Bring back court scrutiny of corporate schemes

Shifting jurisdiction to the corporate affairs ministry would be retrograde and indeed unconstitutional

If news reports are to be believed, a proposal to prune the jurisdiction of the National Company Law Tribunal (NCLT) is afoot. The power of the NCLT to approve of schemes of compromise and arrangement involving companies, as reports would have it, would stand transferred to the Ministry of Corporate Affairs (MCA).

At first blush, this can sound reasonable — sanctioning a scheme can appear to be a routine administrative matter, and the judicial time of the NCLT can get freed up to focus on the other pressing burdens imposed on the tribunal. However, the reality is that such a move would not only be disastrous but would compound an existing disaster. To begin with, it was the jurisdiction of the High Courts — creatures of the Constitution of India — that was replaced with the jurisdiction being vested in the NCLT. This move, first attempted in the early 2000s, was repeated in the newly-minted Companies Act, 2013. Both attempts were subjected to judicial review.  

The Supreme Court approved of the shifting of the jurisdiction but ruled clearly that the composition of the NCLT ought to ensure that judicial members of the Tribunal were taking decisions on company law. In a nutshell, the court put the proposal to terms, pruned the framework for the shifting of jurisdiction, and laid down safeguards.  

By proposing to now move the jurisdiction from the NCLT directly to the MCA, there would be a direct conflict with the basis on which the Supreme Court approved of the removal of the High Courts from jurisdiction over company law. That apart, such a move would be totally unwise for a variety of reasons.

Illustration by Binay Sinha

First, when a court considers a draft scheme of arrangement (basically, mergers, de-mergers, spin-offs etc) propounded by a company, it hears the public at large since the proposal would entail a change in the persona of the company, which is an artificial legal person that engages with society. When an entity that transacts with the rest of society undergoes a change in character, the change requires to be reviewed by an authority, and that authority has historically been the High Court. Since the introduction of the new company law, the NCLT took over the jurisdiction from the High Courts. The court or the tribunal has to hear various objections from society, inputs from other statutory agencies and departments, and deal with them.  

Now, the incentives for a government agency to readily and easily say that everything about a proposed scheme is fine, is indeed very low. Since time immemorial, various departments would present half-hearted expressions of “no objection” or would even object, raising grounds that would at times not be worth the paper they were typed on. High Courts would examine such objections, and being exposed to the functioning of the government, take a judicious call on whether to accept or reject the objections raised. Typically, the income-tax authorities would point to how the same transaction effected through other structures or other means would have led to greater revenue for the government. High Courts would rule on these routinely with the maturity that a constitutional court could bring to bear.

After the shift of the jurisdiction to the NCLT, such objections raised by the government departments had become more difficult to be assessed, appreciated and ruled on. For example, objections from income-tax authorities to the choice of structure leading to a revenues loss would be ruled upon by the High Courts with a finding that a government department cannot dictate the choice of structure, which is the domain of the parties to the scheme of arrangement. Courts had repeatedly ruled that they would not substitute the wisdom of the parties to the arrangement with their own purported wisdom. However, after the shift of the jurisdiction from the High Courts to the NCLT, the ability of government departments to point to intimidating scales of loss of revenues went up.

Picture the same work now being downgraded to a totally non-judicial forum such as a ministry official.  Schemes would get tied up in knots and not get approved. Leaving aside the fact that such a shift would be constitutionally invalid and violative of the terms on which the Supreme Court agreed to view the shift of jurisdiction to be constitutionally valid, it would be totally unwise to relegate work involving application of the judicial mind to government servants without judicial training or experience. Indeed, the replacement of the NCLT with a mere government department may score a few points that could game the “Ease of Doing Business” rankings but the reality of the outcome on the ground would be worse.  

It appears that the policy-makers have realised that the burdening of the NCLT with adjudication of all matters under the Insolvency and Bankruptcy Code, 2016, has led to a breakdown. Likewise, it is reasonable to see that the shift of jurisdiction has not necessarily been a smooth one. If these propositions were valid, the right thing to do would be to acknowledge that the shifting of jurisdiction away from the High Court was a mistake that begs for correction. The reform then, would need to take the shape of going back to the High Court, and not to erode the scope for application of the judicial mind even further.

The author is an advocate and independent counsel. Tweets @SomasekharS