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122 South -Asian Journal of Multidisciplinary Studies (SAJMS) ISSN:2349-7858:SJIF:2.246:Volume 3 Issue 3

PARADIGM SHIFT IN DISPUTE RESOLUTION MECHANISM IN COMPANIES ACT 2013

Shrayansh Niranjan1 Abstract A dispute resolution mechanism is a structured procedure2that tackles disputes or grievances that arise

amid two or more parties engaged in business, legal, or societal relationships. Dispute mechanisms are

used in dispute resolution, and may encompass conciliation, conflict resolution, mediation, and

negotiation.

Dispute means disparity in belief or opinion. In a greatly competitive market place occurrence of dispute is

highly probable. Sustained dispute resolution is not only costly but also corrodes status of the company,

which resembles a critical constituent in competition-driven integrated market.3Under the Companies Act

1956, corporate law matters were dealt by numerous judicial/ quasi-judicial forums like District Court,

High Court, BIFR and Company Law Board. This results in time-consuming litigation. With a view to

streamline the process and also put in place a single forum with subject matter experts, it is now proposed

under the Companies Act 2013, that all corporate law matters would be administered through NCLT and

NCALT, which shall be granted requisite powers for speedy and efficient decisionmaking.Time taken to

settle litigation in India has always been a key concern.

Keywords: company, conciliation, conflict resolution, dispute, mediation, negotiation.

1 Symbiosis Law School, Noida 2 “ACCESS Facility database of non-judicial grievance mechanisms", Retrieved 2013-12-13. 3 Ghosh, S.N. “Concept paper on Companies Bill 2012”, March 30th 2013, p. 06.

123

I: Introduction

The new act also introduces Mediation, as an Alternative Dispute Resolution Mechanism in the

Companies Law Disputes, which is relatively inexpensive while seeing a case through trial is an expensive

proposition.Mediation does not run by a clogged court schedule and sessions can be easily scheduled any

time at the mutual convenience of the parties and the mediator, and can take place in a variety of locations.

Above all Mediation provides for a Win-Win conflict settlement.The Act for the firsttime gives a

legislative mandate to Central Government to maintain apanel of experts to be called Mediation and

Conciliation Panel formediation between disputing parties. Plea Bargaining has been afforded

parliamentary endorsement. Special Courts for speedy trials will considerably improve corporate peace

and harmony.

‘The provisions of the Companies Act, 2013 relating to offences, penalties and prosecution are refreshingly

different from the existing provisions. The Act testifies the fact that it is a re-codification in the real sense of

the term and aims to serve the corporates with greater freedom but with severe consequences for non-

compliance. Public interest is sought to be protected adequately.’

In August 2000 the Justice Eradi committee was the first to recommend the creation of a National

Company Law Tribunal or NCLT & Appellate Tribunal NCLAT that would subsume the company law

board, BIFR and winding up cases in high courts. The rationale - to avoid long, drawn court proceedings.

The Paper will also discuss on the contentions put forth by the Madras Bar Association, which

thought this tribunalisation to be outside the legislative competence of parliament and ‘violative of the

doctrine of separation of powers and independence of the judiciary’4.

4 Union of India v. R. Gandhi, President, Madras Bar Association, 2010 (5) SCALE 514, (¶ 18).

Dispute Resolution Mechanism

under Companies Act, 2013

(Paradigm Shift)

Mediation & Conciliation Panel

Plea Bargaining

National Company Law Tribunal (NCLT)/

National Company Law Appellate

Tribunal(NCLAT)u/s. 442 of Companies

Act,2013

Special Courts

124II: DISPUTE RESOLUTION u/ COMPANIES ACT 1956- The dispute resolution mechanism under the provisions of Companies Act, 1956- A dispute in a company

can be like:

(a) A dispute between a Company and an outsider.

(b) A dispute between a Company and any of its members.

(c) A dispute between majority and minority in a Company.

Disputes as referred to above and its adjuratory mechanism:

(a) A dispute between a Company and an outsider:

A1-There can be disputes between a company and an outsider like creditors. There can be a business

agreement between the Company and an agency or another company.

When it is a dispute between a Company and an outsider, the outsider can approach the traditional

civil courts seeking for enforcement of his/their rights or damages and simultaneously, they can

approach the High Court seeking to wind-up the Company on the ground that the Company is not in

a position to pay its debts or there exists a reasonable ground to wind-up the Company.

A2-There are many principles and procedures governing the issue of winding-up. The High Court

may not automatically wind-up the Petition on presentment in view of the interests of other

shareholders and stake holders who may not raise their voice before the Court or who may not even

have the knowledge of winding up proceedings. Thus the High Court will take care of the interests of

the other shareholders or stake holders when, a petition is filed by an outsider like creditor seeking

winding-up. Yes, it is true that the realization of money or claims after the company is liquidated is

complicated exercise and it is a big subject to deal with and the proposed new companies act may

deal with it also.

A3-When it comes to the issue of dispute between the Company and an outsider before a traditional

civil court, the proceedings before a civil court may not affect the company as an entity in most cases

and it is like determination of rights and liabilities of the parties before it. Thus, there may not be any

problem when there is a dispute between the Company and an outsider.

(b) A dispute between a Company and any of its members:

There can be disputes between the Company and any of its members who may not qualify to present

an application for winding-up before the High Court and qualify to file an application under section

397/398 of the Companies Act, 1956. In such a case, the option available to the member is to

approach the traditional civil court or to complaint to the Registrar of Companies or Central

Government or the Company Law Board as the case may be.

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(c) A dispute between majority and minority in a Company:

C1-When there are disputes between majority and minority in a Company, it becomes very

complicated. These differences between the majority and minority may lead to presentment of an

application under section 397/298 of the Companies Act, 1956 alleging some oppression and

mismanagement, or presentment of an application under section 234 of the Act seeking an

investigation into the affairs of the Company or presentment of a winding-up petition before the

High Court.

C2-We will see the disputes between majority and minority very frequently in family companies,

private companies or even in closely held public companies. Stakes in any company will be very

high and any delay in preventing the illegality in a Company will cost more to a minority. The

majority may be selling all the properties of the Company undervaluing the same, the majority may

dilute the shareholding pattern and the majority may completely run the company as if it is a

proprietorship concern and anything can happen.

C3-The provisions of the Companies Act, 1956 confers rights on every shareholder and special

protection is given to the minority group in a company. If the minority can not effectively agitate

their grievance or not able to get the remedy even if their case is established, then, it is certainly a

bad thing and against the theme of company law.

C4-There are many issues to discuss in this connection. A minority shareholder may not have

simultaneously knock both the Company Law Board and also Civil Court at times as there are

precedents that disputed facts can not be gone into by the Company Law Board which follows a

summary procedure. For example, there is some sale transaction between a majority in a company

and outsider wherein the company sells the substantial portion of its assets. If such a sale

transaction is challenged, it is very difficult to get the preventive orders or getting the sale set-aside

speedily on the precedent as referred to.

C5-Apart from this, there are precedents like Company Law Board has no jurisdiction to punish

the contemnors and only the High Court can punish the persons who have committed

contempt of the orders of the Company Law Board and it all definitely delays the adjudication

process. There is need to make the dispute resolution between the majority and minority more

effective than present and we may need many new principles and also practice.

126

III. PERIOD BETWEEN 1956’s ACT and 2013’s ACT and slow inclusion of

multifarious techniques limiting the Conventional Court-Based Litigation-

#3.1- The Company Law Board (CLB), created in 1988, began functioning in May 1991. It was patterned

on the ITAT (Income Tax Appellate Tribunal)and marked a major departure in the creation of tribunals.

Till then, all tribunals outside the judiciary dealt with disputes between the citizen and government

departments.

For the first time private disputes between two shareholders or between the shareholders and the

company were shifted to a quasi-judicial body.

The functions discharged by the High Court for almost 80 years were now shifted to four benches of the

Company Law Board. Strangely, for the last two decades, the government has been unable to recruit even

nine members for this tribunal and, over the years, cases which were heard by two members are now being

heard by a single member.

#3.2-Following the establishment of the CLB, the Debt Recovery Tribunals (DRT) were set up. The

rationale was that there weretoo many cases pending before the civil courts and banks had to wait for

several years to recover their money. It never occurred to anyone that instead of creating two or three

Debt Recovery Tribunals in Tamil Nadu or other states, it would have been easier (and cheaper) to dedicate

three civil courts to deal exclusively with bank cases.

#3.3-Flush with this success, the National Company Law Tribunal (NCLT)/ National Company Law

Appellate Tribunal (NCLAT) were created in 2002; In a span of two years, the jurisdiction of the High

Courts in company law were simply taken away. The primary reason for creating tribunals is often attributed

to the huge backlog of cases and the need for specialization.

IV- (A) CASE LAW- Union of India v. R. Gandhi, President, Madras Bar

Association, 2010 (5) SCALE 514, (¶ 18).

The constitutional validity of NCLT and NCLAT was challenged in Thiru R. Gandhi President,

Madras Bar Association vs. Union of India, Department of Company Affairs (2004) (Mad).-

Thiru R. Gandhi President, Madras Bar Association vs. Union of India, Ministry of Corporate

Affairs-

Earlier, the amendment to the Companies Act, 1956 to set up the NCLT was rendered unconstitutional

by Madras High Court for several reasons; few of amongst those were as under:

127"The issue is not whether judicial functions can be transferred from courts to Tribunals. Rather the

issue is whether judicial functions can be transferred to Tribunals governed by persons who are not suitable

or qualified or competent to discharge such judicial powers or whose independence is suspect"

"A lifetime of experience in administration may make a member of the civil services a good and able

administrator, but not a necessarily good, able and impartial adjudicator"

APPEAL TO SUPREME COURT- Union of India v. R. Gandhi, President, Madras Bar Association-

The Supreme Court of India on 11th May, 2010 gave a ruling validating the provisions of Companies

(Second Amendment) Act, 2002 pertaining to transfer of several judiciary and quasi-judiciary powers

under the act to an independent tribunal, called NCLT. The creation of a new substitute judicial forum

which is to carry out the work which is now being carried out by different High Courts in the country for

over nine decades, is to be done with great care so that the new Tribunal will be efficient and effective

alternate institutional forum to the High Courts and the Company Law Board. Once the tribunal is

established, all company-related matters pending with the Company Law Board (CLB), Board for Industrial

and Financial Reconstruction (BIFR), Appellate Authority for Industrial and Financial Reconstruction

(AAIFR) and different High Courts across the country will be transferred to the NCLT.

(B) CASE LAW- MADRAS BAR ASSOCIATION v. UOI- [2013 WRIT PETITION]

(Status-Unreported)

The Madras Bar Association recently filed a writ petition before the apex court challenging the

provisions of the new company law as regards NCLT. This is the second time Madras Bar Association

had challenged the provisions of NCLT.Even as the apex court's decision is awaited, the Corporate Affairs

Ministry has now moved forward and finalized the norms for the salaries and allowances to be paid to the

NCLT President and members.However, these norms are yet to be notified. After more than a decade of

legal challenge, NCLT finally made it to the statute book in 2013.

NCLT now forms part of the Companies Act 2013. This was made possible by a Supreme Court order in

2010 affirming Parliament's power to create a tribunal for administration of justice. Prior to this apex court

order, the legislative competence for creation of a tribunal was being questioned.In its May 2010 order, the

Supreme Court had ruled that the formation of NCLT and National Company Law Appellate Tribunal

(NCLAT) is constitutional. But some necessary amendments are required in the composition of NCLT and

NCLAT before they are set up, the apex court had ruled.However, the NCLT provision in the new company

is in variance with the apex court order, say company law experts.

128The new Companies Act, 2013 does not contain the provisions as were laid by the Supreme Court in its

order of May 2010. Two months after inviting applications for the posts of judicial members in the National

Company Law Tribunal, the government has put the process on hold pending a writ petition filed by the

Madras Bar Association in the Supreme Court.The corporate affairs ministry has told the Supreme Court

that the process of recruiting judicial and technical members will be deferred till the time the matter is

resolved. This would mean further delay in setting up of NCLT, which found its way into the Companies

Act, 2013 after almost a decade of legal tussle.

The setting up of NCLT was made possible by a Supreme Court order in May 2010 which affirmed

Parliament’s power to create such a tribunal which would subsume the company law board (CLB), BIFR

and winding up cases in high courts.The apex court had ruled that the formation of the NCLT and National

Company Law Appellate Tribunal (NCLAT) was constitutional but certain amendments were required in the

composition before they were set up.

V. PARADIGM SHIFT- DISPUTE RESOLUTION u/ COMPANIES ACT, 2013- (A) National Company Law Tribunal (NCLT)/ National Company Law Appellate Tribunal

(NCLAT)-

An important, yet under-reported, aspect in the new Companies Act 2013 is the introduction of mediation as

an alternative dispute resolution mechanism. Under Section 442 of the Act, the National Company Law

Tribunal (NCLT), its appellate body — the National Company Law Appellate Tribunal (NCLAT) — and

the Centre can refer cases for settlement through mediation.

129

UNDER COMPANIES ACT 2013

CLB under the Companies Act, 1956

primarily oppression and mismanagement

BIFR & AAIFR under the Sick Industrial Companies (Special

Provisions) Act, 1985

High Courts primarily in relation to winding-up,

amalgamation, restructuring and appeals from CLB

NCLT & NCLATwill have jurisdiction & powers

vested in

130

•Important change in the Companies Act, 2013 (Act, 2013) for administration of the law –introduction of

National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)

•NCLT -a single window for corporate justice

A‒remove the hurdles of multiple court jurisdictions

B‒speed up the adjudication of corporate disputes

•Transfer of pending proceedings

1‒All matters, proceedings or cases pending before CLB will stand transferred to NCLT;

2‒All proceedings under 1956 Act, including proceedings relating to arbitration, compromise, arrangements

and reconstruction and winding up of companies, pending before any District Court or High Court, will

stand transferred to NCLT. NCLT may proceed to deal with such proceedings from the stage before their

transfer;

3‒All appeal pending before Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and

Board for Industrial and Financial Reconstruction (BIFR) shall stand abated. In such a case, the Company

may make a reference to NCLT within 180 days from the commencement of Act.

131

•Illustrative list of provisions of the 2013 Act where approval of NCLT is required:

i. Seeking exemption for having FY of a company which ends on a day other than 31 March

ii. Issue of further redeemable preference shares in lieu of arrears of dividend or failure to redeem

existing preference shares as per the terms of issue

iii. Preparation of revised financial statement or board report for past 3 FYs, where BOD believes

that they do not comply with the relevant provisions

iv. Conversion of a public limited company into a private limited company

v. Capital reduction

vi. Filing Class action suits

vii. Scheme of compromise, arrangements and reconstruction

viii. Winding up of companies

ix. To declare a company as a sick company etc.

#A BROADER DOMAIN-

I. Compared to the jurisdiction exercised by the Company Law Board (CLB) under the 1956

Companies Act, the jurisdiction of the NCLT is considerably wider. In addition to the jurisdiction

of the CLB, the NCLT will hear all company cases that are currently under the jurisdiction of the

high courts and the Board for Industrial and Financial Reconstruction (BIFR), including cases

relating to winding up of companies, mergers, revival of sick companies, oppression, minority and

class action proceedings.

132

II. The Centre will exercise powers under the new Companies Act in certain disputes –

For example-

Disputes such as those relating to the adoption of the name of a company, claims in summary

proceedings for winding up, where the Government determines the rights of parties. Mediation

will play an important role in all such proceedings.

III. Further, referral to mediation can also take place at the appellate stage by the NCLAT, which

hears appeals from orders from the NCLT. The accommodation of mediation in the Act as a way of

resolving cases involving companies is significant as a policy measure.

IV. While resolution through settlement has always been an option for parties, the neutral mediator

plays an important role in bringing them to the negotiating table. Mediation can form the basis

for a continuing commercial relationship.

#Merits-

•Streamlining: Amalgamating the administration of justice under the company law within one Tribunal.

•Depth: A good mix of senior judicial and technical members. The members of NCLT are intended to have

greater expertise and experience to adjudicate disputes more efficiently and expeditiously.

•Speed: Every proceeding before the Tribunal to be dealt with and disposed of as expeditiously as possible.

Tribunal to endeavor to dispose the proceedings within 3 months from the date of commencement of the

proceeding before it. In case appeal against the order of the Tribunal is not filed within the period of 45

days, then the Tribunal on being satisfied for the reason of delay, can allow the appeal to be filed after the

expiry of aforesaid period, only if the said appeal is filed within additional period of 45 days after the expiry

of the prescribed period and not any indefinite period as available under the 1956 Act.

133

(B) Establishment of Special Court (Sections 435 to 440):

B1-The offences under Companies Act 2013 are tri-able by the Special Court for the area in which the

registered office of the company is situated and in relation to which the offence is committed. Where there is

more than one Special court for such area, the High Court shall specify one of them for the purpose of trial.

B2-The Central Govt.may, by notification, establish or designate as many Special Courts as may be

necessary. Such a court shall consist of single judge appointed by the Central Govt. with the concurrence of

the Chief Justice of the High Court within whose jurisdiction the Judge to be appointed is working.

B3- A person is not qualified to be appointed as aforesaid, unless he is, immediately before such

appointment, holding office of aSession Judge or Additional Sessions Judge, as such judges alone can

impose punishment by way of imprisonment authorized by law, as per section 28 of the Cr. P.C.

(C) Compounding of Offences (Section 441) & Plea Bargaining:

C1-This section is a re-enactment of section 621A of the Companies Act, 1956 and provides for

composition of certain offences involving imposition of fine as punishment. This is a beneficial

measure and provides a silver lining for settlement of offences out of court and takes away the need

for prosecution by the Central Govt.

C2-Any offence punishable with fine only is compoundable in accordance with the procedure laid

down in the new Act, either before or after institution of any prosecution. An offence is

compoundable by the Tribunal where the maximum amount of fine, which may be imposed, does not

exceed Rs 5 lakh.

C3-The authority to do so is either the Regional Director or any officer authorized by the Central

Govt.as may be specified. However, the specified sum should not exceed the maximum amount of

fine, which may be imposed for the offence. Any additional fee already paid is deductible from the

sum payable under compounding facility.

134

(D) Prevention of oppression and mismanagement: D1- Class action suits enabled- One or more members or class thereof or one or more creditors / class

thereof can apply to NCLT for orders to prevent the affairs of the company being conducted in a manner

prejudicial to interests of the company. They may also claim damages / compensation for fraudulent /

unlawful / wrongful acts from or against the company / directors / auditors / experts / advisors etc.

• To prevent possible misuse, Class action applications can be made by prescribed number of members /

creditors. Banking companies to be out of the purview of Class action.

D2- Inspection, inquiry and investigation-

• KMP, auditors and practicing CS also subject to search and seizure of documents by ROC and the

Inspector appointed by CG.

• CG to establish SFIO for investigation of frauds relating to a company. Till the time SFIO is not

established, SFIO already set up by CG in terms of directions of GOI to be used.

• CG may under the specified situations including in public interest refer affairs of a company to be

investigated by SFIO.

• Where pursuant to an investigation or a compliant, NCLT is of the opinion that there is good reason to find

relevant facts about any securities and such facts cannot be found out unless certain restrictions are imposed,

NCLT may provide restrictions on securities for a period not exceeding 3 years.

• Where it appears to NCLT in specified circumstances that there are reasonable grounds to believe that the

removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner

that is prejudicial to the interests of the company or its shareholders or creditors or in public interest, NCLT

may direct such transfer, assets, properties, etc. of the company shall not take place during a period not

exceeding 3 years.

• Notwithstanding anything contained in the Code of Criminal Procedure, 1973,

1- Special Court may try in a summary way any offence under 2013 Act which is punishable with

imprisonment for a term not exceeding 3 years.

2- every offence under 2013 Act except certain offences shall be deemed to be non-cognizable within the

meaning of the said Code. Offences under 2013 Act which are cognizable within the meaning of the said

Code include:

3- Providing misleading or false information on incorporation;

4- Misstatement in prospectus;

5- Fraudulently inducing person to invest money;

6- Personation for acquisition of securities;

7- Concealment of name of creditor entitled to object reduction in capital;

8- Destruction of documents

135(E) MEDIATION AND CONCILIATION PANEL-

The new law constitutes a Mediation and Conciliation Panel (‘Panel’) consisting of suchnumber of experts,

and having such qualifications as may be prescribed for carrying outmediation between the parties during

any proceedings pending before the centralgovernment, the NCLT or the Appellate NCLT.

The new law provides that parties to a dispute may voluntarily apply to the centralgovernment, NCLT or the

Appellate NCLT (as the case may be) to refer the matter to the Panel. Alternatively, the central government,

NCLT and the Appellate NCLT before whichany proceedings are pending may, on its own, refer any matter

pertaining to suchproceedings to the Panel.

The time period provided for disposal of the matter by Panel is 3 months from thedate of reference.

136

CONCLUSION-

Companies Act has proved to be very dynamic piece of legislation and has beenbeen amended to adjust to

the changing corporate atmosphere. The Companies Act attempts to equalize two competing factors of

management autonomy and investor protection. The economy of India has been seeing continuous changes;

it is going through consistent growth and expansion. In this background of continuous change and growth of

economy, the Central Government after due deliberations decided to repeal the Companies Act, 1956 with

the introduction of new enactment in the form of legislation to provide for new provisions to meet the

continuous changing dynamics of national and international economic environment. These new changes in

the newborn legislation are directed towards further acceleration of growth and diversification of the

economy in the corporate scenario. It addresses the public concern over corporate accountability and

responsibility.

"Evolution" is directly proportional to change, so it can be concluded that Progression in the various

dimensions of corporate environment ignited the necessity for change in age-old legislation controlling the

governing of such corporates. There has been tremendous corporate growth in the recent past like with the

introduction of technological advancement in the form of e-governance, the management, functioning and

governance of the companies have become very easy and effective. The tremendous growth of the corporate

requires a sound mechanism, to handle any disputes that may arise from its working and complications.

Therefore, going by the dynamism of the new Companies Act, merits of the constitution of the NCLT and

NCLAT can't be denied, provided it functions well in the eyes of law intended by the legislature. This is so

because establishment of NCLT and NCLAT will unquestionably reduce many delays in the corporate law

proceedings as well as multiplicity of litigations involved in such proceedings. Problem arises at the level

of implementation and execution front because of the fact that the inefficient structured corporate

framework has many pitfalls arising out of bureaucracy and corruption and less initiative by the

corporate.

137 References-

I. Bare Provision- The Companies Act, 2013- Universal Law Publishing, New Delhi, pp. 258-274.

II. Web Resources-

1. Web Article- Narayan, Chitra. “Let’s sort it out”, The Hindu Business Line.

a. Link- http://www.thehindubusinessline.com/opinion/lets-sort-it-out-across-the-table/article5414876.ece-retrieved on August 18th, 2014. This source talks about the new alternative dispute resolution techniques employed by the new Companies Act, 2013 and gives an insight into the Mediation process included by the said act.

2. Research Article-

Ghosh, S.N. “Concept paper on Companies Bill 2012”, March 30th 2013, p. 06.

This source talks about the under construction act when the Companies Act 2013 was still at the Bill Stage- The Companies Bill, 2012 and in brief it discusses the novel and salient provisions of the New Companies Act.

Irani, Jamshed.J. “Report on Company Law”, 31st May, 2005, pp.100-105.

This source talks about the shortcomings and loopholes in the 1956 Act and also suggests reforms and since it came after the arrival of tribunal concept in company dispute resolution, it gave an opinion on the challenges to the NCLT also.

Amerjee, Ali. “BIFR & NCLT: An Analysis of Tribunalization in India”, Vol.4 (October, 2013) of the Company Law Journal, pp.1-22 This source talks about the NCLT and NCLAT in detail, its working and also talks about what makes tribunals better than conventional litigation.

III. Cases Referred-

>Union of India v. R. Gandhi, President, Madras Bar Association, 2010 (5) SCALE 514, (¶ 18).