Significant reversal

GS Paper IV

Topic: Corporate governance.

Prelims:

Mains: Composition of the National Company Law Appellate Tribunal (NCLAT)

What’s the News?

• On December 18, the National Company Law Appellate Tribunal or NCLAT (as the appellate tribunal is known) declared as “illegal” the October 2016 removal of Cyrus P. Mistry as Executive Chairman of Tata Sons Limited and ordered his reinstatement to the post.
• The Registrar of Companies (RoC) moved the National Company Law Appellate Tribunal (NCLAT) requesting to amend its order and remove the word “illegal” with respect to the conversion of Tata Sons from a public company to private company.

National Company Law Appellate Tribunal (NCLAT):

• As part of a comprehensive revamp of the adjudication of corporate law disputes, the NCLAT was constituted with effect from June 1, 2016, for hearing appeals against the orders of the NCLT, which, in turn, simultaneously replaced the erstwhile Company Law Board.
• Constituted under Section 410 of the Companies Act, 2013, the appellate tribunal was conceived as the dedicated appeals forum for resolving corporate law disputes and speeding up the resolution by taking over the role hitherto played by overburdened High Courts in adjudicating such appeals.
• NCLAT also serves as the appellate body for those aggrieved by decisions made by the Competition Commission of India or orders passed by the Insolvency and Bankruptcy Board of India.

Composition:

• NCLAT initially comprised five members: two members each on the judicial and technical sides and the Chairperson Justice S.J. Mukhopadhaya.
• As part of its efforts to strengthen the entire NCLT and NCLAT apparatus with a view to further reducing pendency, the Centre this year added a total of four new members to the NCLAT — two each in judicial and technical capacities.
• The chairperson must have been a judge of the Supreme Court of India or a Chief Justice of a High Court.

It’s working:

• A party aggrieved by a ruling by any of the NCLT’s numerous benches can file an appeal against it within 45 days of receipt of a copy of the order, with a further 45 days allowed if the NCLAT is satisfied that the appellant had sufficient cause that prevented the filing of the appeal within the stipulated period.
• The NCLAT’s verdicts can in turn be challenged on a question of law in the Supreme Court, within a 60-day window.

NCLAT’s rulings challenged:

• Some of its recent decisions have faced intense judicial scrutiny including one pertaining to ArcelorMittal’s bid to acquire debt-laden Essar Steel.
• The NCLAT ruling in this case was challenged in the Supreme Court, which overturned a significant portion of the verdict. In its November judgment, the top court upheld the primacy of financial creditors over operational creditors in the repayments waterfall, settling the disquiet spurred by the NCLAT’s decision to seemingly place secured financial creditors on a par with the operational creditors.

Its implications on corporate governance:

• By upholding the appellants’ contention that the minority group of shareholders — the ‘Shapoorji Pallonji (SP) Group’ — had been a victim of ‘prejudicial’ and ‘oppressive’ actions undertaken by the majority shareholders of Tata Sons, the NCLAT has struck a blow on behalf of the rights of all minority shareholders.
• Terming the company effectively a “quasi-partnership-company” — the Tata Group through the Tata Trusts and other Tata entities and family members holds 81% of Tata Sons’ effective shareholding while the SP Group owns 18% — the appellate body stressed the need for the Tata holding firm to operate as a “two-group company” that could provide checks and balances in the running of the businesses.