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Energise the courts

Arvind P. Datar

THE Companies (Amendment) Bill, 2001, seeks to abolish the Company Law Board (CLB), the BIFR and, worse, the jurisdiction of every High Court under the Companies Act, 1956. The main object of the Bill is to facilitate or expedite the revival/rehabilitati on of sick companies while protecting the interests of the workmen.

While the move to abolish the Sick Industries Companies (Special Provisions) Act, 1985 (SICA) is long overdue, the proposal to take away the jurisdictions of the CLB and the High Courts is retrograde. There is a naive notion that Tribunals can solve comm ercial problems. Unfortunately, in most cases, there is no attempt to investigate the nature or cause of the problem itself.

Dismal record

SICA was introduced in 1985 with much fanfare. The track record of the BIFR has been dismal for no fault of its. Expecting to cure industrial sickness by setting up a Tribunal is unwise. The cause of the sickness is either avoidable or unavoidable.

If an industry becomes obsolete or a company cannot break-even because of prohibitive raw material costs, it is futile to expect any Tribunal to give a fresh lease of life. Similarly, if an industry is power-intensive and unable to bear the high cost of captive power generation, the bitter truth must be accepted and the company liquidated.

Unfortunately, the BIFR prolongs the inevitable liquidation of the company. If there is scope for rehabilitation, banks and financial institutions are competent enough to assess the possibility.

Section 22 of that Act gives protection against suits and recovery proceedings. Consequently, many companies which do not have any hope of recovery, deliberately induce sickness and seek to get themselves registered under Section 16 of SICA. Once registe red, a sick company gets protection against law suits, recovery proceedings, and so on.

Rehabilitation schemes often require the hearing of various banks and other institutions; the unlucky creditors need to make concessions and there is seldom any legal issue to be considered.

The current legislation seeks to lift the SICA provisions and transpose them into the Companies Act. The entire scheme of appointing an operating agency and preparation of rehabilitation schemes for financial reconstruction will now vest with the Nationa l Company Law Tribunal (NCLT). A substantial part of the Tribunal's time and energy is going to be wasted on rehabilitation schemes which will seldom be implemented.

Abolition of the CLB

A deplorable part of the current Bill is the proposal to abolish the CLB. At present, the CLB hears cases at its principal Bench in New Delhi as also at the four Regional Benches. Approximately, 50-60 cases are filed before the CLB per annum. Most of the se are under Sections 397 and 398 of the Companies Act. The cases, initially heard by the High Court, will now be shifted to the new Tribunal.

Selection of members

The Bill provides the Tribunal members a three-year term. As regards retired judges who get appointed, this tenure will not present any problem. But for the other members recruited from the Bar -- chartered accountants, and so on -- the term may not be a ttractive. This would be a major handicap in getting top-class professionals to man the Tribunal.

The most pernicious provision is Section 10FD(f), which permits retired civil servants -- with 15 years' experience in various disciplines -- to become Tribunal members.

Over the past 10 years, vacancies in the CLB have not been filled up. In several Tribunals, it is difficult to get competent persons and several posts remain vacant. Thus, selecting members to the 10 Benches all over the country is going to be a tough ta sk. It would be far easier and economical, especially in the long run, to fill up vacancies in the High Courts and have a permanent Company Judge. Experience has shown that judges with knowledge of commercial laws have done extremely well in the Company Court.

Bankruptcy code

Independent of the Companies Amendment Bill, the RBI had constituted an advisory group to examine bankruptcy laws. This report should have been considered before the Bill was announced. A major recommendation in the Bill is to have a dedicated Bench in e ach High Court to deal with bankruptcy matters.

The Company Court, consisting of one Judge, can be requested to have a sitting every day to deal with all matters now proposed to be transferred to the Tribunal, except the provisions relating to sick industries. A dedicated Company Court will substantia lly reduce the arrears and expedite liquidation of companies.

Appeals

The Bill seeks to constitute an Appellate Tribunal at Delhi to be headed either by a Supreme Court judge or a retired Chief Justice. This, once again, is unfortunate. At present, against any order of a single judge, an appeal lies to the Division Bench i n the same High Court. Few matters reach the Supreme Court, as most of the disputes are resolved at the High Court level.

Under the present scheme, an appeal lies to the National Appellate Tribunal even against interlocutory orders. Thus, the assessee will have to go before the Tribunal at Delhi on appeal. This definitely is going to add to the cost of litigation and cause further delay.

Liquidation by privatisation

A major hurdle in winding-up matters is the extremely slow pace at which the office of the Official Liquidator functions. The Bill contains welcome provisions to entrust the work of liquidator to private organisations such as chartered accountants/cost a ccountants and remunerate them with reasonable commission.

The Bill should be widely discussed and debated by chambers of commerce and various Bar associations. If at all any change is required, the provisions repealing SICA and abolishing BIFR may alone be implemented. It will be a case of survival of the fitte st in the corporate sector. But in the long run, this will benefit the country.