Introduction
For a company or a large corporate group, the outcome of a single litigation can be life changing, and may severely impact the interests of the promoters, the management, investors, and other stakeholders. Given the impact that even a single litigation can have on the life of a company, the lawmakers have been conscious of the fact that time is of the utmost essence in adjudicating company disputes.
Keeping this in mind, the Bhabha Committee on company law reform [which submitted its Report[1] in 1952] first emphasised the need for expeditious disposal of company law matters, and suggested that company cases be allotted to a special bench of the High Courts (“HC”).
However, devising a robust mechanism for adjudicating company matters has been a vexed issue for the Government, with several hits and misses. Over the years, jurisdiction on company matters came to be vested in multiple fora – such as the HCs, the Company Law Board, and the Board of Industrial and Financial Reconstruction (BIFR).
After noting that the existence of multiple fora for adjudicating company matters led to significant delays in disposal of cases, the Eradi Committee[2] recommended the establishment of a single national tribunal that would be empowered to deal with all issues relating to company law, insolvency, winding up, etc.
The Government of India accepted the recommendations of the Eradi Committee, and the Companies Act, 1956 was amended in 2002[3] to establish the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”).
After the constitutional validity of the establishment of the NCLT and NCLAT was upheld by the Supreme Court of India (“SC”) in the R Gandhi case[4], the provisions relating to the establishment of the NCLT and NCLAT were incorporated in Chapter XXVII of the Companies Act, 2013 [Sections 407 to 434].
In keeping with the rationale behind establishing a specialised tribunal to adjudicate upon company law matters, Section 430 of the Companies Act, 2013 (“Act”) provides that:
“No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal.”
In a recent judgment in Zee Entertainment Enterprises Limited v. Invesco Developing Markets Fund[5] (referred to hereinafter as the “Invesco Judgment”) – a single judge of the Bombay HC has held that Section 430 of the Act does not place an absolute bar on the HC’s jurisdiction to adjudicate matters arising under the Act, and Section 430 would not bar the HC from adjudicating on the validity of the requisition notice issued by Invesco under Section 100(4) of the Act, to call for an extraordinary general meeting (“EGM”) of Zee.
This blog examines the legislative intent behind the enactment of Section 430, in the context of the Invesco Judgment.
Legislative Framework
As explained above, the establishment of the NCLT and NCLAT has its genesis in the Eradi Committee Report, which laid emphasis on the need for consolidation of all categories of matters relating to company law, insolvency and winding up under the jurisdiction of a single national tribunal .[6] The NCLT and the NCLAT were, thus, envisaged as a ‘one-stop solution’ for speedy resolution of all company law-centric litigation, which would have the added advantage of decongesting the HCs.
The recommendations of the Eradi Committee equally laid emphasis on the exclusive jurisdiction of the NCLT and NCLAT on company law matters. This objective was also noted in Madras Petrochem Ltd. v. BIFR[7], where the SC observed that the Companies (Second Amendment) Act, 2002 provided for the constitution of the NCLT as a “substitute” for the Company Law Board, the HCs, BIFR etc.
After the Eradi Committee’s recommendations were incorporated in 2002, the Irani Committee took note of the Government’s objective of creating an ‘institutional structure’ to adjudicate company law issues.[8]
SC Judgment in the R Gandhi case
The Government’s objective of fast-tracking the establishment of specialised company law tribunals was delayed, since the constitutional validity of the establishment of the NCLT and NCLAT was subjected to prolonged litigation. This litigation culminated in a Constitution Bench judgment of the SC in the R Gandhi case, which ultimately upheld the constitutional validity of the establishment of the NCLT and NCLAT, whilst inter alia, rejecting the petitioner’s argument that the ‘wholesale transfer’ of powers from the HC to the NCLT/NCLAT violated the basic structure of our Constitution, by disregarding the doctrine of separation of powers and the independence of the judiciary.
The SC held that Article 246 of the Constitution, read with various entries of List I and List III of the Seventh Schedule [including Entries 43 and 44 of List I (dealing with incorporation, regulation and winding-up of trading and non-trading corporations) and Entry 95 of List I (dealing with jurisdiction and powers of all Courts except the Supreme Court, with respect to any of the matters in the Union List)] confers the Parliament with the legislative power to establish a company law tribunal.[9]
Pertinently, the SC held that – “When a Tribunal is constituted under the Companies Act, empowered to deal with disputes arising under the said Act and the statute substitutes the word “tribunal” in place of “the High Court” necessarily there will be “wholesale transfer” of company law matters to the tribunals”.[10]
The SC also held that such a ‘wholesale transfer’ of company law jurisdiction from the HCs to the Tribunal was an ‘inevitable consequence’ of creating the NCLT.[11] The R Gandhi judgment hence recognises that the NCLT/NCLAT’s exclusive jurisdiction on company law matters would substitute and oust the jurisdiction of the HCs.
Bombay HC’s interpretation of Section 430
In the Invesco Judgment, the Bombay HC, whilst holding that it has jurisdiction to adjudicate upon the civil suit filed by Zee, rejected Invesco’s contention that Section 430 ousts the HC’s jurisdiction to adjudicate the validity of the EGM requisition notice issued by Invesco under Section 100(4) of the Act.
In this regard, the Bombay HC observed that – “….the NCLT Rules that set out the list of provisions over which the NCLT/NCLAT have jurisdiction does not include Sections 100, 149, 150 or 168 [of the Act]”[12] However, the NCLT Rules, 2016 are in the nature of delegated legislation, which cannot be used to define/restrict the scope of a substantive provision of the parent statute [i.e. Section 430].
It is settled law that delegated legislation must conform to the substantive provisions of the parent statute [and not vice versa], and that delegated legislation cannot be used to curtail the ambit of a provision in the parent Act.[13] Further, the NCLT Rules cannot be used to curtail the clear legislative intent of Section 430 – which envisages exclusive jurisdiction for the NCLT/NCLAT on all company law matters, and seeks to avoid a situation where the NCLT and the civil courts have concurrent jurisdiction on matters relating to company law. The constitutional limits for delegated legislation are discussed in further detail in our previous blog[14].
In this regard, the SC in Shashi Prakash Khemka v. NEPC[15] observed that Section 430 is ‘widely worded’, and Section 430 completely bars the jurisdiction of civil courts in matters over which power has been conferred upon the NCLT.
In any case, the NCLT Rules only prescribe the fees for filing of an application before the NCLT and do not (and cannot) confer ‘jurisdiction’ on the NCLT to adjudicate upon matters under the Act. Further, S. No. 30 of the Schedule of Fees under the NCLT Rules, 2016 provides for “Application under any other provisions specifically not mentioned herein above”, prescribing the fees for all provisions of the Act, not otherwise specifically covered therein.
It is also pertinent to note that Section 100 of the Act confers upon a shareholder [who holds a minimum of 10% stake in a company] the right to call for an EGM after complying with the statutory pre-conditions. However, Section 100 is not an ‘enforcement provision’ in the strict sense, as a shareholder’s right to approach the NCLT to call for an EGM is already contained in Section 98 of the Act.
Hence, the bar on civil court jurisdiction placed by Section 430 would equally apply in the context of Section 100 read with Section 98 of the Act, and the NCLT Rules do not (and cannot) circumscribe the scope of Section 430 in this regard.
Section 430 also prohibits a Court or other authority from granting an injunction in respect of any action taken or to be taken by the NCLT/NCLAT. In the Invesco Judgment, the Bombay HC prohibited Invesco from approaching the NCLT to enforce its rights under Section 98 read with Section 100 of the Act. Note here that Section 41(b) of the Specific Relief Act, 1963, specifically provides that an injunction cannot be granted to “restrain any person from instituting or prosecuting any proceeding in a court not sub-ordinate to that from which the injunction is sought”.
It is trite that the NCLT is not sub-ordinate to the Bombay HC, when the Bombay HC is acting in its ordinary civil jurisdiction. In this regard, the Bombay HC, whilst noting that it is not injuncting the NCLT from adjudicating the matter, proceeds to injunct Invesco from approaching the NCLT. However, in Export Credit Guarantee Corporation of India v. Annamma Phillips[16], a Full Bench of the Bombay HC has clarified that Section 41(b) would also prohibit a court from restraining any person(s) from instituting a proceeding in a court that is not sub-ordinate to the injuncting court.
Therefore, on a combined reading of Section 430 of the Act, and Section 41(b) of the Specific Relief Act, 1963, no injunction could have been granted by the Bombay HC either restraining the NCLT itself and/or any party/(ies) from instituting, or continuing any proceedings before the NCLT .
Concluding Thoughts
While it could be argued that the Bombay HC’s view on Section 430 was only limited to the specific context of the Zee-Invesco dispute, relying on the Invesco Judgment, litigants may now (at the very least) question the NCLT’s jurisdiction to adjudicate matters arising out of Section 100 of the Act, and would approach the civil courts for an injunction restraining an eligible shareholder from calling for an EGM and/or initiating proceedings before the NCLT under Section 98 of the Act.
A more worrisome development would be litigants insisting that the civil courts have ‘residuary jurisdiction’ to adjudicate any dispute arising out of or in connection with those provisions of the Act, that are not explicitly mentioned in the schedule of fees provided in the NCLT Rules. For instance, important provisions such as Section 186 (inter-corporate loans and investments) and Section 188 (related party transactions) are not explicitly covered under the NCLT Rules – and parties may rely on the Invesco Judgment[17] to contend that the civil courts are empowered to adjudicate any dispute arising out of, or in connection with the said provisions.
The Bombay HC’s views on Section 430 could lead to a deluge of parallel proceedings (before the NCLT and the civil courts) in high-stake corporate disputes and boardroom battles, thereby undoing the legislative intent behind the enactment of Section 430, and the rationale of having a single specialised forum for adjudication of all company disputes.
For further information, please contact:
Bharat Vasani, Partner, Cyril Amarchand Mangaldas
bharat.vasani@cyrilshroff.com
[1] Report of the Company Law Committee, 1952, chaired by Mr. C.H. Bhabha, at Para 31.
[2] Report dated July 31, 2000 of the High-Level Committee on ‘Law relating to Insolvency and Winding up of Companies’ chaired by Justice V Balakrishna Eradi, at Paras 3.24, 3.25, 7.1 and 7.2 (“Eradi Committee Report”).
[3] The Companies (Second Amendment) Act, 2002.
[4] Union of India v. R Gandhi, President, Madras Bar Association, (2010) 11 SCC 1 (“R Gandhi case”).
[5] [2021] 229 CompCas 540 (Bom), decided on October 26, 2021.
[6] Eradi Committee Report, at Paras 3.24, 3.25, 7.1 and 7.2.
[7] (2016) 4 SCC 1, at Para 41.
[8] Report of the Expert Committee on Company Law, chaired by Dr. Jamshed J Irani (submitted to the Ministry of Corporate Affairs on May 31, 2005), at Paras 23 and 24.
[9] R Gandhi case, (2010) 11 SCC 1, at Paras 80-86.
[10] R Gandhi case, (2010) 11 SCC 1, at Para 88.
[11] Ibid.
[12] Invesco Judgment, at Para 75.
[13] See In Re: The Delhi Laws Act, 1912, AIR 1951 SC 332; Rajnarain Singh v. Chairman, Patna Administration Committee, AIR 1954 SC 569; Ispat Industries Ltd. v. Commissioner of Customs, (2006) 12 SCC 583; ITW Signode India Ltd. v. Collector of Central Excise (2004) 3 SCC 48.
[14] https://corporate.cyrilamarchandblogs.com/2022/01/the-rise-rise-of-delegated-legislation-do-we-need-more-safeguards/
[15] (2019) 18 SCC 569, at Para 6.
[16] 2010 (5) Mh. L. J. 659.
[17] An appeal was filed against the Invesco Judgment on October 28, 2021, and is presently pending adjudication before a division bench of the Bombay HC.
