16.5% in Q2FY23 to 18.3% in Q2FY24. Despite this, liquidation continues to dominate the closure of the corporate insolvency resolution process.
The company tribunals, established under the Companies Act 2013, were constituted on June 1, 2016 by the government of India based on the recommendation of the V. Balakrishna Eradi committee on laws relating to insolvency and winding up of companies. The NCLT and NCLAT consist of both judicial and technical members.
According to the provisions of the Companies Act, 2013, judicial members must have served as a judge of a High Court or as a district court for at least five years or possess at least 10 years of experience as an advocate in a court.
On the other hand, technical members must meet specific qualifications, including being a member of the Indian Corporate Law Services or Indian Legal Services or holding the position of Secretary or Additional Secretary in the Government of India.
Alternatively, a technical member may also be a chartered accountant with minimum 15 years of experience, a cost accountant with a similar tenure, or an individual with at least 15 years of experience in fields such as industrial finance, industrial management, industrial reconstruction, investment or accountancy, demonstrating special knowledge in these areas.
Currently, the sanctioned strength of the NCLT is 63, including both judicial and technical members. The NCLT plays a dual role – it hears pleas under both the IBC as well as the Companies Act, 2013. The NCLT consists of 28 courts and 16 benches across India. Any increase in the sanctioned strength would likely require Cabinet approval.
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