Understanding NCLT and NCLAT in Corporate Disputes

The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) are the two important judicial bodies in India’s corporate justice landscape. These tribunal bodies were established under the Companies Act, 2013, to handle the disputes and issues under the ambit of Companies Act, IBC and other issues related to companies.

Before these tribunals, the corporate disputes were dealt with by the traditional courts, which were slow and overburdened. By creating these specialized tribunals, the government aimed to speed up the conflict resolution process.

National Company Law Tribunal (NCLT)

The NCLT started functioning on June 1, 2016 under Section 408 of the Companies Act, 2013.

It replaced several older bodies, including:

• The Company Law Board (CLB), which handled company-related disputes.

• The Board for Industrial and Financial Reconstruction (BIFR), which dealt with sick companies.

• The Appellate Authority for Industrial and Financial Reconstruction (AAIFR), which heard appeals against BIFR orders, and

• The Official Liquidator, who managed company liquidations.

This consolidation was made to make NCLT a single forum for resolving various company-related disputes.

Objectives of NCLT

The NCLT was created to:

1. Resolve corporate disputes: This includes cases related to shareholder disagreements, mismanagement, and oppression.

2. Handle insolvency and bankruptcy cases: Under the Insolvency and Bankruptcy Code (IBC), it deals with companies and Limited Liability Partnerships (LLPs) that cannot pay their debts.

3. Oversee mergers and acquisitions: It approves and supervises corporate restructuring.

4. Facilitate voluntary winding-up: Companies that want to shut down can apply to the NCLT for liquidation.

Structure and Composition of NCLT

The NCLT operates through 14 benches across India, with the Principal Bench in New Delhi. These benches are managed by a President, Judicial Members, and Technical Members:

• Judicial Members: Experts with legal backgrounds, such as retired judges.

• Technical Members: Professionals with expertise in finance, law, and corporate governance.

Currently, the NCLT has 16 judicial members and 9 technical members. This setup ensures that corporate disputes are handled by experts who understand both legal and business matters.

Powers and Scope of NCLT

The NCLT is a quasi-judicial body with powers similar to a civil court, meaning it functions like any other court but focuses only on company-related matters.

Its powers includes handling:

1. Insolvency and Bankruptcy Cases: Resolving cases of companies and Limited Liability Partnerships (LLPs) under the IBC that cannot repay debts.

2. Investigating Mismanagement: If company members feel that their rights are being misused or the company is being mismanaged, they can approach the NCLT.

3. Mergers and Acquisitions: Approving large corporate deals and restructuring plans.

4. Revising Financial Statements: Ordering changes to a company’s financial records if they are incorrect.

5. Paying Creditors: Directing companies to pay back debts.

6. Voluntary winding up: Companies can approach the NCLT for liquidation.

National Company Law Appellate Tribunal (NCLAT)

The NCLAT was also established and started functioning on June 1, 2016 under Section 410 of the Companies Act, 2013.

It acts as an appellate body, meaning it reviews and decides on appeals against decisions made by the NCLT. If someone is dissatisfied with the NCLT’s decision, they can approach the NCLAT for relief.

Objectives of NCLAT

The NCLAT was created to:

1. Hear Appeals Against NCLT Decisions: It evaluates whether the NCLT’s orders are legally correct.

2. Handle Insolvency Appeals: Under the IBC, it hears appeals related to insolvency cases.

3. Review Competition Commission of India (CCI) Orders: Since 2017, the NCLAT also hears appeals against decisions made by the CCI regarding unfair trade practices.

4. Address Financial Reporting Issues: It handles appeals against decisions made by the National Financial Reporting Authority (NFRA).

Structure and Composition OF NCLAT

The NCLAT is headed by a Chairperson and includes Judicial and Technical Members. Its Principal Bench is in New Delhi, and there is an additional bench in Chennai. The current Chairperson is Justice Ashok Bhushan, a retired judge of the Supreme Court.

Powers and Scope of NCLAT

The NCLAT has the authority to:

1. Review and modify decisions of the NCLT.

2. Handle appeals under the IBC.

3. Oversee appeals against orders from the CCI and NFRA.

4. Provide legal remedies for corporate and insolvency disputes.

Key Differences Between NCLT and NCLAT

Importance of NCLT and NCLAT

1. Faster Dispute Resolution: Traditional courts were overburdened with cases. NCLT and NCLAT ensure quicker judgments.

2. Ease of Doing Business: By speeding up corporate dispute resolution (within 180 to 270 days), they make India more attractive for businesses.

3. Specialized Expertise: These tribunals are managed by experts in corporate law, finance, and governance, ensuring better decisions.

Challenges faced by the NCLT and NCLAT

1. Backlog of Cases: Despite their establishment, increase in insolvency cases under the IBC have created delays.

2. Limited resources: Limited benches and resources hamper their functioning.

3. Complex Disputes: High-stakes disputes require expert handling, which can sometimes delay judgments.

Cases handled by NCLT and NCLAT

The tribunals have played a vital role in high-profile insolvency cases, including:

1. Jet Airways Insolvency:

The tribunal oversaw the insolvency process of Jet Airways, helping its creditors recover money.

This case is a landmark example of the Insolvency and Bankruptcy Code (IBC) in action. Jet Airways ceased operations in April 2019 due to massive debts, operational inefficiencies, and a competitive aviation sector. The insolvency proceedings were initiated by the State Bank of India (SBI) and other creditors before the Mumbai Bench of the NCLT. The tribunal oversaw the insolvency process, helping recover money for its creditors, employees and other vendors.

After multiple delays and legal challenges, the NCLT approved the resolution plan submitted by the Jalan Kalrock Consortium (JKC), which proposed to revive the airline. The plan focused on settling debts and ensuring operational viability. The process was prolonged further by creditor disputes regarding the conditions precedent to ownership transfer. Eventually, the NCLAT approved the plan, setting the stage for Jet Airways' revival and signaling the effectiveness of the IBC framework in tackling large-scale insolvency.

2. Essar Steel Case:

A landmark insolvency resolution that resolved one of India’s largest bankruptcy cases under the IBC.

The Essar Steel insolvency case is often regarded as one of the most significant examples of the IBC's capability to resolve large-scale corporate bankruptcies. Essar Steel, once a major player in India’s steel industry, defaulted on loans amounting to ₹54,000 crore. The case was referred to the NCLT by a consortium of lenders led by SBI, marking it as one of the first large cases under the IBC framework.

The NCLT approved a resolution plan submitted by ArcelorMittal, one of the world's largest steelmakers, which proposed to pay over ₹42,000 crore to creditors and take control of Essar Steel. However, the process faced significant hurdles, including legal challenges by the promoters of Essar Steel and disputes over the allocation of funds between financial and operational creditors.

The matter eventually reached the Supreme Court, which upheld the NCLT's approval of ArcelorMittal's resolution plan. The case demonstrated the IBC’s ability to resolve complex disputes, attract global investors, and achieve substantial recovery for creditors while reviving a distressed asset.

3. Finolex Cables Dispute:

The NCLAT was involved in a family feud over company control, showcasing its role in resolving complex corporate disputes.

The Finolex Cables case highlights the NCLAT's critical role in resolving complex corporate disputes. The matter revolved around a power struggle between two family factions within the company—Prakash Chhabria and Deepak Chhabria—over control of the board and the company’s operations. The dispute escalated when the company held its Annual General Meeting (AGM) in 2023, leading to allegations of irregularities and misuse of power.

The NCLT and subsequently the NCLAT were tasked with determining the validity of the AGM and the decisions taken therein. The case also involved allegations of contempt of court orders, adding to its complexity. The Supreme Court eventually directed the NCLAT to expeditiously resolve the matter. The NCLAT’s role in this case demonstrates its capacity to handle sensitive governance issues, protect shareholder rights, and ensure compliance with corporate laws.

This case serves as a cautionary tale about the challenges of family-run businesses and the importance of robust corporate governance frameworks.

4. Bhushan Steel Case:

The NCLAT upheld the insolvency resolution plan, paving the way for efficient resolution under the IBC.

The Bhushan Steel insolvency case is another key milestone under the IBC, showcasing the framework’s ability to resolve complex financial distress efficiently. Bhushan Steel, a major player in the Indian steel sector, defaulted on loans amounting to ₹48,000 crore, prompting creditors to initiate insolvency proceedings.

The NCLT approved a resolution plan submitted by Tata Steel, which proposed an upfront payment of ₹35,200 crore to creditors and an additional ₹1,200 crore to settle operational dues. The decision was challenged in the NCLAT, where dissenting creditors and Bhushan Steel's former promoters raised objections.

The NCLAT upheld the NCLT's approval of Tata Steel's resolution plan, emphasizing the principles of IBC, including time-bound resolution and maximizing the value of distressed assets. The Bhushan Steel case is often cited as a success story, as it not only ensured substantial recovery for creditors but also restored the operations of a critical industrial asset under the stewardship of a strong new promoter.

Conclusion

The NCLT and NCLAT have significantly transformed India’s corporate dispute resolution system. They provide specialized, faster, and more efficient solutions for corporate and insolvency matters. While there are challenges, these tribunals remain essential for improving corporate governance and maintaining business confidence in India. With continued reforms and enhancements, they can better serve India’s growing corporate sector.

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