CASE ANALYSIS OF MADRAS BAR

ASSOCIATION V. UNION OF INDIA, WRIT

PETITION NO. 1072 OF 2013

BY

DISHA GUPTA

INTERN

3rd YEAR

AMITY LAW SCHOOL, LUCKNOW

Mob No. - 9129295593

Email ID- [email protected]

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Bench

 Chief Justice Hl Dattu

 Justice Ak Sikri (Author Of The Judgment)
 Justice Arun Mishra
 Justice Rohinton F Nariman
 Justice Amitava Roy

Counsels

Petitioner- Sr. Advocate Arvind P Datar

Respondent- Ps Patwalia And Pinky Anand, Additional Solicitor Generals

Background Of The Case

on 14 may 2015, a constitution bench of the supreme court has upheld the validity of the
national company law tribunal (nclt) and the national company law appellate tribunal (nclat)
and has paved the way for setting up of these tribunals after taking care of the observations of
the court. the validity of nclt and nclat had already been upheld by a constitution bench of the
supreme court in 2010 in the case of union of india v. r.gandhi, president of madras bar
association1 (also known as r gandhi case) where the impugned sections were in regard to the
companies act, 1956. the writ petitions2 filed under article 32 of the constitution sought to
challenge the corresponding provisions in regards to nclt and nclat under the companies act,
2013.

in r gandhi’s case the constitutional validity of the national company law tribunal and
national company law appellate tribunal was challenged as the absolute power of solving the
dispute was given to high court. hence the formation of nclt and nclat violates the basic
structure of constitution has it is against the concept of separation of powers. (Johar)

the constitutional bench in r gandhi case upheld the decision of the high court in which it was
held that the creation of national company law tribunal and national company law appellate
tribunal and vesting in them, the powers and jurisdiction exercised by the high court in regard
to company law matters, are not unconstitutional. the court also declared that the prescribed

1
Union of India v. R.Gandhi, President of Madras Bar Association, (2010) 11 SCC 1
2
WP No. 1072 of 2013

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format of appointment of technical members should be followed and for the appointments of
members, president, chairperson and vice chairperson the selection committee must be
prescribed (Johar, Constitution of National Company Law Tribuna). the court in this case had
also referred to various other judgements3.

however even after the r gandhi judgment, the tribunals could not be set up. in the mean
while, parliament of india passed the 2013 act, replacing the 1956 act. this act also contains
the corresponding provisions in relation to the constitution of nclt and nclat.

later, madras bar association filed a writ petition contending that various directions given in r
gandhi judgment and the new provisions in the 2013 act are almost on the same lines as were
incorporated in the act, 1956 and, therefore, these provisions suffer from the vice of
unconstitutionality as well on the application of the ratio in 2010 judgment (Supreme Court
paves way for National Company Law Tribunal and Appellate Tribunal, 2015).

Facts In Issue

the writ petition no. 1072 of 20134 filed by madras bar association revolved around three
main issues. the first issue was regarding the validity of the constitution of nclt and nclat.
this issue was already dealt in the case of r gandhi5 and the bench had upheld the
constitutional validity of nclt and nclat. the second issue raised in the instant case was
regarding prescription of qualifications including term of their office and salary allowances
etc. of president and members of the nclt (under section 4096) and as well as chairman and
members of the nclat (under section 4117). this issue also challenged the qualifications of
technical members of nclt/nclat. this issue was also dealt in the r gandhi case and the bench
had held this to be unconstitutional. the last issue was regarding the structure of the
selection committee for appointment of president/members of the nclt and
chairperson/members of the nclat (dealt under section 412 (2)8). this issue was also one to
be dealt by the bench in r gandhi case and held that chief justice of india, or his nominee
should possess the final say in the matter of selection with right to have a casting vote.

3
S.P. Sampath Kumar v. UOI, AIR 1897 1 SCC 124
4
Madras Bar Association v. Union of India and Another, AIR 2015 SC 1571
5
Union of India v. R Gandhi, President, Madras Bar Association, (2010) 11 SCC 1
6
Companies Act, 2013
7
Companies Act, 2013
8
Companies Act, 2013

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 Petitioner’s Contentions

the writ petition in the instant case was filed by the madras bar association. it felt aggrieved
by that part of the judgment vide which establishments of nclt and nclat was held to be
constitutional. he primarily challenged the constitutional validity of nclat without making any
serious efforts to challenge the constitution of nclt. he further argued that section 410 should
also be meted out the same treatment for the reasons recorded in the said judgment pertaining
to national tax tribunal. mr. datar continued to attack the setting up of nclat on the ground that
there were no reasons given in the previous judgments and wherein formation of national tax
tribunal has been held to be unconstitutional.

however, the petitioner further continued that insofar as technical members of nclt/nclat are
concerned, the provision is almost the same which was inserted by way of an amendment in
the act, 1956 and challenge to those provisions was specifically upheld finding fault
therewith.

Respondent’s Contentions

the respondents have endeavoured to justify the provision of technical members by stating
that this variation was made in view of the lack of available officers at additional secretary
level in Indian companies’ law service. it is further mentioned that functionally the levels of
additional secretary and joint secretary are similar. these officers have knowledge of specific
issues concerning operations and working of companies and their expertise in company law
which is expected to benefit NCLT. such an explanation is not legally sustainable, having
regard to the clear mandate of 2010 judgment.

Nclt And Nclat

the national company law tribunal (nclt) is a quasi-judicial body in india that adjudicates
issues relating to companies in india. the national company law tribunal was formed or
established under the companies act, 2013. on the other hand, national company law appellate
tribunal (nclat) was introduced to hear appeals against the orders of nclt. the tribunals nclt as
well as nclat came into effect from june 1, 2016.

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the ministry of corporate affairs (central government) constituted national company law
tribunal (nclt) and national company law appellate tribunal (nclat) under the provision of
section 408 and section 4109 respectively. the companies (second amendment) act, 2002, had
brought a relief to companies, litigants and the courts by creating two specialized bodies to
bring about speedy disposal of the colossal cases pending before the high court and the
companies law board. these specialized bodies have provided a glint of hope in company
litigation.

after the 2002 amendment, all the matters relating to companies which were earlier handled
by various high courts, company law board (clb), board of industrial and financial
reconstruction (bifr) and appellate authority for industrial and financial reconstruction (aaifr)
will now be handled by the nclt. all the pending matters with the high courts and clb will be
transferred to nclt.

in this case, the validity of the constitution of nclt and nclat was challenged. this issue was
already upheld by the court in the case of r gandhi. the petitioner sought to invoke a 2014
decision of the supreme in madras bar association v. union of india 10 in which the
establishment of the national tax tribunal (“ntt”) was held unconstitutional.

Separation Of Power

the doctrine of separation of power was propounded by montesquieu in 1747 in his book
‘esprit des louis’ with the aim that if power is concentrated in one hand, then there are
chances of arbitrariness. in order to avoid this arbitrariness and autocracy, separation of
power was very important. this doctrine led to division of power between the three organs
of the government, that is, executive, legislative and judiciary. this doctrine signified three
formulations of structural classification of governmental powers. firstly, the same person
should not form part of more than one of the three organs of the government. secondly, one
organ of the government should not interfere with any other organ of the government and
thirdly, one organ of the government should not exercise the functions assigned to any
other organ (Kudrat, 2015). in keshvananda bharti v union of india11, justice beg stated
that separation of powers is a part of the basic structure of the constitution. none of the
three separate organs of the republic can take over the functions assigned to the other. the

9
Companies Act, 2013
10
MANU/SC/0875/2014
11
Keshvananda Bharti v Union of India, (1973 ) 4 SCC 255

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 three wings of governance would operate in their assigned domain/province. but the judicial
power could be allowed to be exercised by an analogous/similar court/tribunal, with a
different name. however, by virtue of the constitutional convention, while constituting the
analogous court/tribunal, it will have to be ensured, that the appointment and security of
tenure of judges of that court would be the same, as of the court sought to be substituted.
the newly constituted court/tribunal will be deemed to be invalidly constituted, till its
members are appointed in the same manner, and till its members are entitled to the same
conditions of service, as were available to the judges of the court sought to be substituted.
but whenever there is such transfer, all conventions/customs/practices of the court sought to
be replaced, have to be incorporated in the court/tribunal created (Madras Bar Association
vs. Union of india, 2014). in the case of union of india v. r. gandhi 12, apex court held that
legislature has the competence to make laws providing which disputes will be decided by
courts and which disputes will be decided by tribunals subject to constitutional limitations
and in view the principles of rule of law and separation of powers (RECENT JUDICIAL
TRENDS ON SEPARATION OF POWERS ).

Independence Of Judiciary

impartiality, independence, fairness and reasonableness in decision making are the

hallmarks of judiciary. if impartia1ity’ is the soul of judiciary, “independence’ is the life
blood of judiciary. without independence, impartiality cannot thrive. independence of the
judiciary is one of the basic structures of the indian constitution and has also been
recognised as a human right by international conventions. in our constitution, three wings
of government are enshrined, and each of these three wings of government has to work
independently in spite of the fact that they are inter connected with each other
(Independence of the Judiciary). if we look at the instant case 13, nclt and nclat do not
contravene the parts of doctrine of basic structure. these parts include rule of law and
independence of judiciary. it cannot be said that constitution of tribunals and transferring
judicial functions per se breach rule of law, independence of judiciary and separation of
powers as the constitution contemplates judicial power being exercised by both courts and
tribunals. the crucial aspect is to ascertain that whether the constituted tribunals respect and
maintain the principles of independence and separation of powers. the constitution of nclt
and nclat and the eligibility criteria of its members shall be subject to judicial review. if the
12
MANU/SC/0378/2010
13
Madras Bar Association v. Union of India and Another, AIR 2015 SC 1571

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 court in exercise of judicial review is of the view that the rule of law, independence of
judiciary and separation of powers are compromised by introducing such tribunals, the
court may interfere to preserve the same. such an exercise will be part of the checks and
balances to maintain the separation of powers and to prevent any encroachment, by other
organs of the state (Vyapak Desai).

Judicial Review

doctrine of judicial review is the basic feature of the constitution. though there is no express
provision for judicial review in indian constitution but it is an integral part of our
constitutional system. in india, judicial review is a power of court to set up an effective
system of check and balance between legislature and executive .various provisions in indian
constitution explicitly provides for the power of judicial review to the courts such as article
13, 32, 131-136, 141, 143, 226, 227, 245, 246, 372. the most prominent object of judicial
review to ensure that the authority does not abuse its power and the individual receives just
and fair treatment. apart from this, the main function of the doctrine is that no statute or
provisions of the statutes which is repugnant to the constitution should be enforced by
courts of law.

in the case of madras bar association vs. union of india 14 the supreme court scrutinized the
provisions of companies act, 1956 and declared some provisions ultra vires. the issues
raised in the instant case were regarding the formation of the nclt and nclat committee, the
appointment of the judicial members as well as the technical members under sections
409(3) (a), 409(3)(c), and sec. 411(3), 412(2). the apex court declared the above mentioned
provisions ultra vires and held that these provisions are unconstitutional in nature on the
ground that any institution performing a judicial function should be constituted of members
having judicial experience and expertise and thus judicial member were to exceed the
technical members so as to maintain the essential feature of that constitution (Gupta).
henceforth, the court ordered section 409(3) (a) and (c) as invalid and ordered to remove
the defects in the sections 409 (3) and 412 (2) in order to make them operative again.

On Doctrine of Eclipse

14
Madras Bar Association vs. Union of India, (2015) SCC 484

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 the doctrine of eclipse is based on the principle that a law which is inconsistent with the
provisions of article 13 (1)15 is not nullity or void ab initio but becomes only unenforceable.
the objective of this doctrine is not to make a provision or act dead but this aims at
correcting the defects while inoperative and then to make it operative through amendments.
in deep chand vs state of uttar pradesh16, the apex court held that a post-constitutional law
made under article 13 (2) which contravenes a fundamental right is nullity from its
inception and a stillborn law. it is void ab initio. the doctrine of eclipse does not apply
to post-constitutional laws and therefore, a subsequent constitutional amendment cannot
revive it. although, this doctrine is inapplicable to post constitution laws, yet we may
presume the reference. in the instant case, the court held that the act which created the
national company law tribunal and national company law appellate tribunal has
unconstitutional “defects”, which are capable of being “cured” by suitable amendment. the
decision revolved around two concepts. firstly, in emphasizing the importance of the
composition of the members of the tribunal and secondly, the court emphatically held in
this case that the basic structure theory could not be applied against ordinary legislation. it
was argued that principles such as rule of law, separation of powers, and independence of
the judiciary were violated by the amending act, and that the law was therefore
unconstitutional.

On Part 1b And 1c

the petitioners had challenged parts 1b and 1c of the companies act, 1956 that provide for
the constitution and operation of nclt and nclat are ultra vires the constitution of india. nclt
and nclat are judicial tribunals that exercise the jurisdiction previously vested on the high
courts. hence the standards and qualification of its members should necessarily confirm, as
nearly as possible to the qualification of high court judges. indiscriminate appointment of
technical members in all tribunals will dilute and adversely affect the independence of the
judiciary. therefore, only officers who are holding the ranks of secretaries or additional
secretaries alone can be considered for appointment as technical members of nclt. all the
other criteria prescribed for appointment of technical members under parts 1b and 1c are
invalid. persons having ability, integrity, standing and special knowledge and professional
experience of not less than fifteen years in industrial finance, industrial management,
industrial reconstruction, investment and accountancy, may however be considered as
15
The Constitution of India, 1949
16
1959 AIR 648

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 persons having expertise in rehabilitation/revival of companies and therefore, eligible for
being considered for appointment as technical members (Vyapak Desai).

the court in this judgement undertook the exercise of going through the aforesaid provisions
contained in parts 1b and 1c of the act, 1956 and in substantial measure agreed with the
madras high court finding various defects in these provisions. the court tabulated the
corrections required to set right the defects17. these corrections include the following:
 only judges and advocates can be considered for appointment as judicial members of
the tribunal.
 as the nclt takes over the functions of high court, the members should as nearly as
possible have the same position and status as high court judges.
 persons having ability, integrity, standing and special knowledge and professional
experience of not less than fifteen years in industrial finance, industrial management,
industrial reconstruction, investment and accountancy, may however be considered as
persons having expertise in rehabilitation/revival of companies and therefore, eligible
for being considered for appointment as technical members.
 the term of office of three years shall be changed to a term of seven or five years
subject to eligibility for appointment for one more term.

Judgement of The Case

the judgement of the case was given by a 5-judge bench. the court considered
previous judgements also and upheld some of the issues while pointed put certain
defects in provisions and ordered to correct the defects so that the same could be
made effective.
the judgement was given as follows:
 the apex court upheld the constitutional validity of the nclt and the nclat and
that the issue could not be reopened again. although the national tax tribunal
had been held unconstitutional in the interim, the Court Noted That The Ntt
had been held unconstitutional after distinguishing the 2010 judgment
(Murthy, 2015).

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MANU/SC/0610/2015

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  on the second issue, the court had held that only those holding the post of
secretaries/ additional secretaries and having technical expertise could be
appointed to the post. it had struck down the parts of the provision which were
inconsistent with the law. this provision stated that joint secretaries with
certain experience were eligible for appointment as technical members. section
409 (3) of the companies act, 2013 states that joint secretaries with certain
experience are eligible for appointment as technical members. the sc reiterated
that this was a complete dilution of the principles that the court had zealously
tried to protect in 2010 itself and therefore, struck down s. 409(3) (a) and (c).
 on the third issue, section 412 of the companies act, 2013 states that the
selection committee consists of 2 judicial members and 3 administrative
members. the analogous provision in the 1956 act had been discussed in the
2010 judgment wherein the sc had held that it ought to be a four member
committee (with equal division between the judicial and administrative
members) and that the chief justice should have the casting vote. the sc ruled
that the 2010 judgment is binding precedent and should be followed. it
therefore struck down s. 412(2) and ordered that it be brought in accord with
the relevant parts of the 2010 judgment (Murthy, 2015).

Overview Of The Judgement

this case was an appeal case and the judgement of both high court and supreme court was
consistent with each other. both the courts have kept in mind the basic structure of the
constitution including the concept of natural justice and fairness. the judgement of court has
to be applauded because the courts have been impartial and fair enough to give the
judgement. it has been seen that the high court as well as the supreme court has been
employing similar rationales in order to bring our tribunals in line with the constitution. by
this judgment, the supreme court has not only paved the way for the establishment of the nclt,
but it may also potentially lead to the notification of the remaining sections of the 2013 act so
as to make the entire legislation effective. the court seems to display enthusiasm and even a
sense of urgency for the commencement of the tribunals as the establishment and constitution
of nclt and nclat as exclusive tribunals for the administration of all matters arising out of the
companies act will definitely reduce, if not wipe out the grave delay involved in the company

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law proceedings, avoid multiplicity of litigation before various forums, streamline the process
of appeal and reduce the burden on high courts.
the supreme court ruling will have the following impacts:
 the ruling of the supreme court on the constitutional validity of nclt & nclat is one of
the biggest leaps for the corporate sector and the professional fraternity. the step will
have a positive impact on the corporate restructuring (i.e. mergers and acquisitions,
capital restructuring, revival of sick companies and dispute related matters) as the
nclt will not just only replace the company law board (clb), but will also bring under
its umbrella cases filed with the high courts, board for industrial and financial
reconstruction (bifr) and the appellate authority for industrial and financial
reconstruction (aaifr).
 the nclt / nclat formation is welcome step as it will reduce the burden of the supreme
court, high courts and clbs on the corporate law related matters, which will ultimately
help in unlocking the value of distressed assets. nclt / nclat being the ‘specialized
benches’ for corporate law related mattes, it is expected that the matters will be listed
and heard in an expeditious and time bound manner.
 the formation of nclt / nclat will open wide gates for the practicing chartered
accountants, practicing company secretaries, and practicing cost accountants, as they
would now be able to represent their client companies in matters requiring tribunal
approval i.e. mergers and amalgamations, capital restructuring, revival of sick
companies and shareholders-management dispute matters (Athalvale, 2015).

This Was the Step Taken By The Judiciary To Uphold The Validity Of Nclt And Nclat, The
Next Step Has To Be Taken By The Government. This Development Is Significant As It
Might Likely Alter The Face Of Corporate Litigation In India. The He Tribunal Was
Established Under the Companies Act, 2013 And Was Constituted On 1 June 2016 By the
Government of India And Is Based on the recommendation of the V. Balakrishna
Eradi Committee on law relating to the insolvency and the winding up of companies.
this judgement, as any other judgement was a landmark one that gave hope to the companies
that they will not be deprived of justice.
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