Companies
Finolex, SC and the NCLAT 'rot': A Mint explainer
Summary
The Supreme Court challenges NCLAT's defiance, shedding light on judicial accountability and the complexities of the Finolex Cables succession dispute
Last week, the Supreme Court unexpectedly issued show-cause notices to two National Company Law Appellate Tribunal (NCLAT) members due to their alleged non-compliance with the court's directives in the Finolex Cables case. This move stunned both the legal and corporate sectors since company tribunal members had never before been summoned for contempt by the apex court.
In this explainer, Mint will dissect the Finolex Cables' succession dispute, delve into why the Supreme Court criticized company tribunals, and forecast the implications of this groundbreaking event.
Finolex Cables' succession saga
Founded in 1958 by Pralhad Chhabria and his brother Kishandas, the Finolex Group initially sold electrical supplies door-to-door, later establishing Finolex Cables. The company grew into two public entities, Finolex Cables Ltd and Finolex Industries Ltd, with several joint ventures. While Pralhad managed commercial aspects like finance and sales, Kishandas handled technical facets, such as production and R&D.
In 1989, to address tax laws, Pralhad suggested a strategy to transfer Finolex Cables shares to investment companies. By 2009-10, the brothers aimed to consolidate their holdings under a single entity, Orbit Electricals. After various transfers and mergers, Pralhad's shares in Orbit were eventually entrusted to the Pralhad Chhabria Trust, with specific governance conditions.
The succession feud intensified after Pralhad's death in 2016, with disputes over share transfers and company governance decisions leading to legal battles.
Prahlad Chhabria had drafted a succession plan in 2012, designating his daughter Aruna Katara, son Prakash Chhabria, and nephew Deepak Chhabria as successive trust chairpersons.
The plan also outlined a structure ensuring that each trust beneficiary chaired a company within the Finolex Group.
However, before his death, Prahlad transferred 80% of his share to his son Prakash and nominated him to the board, bypassing the 2012 trust deed. These changes were made through a board meeting in 2016, leading Deepak and Vinni Chhabria to challenge the legality of this meeting in the company tribunal.
Defying the apex court
The drama in the courtroom on 13 October began with the NCLAT imposing a status quo on the Annual General Meeting (AGM) held on September 26. This led to Prakash Chhabria approaching the Supreme Court against the NCLAT's decision, which the court overturned on 26 September. The top court instructed the meeting's scrutinizer to release the AGM results and directed the NCLAT not to issue any order until the results were released.
However, the NCLAT defied this directive and announced its order on 13 October, prior to the release of the scrutineer's results, leading the Supreme Court to initiate an inquiry into tribunal's actions. The inquiry was assigned NCLAT chairperson, Ashok Bhusan, who had to determine whether NCLAT members were aware of the Supreme Court's order and what circumstances led them to defy it. The NCLAT suspended its order on 16 October following the Supreme Court's intervention.
Summoning of the NCLAT bench
On 18 October, a Supreme Court bench led by chief justice DY Chandrachud convened to question the two NCLAT members. Unsatisfied with their responses, the court sent show-cause notices to both members and nullified the NCLAT's recent order, with the chief justice saying, "I am not talking about Justice Ashok Bhushan…but NCLT and NCLAT have gone down to rot now. This case is an illustration of that decline."
The court also reprimanded the AGM scrutineer for delays.
Reflections on tribunal functioning
While backlogs in Indian courts are a known issue, tribunals face similar challenges. At NCLT, over 21,000 cases, including nearly 13,000 insolvency-related, remain pending. Concerns have been raised about the expertise of tribunal appointees and the need for better resources.
Anindya Mazumdar, partner at Singhania & C, points out the necessity for tribunal members to operate strictly within the law's boundaries, emphasizing the importance of both clarity and fairness in their judgments.
The road ahead
The hearing on 30 October will require NCLAT members to justify their actions to the Supreme Court.
Sonam Chandwani, managing partner KS Legal & Associates, said that a contempt notice from the Supreme Court is a grave matter. The court will then decide on any punitive actions after hearing from the NCLAT members.
“This high-profile case will likely lead to debates about the balance of power within the judiciary and the accountability of judicial bodies. Depending on the outcome, there might be avenues for appeal, though challenging a Supreme Court's contempt decision is rare," Chandwani added.
