Year in Review: NCLT and NCLAT Under the Supreme Court’s Microscope

Summary – The NCLT and NCLAT, crucial for corporate and insolvency cases, faced intense scrutiny from the Supreme Court in 2024. In this blog, Ritima Singh discusses the key judgments that exposed issues like lack of domain expertise, jurisdictional overreach, and failure to examine facts. Taking suggestions from these proceedings, she calls for reforms, including better judicial discipline, capacity-building, and improved accountability.

Key takeaways

Supreme Court criticised the NCLT and NCLAT for various shortcomings, ranging from inefficiency to jurisdictional overreach.
NCLAT was reprimanded for misusing Rule 11 in Byju’s case, undermining statutory procedures and in Chalasani Udaya Shankar exposed tribunals’ failure to examine evidence, leading to flawed rulings.
The Supreme Court emphasized capacity-building, tech-driven solutions, and accountability mechanisms to improve tribunal functioning.

The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have become some of the most crucial tribunals in the country’s commercial and business landscape. These tribunals, once conceived to deliver swift and specialized justice, today stand as institutions with several gaps in resolving corporate disputes, insolvency matters, and other complex commercial issues. Their effectiveness and impact have come under increasing focus from appellate courts, exposing cracks and offering scope for improvement. This year-end wrap up looks at the output of these tribunals through the lens of Supreme Court judgments.

A Defining Moment: The Finolex Judgment

The year began with discussions around the Supreme Cour’s judgment in the Finolex Cablescase. The case involved serious allegations of board mismanagement and shareholder rights violations within one of India’s leading cable manufacturers. In a rare move, the apex court issued notices to NCLAT members, questioning their defiance of its orders. The ‘Supreme Courts’ warning was unequivocal: “Corporate India should know that if our orders are being subverted, there is a Supreme Court watching.”

This was followed by a series of judgments in which the Supreme Court put NCLT and NCLAT under a spotlight for various shortcomings, ranging from inefficiency to jurisdictional overreach being highlighted.

When Judgments Falter: Supreme Court’s Critique

1. Lack of domain knowledge and judicial discipline

State Bank of India v. Murari Lal Jalan and Florian Fritsch (Jet Airways Case:2024 INSC 852)

In this high-stakes insolvency case, the Supreme Court remarked on the performance of NCLT and NCLAT at great length. The Court noted a lack of domain expertise among tribunal members, compounded by their failure to sit for full working hours. “The Members often lack the domain knowledge required to appreciate the nuanced complexities involved in high-stake insolvency matters in order to properly adjudicate such matters. It has been noticed that the benches of NCLT(s) and NCLAT don’t have the practice of sitting for the full working hours.”

The Supreme Court specifically

A) Criticised the tribunals for neglecting timelines which leads to asset value erosion and spilled over litigation.

B) Suggested that the tribunals should enhance their approach and go beyond being rubber-stamping authorities.

C) Recommended that the members should undertake capacity-building measures to enhance their domain knowledge.

D) Asked these tribunals to ensure consistent judicial discipline, and adopt technology-driven solutions for efficient case management.

E) Recommended that tribunal’s accountability mechanisms should be strengthened and their infrastructure gaps must be addressed.

In another interesting judgment given by the Supreme Court in the case of Deccan Value Investors L.P vs. Dinkar Venkatasubramanian ( (2024) 244 Comp Cas 1 : 2024 SCC OnLine SC 804 ) the bench called the judgment given by NCLT and NCLAT “Legally flawed and unsustainable”. The approved resolution plan in the case was based on misconceived and concealed facts and financial information.

2. Jurisdiction overreach:

Byju’s Insolvency Proceedings

In this contentious case, the Supreme Court reprimanded the NCLAT for overstepping its jurisdiction. NCLAT in this case invoked its inherent powers under Rule 11 of the NCLAT Rules without adhering to statutory procedures. Rule 11 grants the appellate tribunal the power to regulate its own procedure in the absence of specific provisions in the law or rules. NCLAT used Rule 11 as a tool to pause certain statutory timelines under IBC, thus nullifying the essence of IBC. The apex court stated that by doing so the tribunal undermined the integrity of the existing legal framework which is IBC in this case.

3- Compounding error of not examining facts:

Chalasani Udaya Shankar & Ors v. Lexus Technologies Pvt. Ltd. & Ors. (2024) 10 Supreme Court Cases 303.

This case is another example of how NCLT overstepped its jurisdiction. The apex court also observed that neither the acting president of NCLT nor the NCLAT examined, with any seriousness, the issues raised before them. The tribunals in this case did not verify the assertions made by the parties, there was no examination of facts, materials and evidence produced by the parties. The error of the acting president of NCLT and NCLAT not getting the facts right was heavily criticised by the apex court.

Both the tribunals were again criticised in a judgement in the case of Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Another (2024) 6 SCC 767). In this case, NCLT approved a resolution plan and subsequently, the appellant filed an application for recalling the order as the approval did not meet the parameters of the Code. The apex court noted here that both the tribunals ignored some crucial facts such as the appellant who was a secured creditor, and had submitted his claim was projected as one who did not submit the claim; the resolution plan approved did not meet all the parameters under Section 30 (2) of IBC; the entire resolution proceedings were conducted ex-parte to the appellant. The tribunals in this case were recommended to use their inherent powers under Section 11 to recall the orders. However, the pertinent question that remains is, why did the tribunals in the first place approve the resolution plan that did not meet primary criteria mentioned in the Code.

Conclusion - Systemic Shortcomings: Recurring Themes

Each overturned judgment based on misconceived or ignored facts, overstepping jurisdiction & precedent non-adherence, lack of domain knowledge and judicial discipline is a missed opportunity to strengthen India’s judicial framework. These shortcomings have the potential that may lead to prolonged disputes, increased costs, and diminished trust in the adjudicatory process.

The challenges facing NCLTs and NCLATs present an opportunity for transformative reform. Addressing these systemic issues requires a multi-pronged approach involving regular capacity building of members to ensure members remain abreast of legal and procedural advancements.