First Notes - 8 August 2016

First Notes - 8 August 2016

The MCA notifies NCLT and NCLAT Rules, 2016

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Background

On 1 June 2016 the Ministry of Corporate Affairs (MCA) constituted the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to exercise and discharge the powers and functions as conferred on it under the Companies Act, 2013 (2013 Act). The MCA also notified certain related Sections of the 2013 Act to enable the NCLT/NCLAT exercise their powers. The constitution of NCLT/NCLAT resulted in the dissolution of the Company Law Board (CLB) constituted under erstwhile Companies Act, 1956 and all matters or proceedings pending before the CLB have been transferred to NCLT from 1 June 2016.

New development

Recently, on 21 July 2016, MCA has notified the rules corresponding to the sections relating to NCLT/NCLAT (The Rules). They are as follows:

  1. National Company Law Tribunal Rules, 2016 (NCLT Rules) and
  2. National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules).

The Rules came into force from 21 July 2016 i.e. the date they have been published in the official gazette of India and provide the procedures that companies would be required to follow while making an application to the NCLT/NCLAT along with the manner in which the cases would be disposed of by the NCLT/NCLAT.

Important topics dealt in the Rules

The notification of the much awaited Rules on NCLT/NCLAT signify the MCA’s continuing efforts towards a smooth transition to the 2013 Act. Amongst others, these Rules provide for the following notable provisions: 

  • Transfer of cases of CLB to NCLT: The NCLT Rules clarify that matters earlier dealt by CLB would be transferred to the respective benches of the NCLT (Tribunal) as if such cases had been originally filed in the Tribunal or its bench (to which it is transferred) on the date upon which they were actually filed with the CLB or its bench.

    However, the Tribunal is allowed to consider the actions of the CLB as deemed to have been taken or done under the corresponding provisions of these Rules and the provisions of the 2013 Act, and could thereupon continue with the proceedings. Where the order is reserved by the CLB or its bench then in such a case, the Tribunal should reopen the matter and rehear the case as if the hearing had not taken place.
  • Conducting a class action suit (Section 245): The 2013 Act has introduced the concept of class action to be instituted against the company through which shareholders and depositors can seek to restrain the company from committing an act which is ultra vires the articles or memorandum. The NCLT Rules provide that while considering the admissibility of an application made under this provision, the Tribunal can take into account additional grounds such as:    
    • Whether the class has so many members that joining them individually would be impractical, making a class action desirable
    • Whether there are questions of law or fact common to the class
    • Whether the claims or defences of the representative parties are typical of the claims or defences of the class    
    • Whether the representative parties will fairly and adequately protect the interests of the class.   
  • Application under Section 131 - Voluntary revision of financial statements or Board’s report: The NCLT Rules provide that where directors of a company feel that the financial statements of the company are not in compliance with the provisions of Section 129 or Section 134 of the 2013 Act, an application in the prescribed format can be made to the Tribunal for obtaining approval for preparing revised financial statements or a revised report. Such an application should be filed within 14 days of the decision taken by the Board.
  • Application under Section 140 - Removal, resignation of auditors and giving special notice: The NCLT Rules deal with three situations:
    • An application can be filed by a director on behalf of the company or the aggrieved auditor to the Tribunal in the manner prescribed in the Rules 
    • Where Tribunal is satisfied on an application of the company or the aggrieved person that the rights conferred by the provisions of Section 140 are being abused by the auditor, then the copy of the representation of the auditor need not be sent to every member of the company and the representation need not be read out at the meeting
    • If the application is made by the central government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such an application make an order that the auditor shall not function as an auditor and the central government may appoint another auditor in his place.
  • Application for calling or obtaining a direction to call annual general meeting (Section 97): Any member of the company can make an application under Section 97 of the 2013 Act for calling or obtaining a direction to call the annual general meeting of the company in the manner prescribed in the NCLT Rules. 
  • Amicus Curiae: The Tribunal may seek views of professionals/professional bodies to provide their views on any points or legal issues.
  • Filling through electronic media: The NCLAT (Appellate Tribunal) may allow filing of appeal or proceedings through electronic modes such as online filing and provide for rectification of defects by e-mail or internet and in such filing, these Rules shall be adopted as nearly as possible on and from a date to be notified separately and the central government may issue instructions in this behalf from time to time.
  • Detailed rules, forms and procedures have been prescribed in relation to certain specific matters including but not limited to the following:
    • Petition for the conversion of a public company into a private company
    • Appeals against the refusal for registration of transfer or transmission of securities or for the rectification of the register of members       
    • Application for consolidation and division of all or any of the share capital resulting in a change in the voting percentage of shareholders
    • Application where a company fails to redeem the debentures or repay the deposits or any part thereof or any interest thereon.

Our comments

While the notification of the rules is pivotal for effective implementation of the
NCLT/NCALT Sections, companies would need to be mindful of the following areas:

  • Certain sections not yet notified: The CLB is dissolved and its powers stand transferred to the NCLT. While provisions relating to the investigation of a company’s accounts, freezing of assets, class action suits, conversion of a public company to a private company will now be governed by NCLT, those relating to compromise, amalgamation and capital reduction, and winding up have not been notified. Accordingly, such Sections will continue to be under the purview of the High Court as per the provisions of the Companies Act, 1956 until the MCA notifies these sections.
  • The Insolvency and Bankruptcy Code 2016 (the Code): The Code creates a framework to help resolve insolvency in India and applies to companies, partnerships, limited liability partnerships, individuals and any other body specified by the central government. The Code has revamped the insolvency resolution processes for companies and identifies NCLT as the Tribunal that will adjudicate cases for companies. The Code has been passed by both houses of Parliament and received Presidential assent on 28 May 2016.

The bottom line 

In light of these developments, companies would need to spend time to understand the requirements of the Rules and the corresponding Sections under the 2013 Act to better understand how the transition from CLB to NCLT/NCLAT might specifically impact them.

KPMG in India had issued a First Notes ‘The central government constitutes NCLT and NCLAT and notifies the related sections of the Companies Act, 2013’ on 22 June 2016. To read this First Notes, please click here

To access the text of the MCA notifications

  • National Company Law Tribunal Rules, 2016 please click here
  • National Company Law Appellate Tribunal Rules, 2016, please click here

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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