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Role of special courts for speedy trial of company offences

October 23, 2021
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Companies-Act

This article has been written by Anshi Jain, pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. This article has been written by Kritika Sharma (Associate, LawSikho) Ruchika Mohapatra (Associate, LawSikho).

Introduction

A judge hears a lot of cases per day. Amidst such a large number of cases, matters that are important and require quick and immediate action often get delayed such as offences relating to the transaction of securities, consuming narcotics drugs, violation of the Negotiable Instruments Act, cases of corruption, corporate offences etc. Such matters require speedy trial and expeditious disposal of the cases, for which certain courts or tribunals are required to be established to deal with these particular cases. There is no specific law in India that provides the timeframe for the conclusion of cases. However, the Supreme Court has observed several times that speedy trial of cases is inherent in Article 21 of the Constitution of India. Hence, different courts are established/designated as special courts to ensure the timely disposal of the cases. 

These courts try only those cases for which they are established. This unique characteristic of these courts makes them special. The main contention behind establishing special courts for company offences is that the company is a separate legal entity from its members. A company does not run on its own. It works through its members. Any act done by the members in the name of the company affects the company as a whole. Lengthy proceedings and trials would affect the management of the company. Hence special courts are required to dispose of the case quickly so that the company can run smoothly.

What are special courts?

Special courts are established to deal with a particular case or a particular class of cases. Hence, they have limited jurisdiction to try the cases. These courts deal with both civil as well as criminal disputes.

The Special Courts Act, 1979 provides for the establishment of the Special Courts for speedy trial of certain offences. The Central Government has been empowered to establish an adequate number of courts to be called Special Courts, which shall consist of a Judge from High Court who is nominated by the Chief Justice of the High Court in whose Jurisdiction the special court is established, with the concurrence of the Chief Justice of India. 

Why are these courts “special”?

These courts are established to try only a particular case or particular class of cases. They are not required to try any suit or case appearing before them unless it falls within the domain and jurisdiction of that court to try that case for which it is established. This unique characteristic makes it special compared to the other regular courts that have jurisdiction to try all cases filed before it. These courts are established for expeditious disposal of certain cases filed before it. Moreover, when a Judge hears the cases relating to a particular class or law, he develops expertise in it with time and delivers judgments faster than those delivered in the regular Courts. 

The legislative body has provided for the establishment of special courts through various laws. However, a careful analysis of these laws reveals that the number of courts required and the number of courts established do not seem to parallelize in any way and that the reality and target go mismatched. State and Union Territory governments set up these courts according to the needs of the state for such a court, after consultation with the High court of the region. Hearings are made more quickly in these special courts than in the common courts. They are not required to follow the procedural guidelines. Hence, they are empowered to adopt a procedure that would expeditiously dispose of the case.

Special courts in India

India has several Special Courts and Tribunals established in many States and Union Territories for the purpose of speedy trial of certain disputes. Some of them are:

Special Courts under Companies Act

Chapter XVIII under the Companies Act, 2013 contains provisions relating to the Special Courts, specifically Sections 435 to 438 and Section 440. The Report of Companies Law Committee chaired by Shri Tapan Ray noted that the establishment of Special Courts would enable faster prosecution of defaulting companies. The Central Government is empowered to establish Special Courts for the purpose of providing speedy trial of offences under the Companies Act, 2013. The Special Court shall consist of a single Judge holding the office as a Sessions Judge or Additional Sessions Judge for offences with imprisonment of two years or more, such as fraud including repayment of the debt, or failure to pay dividend knowingly; however, in other offences, he shall hold office as a Metropolitan Magistrate or Judicial Magistrate First Class. 

The Central Government would appoint him with the concurrence of the Chief Justice of the High Court in whose jurisdiction the appointed Judge is going to work. The Act further empowers the Judicial Magistrate and Executive Magistrate to detain the offender or forward the offender to the Special Court without any detention. The Special Court can even have the summary trial for offences with imprisonment not exceeding three years. It may also revert to the regular trial after fulfilling the conditions prescribed in the Act.

NCLT and NCLAT

To adjudicate on corporate disputes such as liquidation, insolvency, and winding up of the company, there was a need to have a uniform and codified code. The Central Government set up the Justice Eradi Committee to reform the laws related to corporate disputes. The Committee recommended the need to constitute National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to act as the uniform bodies for adjudicating corporate disputes. The constitution of NCLT and NCLAT was challenged on the ground that they are unconstitutional. However, the Supreme Court in Madras Bar Association v. Union of India and Anr. (2015) 8 SCC 583 held that the constitution of both NCLT and NCLAT is constitutional and valid. The legislature is empowered to establish tribunals as an alternative to courts for deciding specialized cases, provided that the tribunals are competent as the courts which they sought to replace.  

The difference between NCLT and Special courts lies in the fact that the former is a judicial body having the power of a Magistrate with jurisdiction to try the cases whereas the latter is a quasi-judicial body.

What are the Company offences?

The Companies Act, 2013 provides certain corporate governance norms that an incorporated company is required to follow. These norms are made to protect the interests of the stakeholders. Violation of these norms is defined as an offense and the Act prescribes the penalties along with the offense. No one, literally no one, whether it be an individual or an entity, follows any rule or order unless it is sanctioned by law. In the absence of sanctions, some entities would either try to make gains on the cost of the stakeholders’ rights or violate the corporate rules. Thus, the protection of the rights of the stakeholder becomes crucial. The presence of attentive and vigilant stakeholders ensures the compliance of the norms by the company. The law should illustrate the rights of the stakeholders and the means of their protection and redressal. It shall be the duty of the State to ensure proper enforcement and implementation of the laws prescribing the rights of the stakeholders, as mere framing of the laws does not suffice. Any violation of the corporate governance norms that affect the rights of the stakeholders should be taken seriously and strict and stringent penalties should be enforced for the same to deter any further violation.

Types of company offences and complaints before the Court

There are certain acts that are considered offences under the Companies Act 2013. They can be categorized into cognizable and non-cognizable offences. Only the offense covered under Section 447 is a cognizable offense. All other offences under the Act are non-cognizable. These offences relate to accounts of company; audit and auditors; management and administration; share capital and debentures; public offer; meetings of the board and its directors; inspection, inquiry, and investigation; prevention of oppression and mismanagement, winding up; removal of names of companies from the register of companies; incorporation of a company and its matters incidental to it; declaration of payment of dividend, etc. According to the Act, only the shareholders or members of the Company, Registrar of Companies, a person authorized by the Central Government, and the person authorized by the Securities and Exchange Board of India (SEBI) are the recognized complainants.

Why is speedy trial required for offences?

In Salomon v Salomon & Co. Ltd. (1897), it was held that the company is a separate legal entity distinct from its members. A company is formed by members and managed by the Board of Directors with the assistance of officers and employees. On incorporation, the law gives a separate legal entity to the Company. The Company’s money and property belong to the Company and not to its members. There exists a corporate veil between the company and its members. Human ingenuity started using this veil deliberately as a cover for fraud or improper conduct. Hence it became necessary to lift the veil and look behind the company to identify the real people who control it. Hence any act done in the name of the company is actually done by its members. So the Companies Act, 2013 provides for penalizing and punishing all those members who were in charge of the company and deliberately and knowingly violated the corporate norms. Hence the members and directors who run the company are sued. Lengthy proceedings and delayed order and judgment seriously affect the management and administration, as the people responsible for managing the company are sued and they have to attend the court sessions. Then the company with other members and employees have to suffer. Thus, it becomes crucial to dispose of the case as expeditiously as possible.

Conclusion

The Special Courts are established for the sole purpose of providing speedy trials of offences. But it can be seen that neither an adequate number of Courts are established, nor do they dispose of the cases expeditiously. In the matter of Serious fraud investigation office and ors. and Rahul Modi and ors. (2019), the Special Court held that according to Section 212(3) of the Companies Act, the investigation should be completed within the specified time. But if the investigation cannot be done on time, the authority can extend the time accordingly. 

This clearly shows that the goal to provide a speedy trial is far to be realized. There seems to be no difference between regular courts and special courts in this respect. The special courts need to be presided by the expert and well versed in that particular law or class of cases. This would enable the courts to realize their goal and dispose of the matter timely. Further, the establishment of an adequate number of courts is required.

References


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