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Corporate Growth Corporate Insolvency: Role of
Ministry of Corporate Affairs: Transmission of
Proceedings from High Court to Tribunal.
BY
D. VIJAYA BHASKAR, ICLS
OFFICIAL LIQUIDATOR, ANDHRA PRADESH,
MINISTRY OF CORPORATE AFFAIRS,
GOVERNMENT OF INDIA
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About Ministry of Corporate
AffairsThe Ministry is primarily concerned with administration of the Companies
Act, 1956, other allied Acts and rules & regulations framed there-undermainly for regulating the functioning of the corporate sector inaccordance with law. The Ministry is also responsible for administeringthe Competition Act, 2002 which will eventually replace the Monopolies
and Restrictive Trade Practices Act, 1969 under which the Monopoliesand Restrictive Trade Practices Commission(MRTPC) is functioning.Besides, it exercises supervision over the three professional bodies,namely, Institute of Chartered Accountants of India(ICAI), Institute ofCompany Secretaries of India(ICSI) and the Institute of Cost and WorksAccountants of India (ICWAI) which are constituted under three separateActs of the Parliament for proper and orderly growth of the professionsconcerned. The Ministry also has the responsibility of carrying out thefunctions of the Central Government relating to administration of
Partnership Act, 1932, the Companies (Donations to National Funds) Act,1951 and Societies Registration Act, 1980. Limited Liability PartnershipAct, 2008.
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Offices under Ministry of
Corporate Affairs MCA Offices
Minister's Office
List of Officials at Head QuarterRegional DirectorsRegistrar ofCompaniesOfficialLiquidatorsCompany Law Board
The Monopolies and Restrictive Trade Practices Commission (MRTPC):Monopolies and Restrictive Trade Practices (MRTPC) An important organ ofthe Department of Company Affairs is the Monopolies and Restrictive TradePractices Commission (MRTP Commission) a quasi-judicial body. TheMRTP Commission established under Section 5 of the Monopolies andRestrictive Trade Practices Act, 1969, discharge functions as per theprovisions of the Act. The main function of the MRTP Commission is toenquire into and take appropriate action in respect of unfair trade practices
and restrictive trade practices. In regard to monopolistic trade practices theCommission is empowered under section 10(b) to inquire into such practices(i) upon a reference made to it by the Central Government or (ii) upon its ownknowledge or information and submit its findings to Central Government forfurther action.
The Director General of Investigation and RegistrationSerious FraudInvestigation Office (SFIO)Competition Commission of India (CCI)Cost
Audit Branch (CAB)
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MINISTRY OF CORPORATE
AFFAIRS
GOVERNMENT OF INDIA
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PRE ONLINE MCA 21 SCENARIO
IN ROC OFFICES
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PRE ONLINE MCA 21- A DUMPING
YARD WITH HEAP OF UNATTENDED
DOCUMENTS
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:PRE ONLINE MCA 21 PRIOR TO 2006ROC OFFICE - A SINKING SHIP STRUCK IN A MASSIVE
GALE WITH OVERLOADED VOLUME OF DOCUMENTS
DESPARATELY WAITING FOR A SAVIOUR
More than 7 lakh companiesregistered with 20 ROCsthroughout India (Now more than8 lakh registered);
Every year receipt of documents
in ROCs offices touches a million; Rough estimates show 45 million
pages maintained in 20 ROCs
Filing of documents in the ROCswas an herculean task and a timeconsuming serpentine queues-unmanageable crowd in peak
filing season ofOCT
to DEC
; Every year, several millions of
corporate representatives used tovisit the ROCs everytransaction was through humaninterface only
Process of registration of documents and consequentialplacing of the documents inrespective Document files of companies a cumbersome
procedure and a dauntingexercise;
Retrieving information / locatingdocument was time consumingand inaccurate;
Inadequate space to storedocuments
Payment of fee was throughCash/DD only.
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Consequences Incidents of manipulation,
replacing, fabricating of physical documents; and
Inadequate manpower tohandle the situation in O/o.ROCs.
In effective governance of theoffices and lack of effectivecontrol and time to concentrateother core areas of work liketechnical scrutiny of documents, identifying and
filing prosecutions; Compliance management was
a difficult task
Resulting in huge number ofdefaulting companies;
Chance for fly by nightoperators;
Scope for unscrupulouselements like defaulters inNBFCs and PlantationCompanies;
Non availability of adequateevidential information/ recordstimely;
Scope for unethical climate inthe offices;
In adequate regulatory/administrative control
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UPHILL TASK FACED TO DEAL
WITH VANISHING COMPANIES Missing documents and
destruction of documentsas per the rules creatednon availability of certain
documents includingshare holders lists etc.
Delay in Identifying thecompanies in right time;
Lack of details of thepromoters/directors andtheir whereabouts inabsence of present MCA21 system
Lack of sufficient materialinformation to prove thedelinquent acts of thedefaulters;
Lack of coordination withother regulators throughthe online from time totime in the absence ofMCA21
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MCA 21 AN OMNIBUS DATA BASE
- AN ANSWER AND A SAVIOUR
First largest e-governance project
and a large scale transmission
project in the Indian History;
Mission Mode Project completedwithin 77 weeks;
Transforms the functions ofROCs
from physical mode to cyber mode -
a paperless system introduced;
Reflects the MCAs goal for21st
Century;
Stakeholders access to the MCA21
at all times and on all occasions
24x7 uninterrupted online service;
Takeover limited computer/piecemeal operations ofROCsfrom the NIC;
Covers 40 field offices, 4 RD and20ROC offices totaling 64
offices; Estimated Budget 345 crore;
45 million documents digitized;
1200 Employees Trained;
More than 3 lakh digital signature
certificates year itself issued inthe first , the largest planneddeployment of DSCs for (an) e-governance project in Indiaand possibly
the world,
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BACK DROP: CORPORATE INSOLVENCY WITH REFERNECE TO
THE PROVISIONS OF COMPANIES ACT, 1956
The Act does not provide any precise definition for the word Corporate Insolvency
Section 433 (e) of the Act only to some extent answer the Insolvency- The companyunable to pay its debt- (i). Debt and (ii). Inability to pay:
Debt is admitted if there is no bonafide dispute;( Seciton 434 is deemingprovision to decide inability to pay debts if due amount is Rs. 500 or more)
Cash Flow Test : Inability to Pay Test Balance Sheet Test: Liability of the Debtor exceeds his assets ash Flow Test
: Inability to Pay Test
Balance Sheet Test: Liability of the Debtor exceeds his assets
The court can hardly exercise any discretion where the company is so hopelesslyinsolvent that there is absolutely no chance of resurrection. A bona fide disputeimplies existence of a substantial ground for the dispute raised. The companies wereunable to pay debts. They could not substantiate their defence. Winding up wasinevitable. Sicom Ltd. v. Shree Panduranga Poultries P. Ltd., (1999) 2 Comp LJ 218:(2001) 103 Com Cases 318 (AP).
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MAIN REASONS FOR CORPORATE INSOLVENCY
Companys entire capital is eroded due to heavy losses:-
Lack of financial management; Inadequate capital investment; Excess percentage of credit borrowing in disproportionate to actual
capital investment; too much reliance on external marketing;
Lack of business skills (risk management); Unpreparedness with thechanges in business scenario;
Diversification of funds; Lack of experience or poor strategies in marketing and customer
service; Lack of harmonious relations with stakeholders as well as among the
management;
Failure to prevent frauds; Circumstantial collapses ( Recession; Unfavorable court verdicts;
Cancellation of Product Licenses; Disturbance in external relations)
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STATUTORY DECLARATION INSOLVENT-I
Companys assets are not sufficient to pay its debts;
A company carrying on business with borrowed money andcarrying forward its losses, in the balance-sheet and a company
whose assets are so locked-up that they cannot be realised forpayment of its debts, these are indications of commercialinsolvency. Ramesh Premchand Shah v. Engineers EnterprisesP. Ltd., (1977) 47 Com Cases 294 (Bom); Concord Finance P.Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156(Del).
Company becomes defunct and it has not been carryingbusiness operations for the last several years.
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STATUTORY DECLARATION INSOLVENT-II
Where the cheques issued by a company inordinary trade transactions were dishonouredthe company was unable to pay its workers'
dues, and did not deposit the contributiontowards Employees' State Insurance andProvident Fund, apart from which there weresuits against the company for recovery of largeamounts as well as substantial liabilities
towards Sales Tax and Central Excise, therewas a clear case of commercial insolvency.Universal Glass Ltd. v. Meerut Bottlers P. Ltd.,(1985) 58Com Cases 68(Del).
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STATUTORY DECLARATION INSOLVENT-III
The shares of a company were accepted bythe stock exchange for listing but subsequentlythe permission was cancelled. The application
money became refundable. There was noprospect of the company doing any businessand there was a complete deadlock among thedirectors. It was doubtful if the creditors werelikely to be paid. It was held to be a case of
commercial insolvency. Deccan Farms &Distilleries Ltd. v. Velabai Laxmidas Bhanji,(1979) 49 Com Cases 321 (Bom) (DB).
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THE PHILOSOPHICAL FOUNDATIONS OF CORPORATE
INSOLVENCY LAW
Corporate Insolvency law has four overriding objectives:
1. to restore the debtor company to profitable trading where this ispracticable;
2. to maximize the return to creditors as a whole where thecompany itself can not be saved;
3. to establish a fair and equitable system for the ranking of claimsand the distribution of assets among creditors, involving alimited redistribution of rights; and
4. to provide a mechanism by which the causes of failure can beidentified and those guilty of mismanagement brought to bookand, where appropriate, deprived of the right to be involved inthe management of the other companies.
To facilitate achievement of these objectives the insolvency law providesa battery of legal and administrative instruments and institutionalstructures.
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OBJECT OF THE LIQUIDATION
For Just Distribution of the Net Assets of
the Company in terms of the Provisions
of the Companies Act, 1956 withreference to the Insolvency Laws;
To bring company in liquidation to alogical end: Termination of Companys
existence i.e., dissolution
7-Dec-09 17
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SCHME OF INSOLVENCY LAWS
Two Kinds of Insolvency Laws:
1. Personal Insolvency, which deals with individuals and
partnership firms governed by Provisional InsolvencyAct, 1920 and Presidency Towns Insolvency Act,
1908; (the process is through the appointment of
Receiver) and
2. Corporate Insolvency It results in winding up of the
company under the Companies Act, 1956. if it is forrevival of the company, the Sick Industrial Companies(Special Provisions) Act,1985 (SICA) deals with it. (theprocess of insolvency through the appointment ofLiquidator
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Process of Liquidation:
All correspondence should clearly indicate that the company is inliquidation (Insolvent);
Tracing out the delinquent directors who have not filed Statementof Affairs under Section 454 of the Companies Act,1956 to compelthem to comply with;
Tracing out assets and their particulars;
Identifying creditors and debtors;
Realization of assets (power to sell)
Contesting in the Litigations if required;
Investigation of the affairs and verification books and records;
Distribution of realization proceeds to creditors (interim or final)
dividends or return of capital; Meeting of the Creditors and other contributories;
Filing Dissolution of Application under section 481 of the Act
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WINDING UP ORDER AND ITS CONSEQUENCES-I
Section 441- Commencement of winding up:- sub-section (2) saysthat: In any other case, the winding-up of a company by the Court shallbe deemed to commence at the time of the presentation of the petitionfor the winding up.
Section 444: order of the winding up order to be communicated to theOL and ROC;
Section 445 (3):Such order shall be deemed to be notice ofdischarge to the officers and employees of the company, except whenthe business of the company is continued.
(Continuity of business for beneficial winding up of a company)
Section 446 Suits stayed on passing of the winding up order
Section448 read with 449`. Appointment ofOfficial Liquidator
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WINDING UP ORDER AND ITS CONSEQUENCES-II
Section 454: Statement ofAffairs to be made to OL;
Section 456- Custody of the companys property
Ownership of companys property vests with the liquidatorthough the title stands in the name of the company. But therights of the company has been divested on the date of winding up order itself.
The Liquidator can take the assistance of the DistrictMagistrate and other revenue staff;(Since the object of winding up proceedings is to put all unsecured
creditors on par and to pay them pari passu, an attachment effectedby the revenue authority on the immovable properties of the companyin respect of dues to the Employees' State Insurance Corporation,Wages Authority and Regional Provident Fund Commissioner, wasineffective and the liquidator could take the properties into his custodyfree from all attachments and realise their value according to windingup procedures. Ananta Mills Ltd. (In Liquidation) v. City DeputyCollector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)).
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POWERS OF LIQUIDATOR
Section 457 certain powers without permission and certain
with the prior permission of High Court;
Section 458- Discretion of Liquidator;
Section 464. Appointment and composition of committee
of inspection;
Section 465 : Constitution of committee of inspection
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PROOFOF RANKING OF CLAIMS
Section 528 (Debts of all descriptions to be admitted to proof), Section 529(Applicatiion of Insolvency rules in winding up of insolvent companies: section 529A(Overriding Preferential Payments and Section 530 Preferential payments)
Sections 541 to 542 _Misfeasance Proceedings against delinquent;
Companies (Court) Rules 1956 Proof of debts: fixation of date by the OL byadvertisement; claimants to prove their debt; liquidator to communicate acceptanceor rejection of debt Rules 147-163
Appeal by creditor against decision of OL Rule 164
Proof and list of creditors to be filed in court Rule 167
Application of the assets of the company Application of Insolvency Rules sec
528/529; Priority of Payments sec 529/529A/ 530
Section 481- Dissolution of company.
Section 560- Defunct company
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ENFORCEMENT OFORDERS OF COURT
Passed Under Companies Act,1956
Section 634 provides that any order made by a court under this Actmay be enforced in the same manner as a decree made by the courtin a suit pending therein.
Order XXI of the Code ofCivil Procedure specifies the procedure for
execution of order and decrees issued by a court.Limitation to Execute Decree: (12 years under Art 136 Sch.I ofLimitation Act,1963 plus grace period under Section 458-A of theCompanies Act,1956
Section 482,634 and 635 relate to the enforcement of the orders of thecompany court. Section 482 empowers the company court of one state
to enforce the orders of a company court of another state. The orderwill be enforced if a certified copy is produced under section 635. Oncethe certified copy is received by the company court, it will havejurisdiction under section 634 to either directly enforce it itself or sendit for execution to a subordinate court in the same manner as its owndecrees are enforced. Kalgara Rama Tulasamma v. SubhadayaPublications Ltd., (1969) 39 Comp. cases 993, 998 (AP).
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Defunct Company Definition
Defunct company means a companyregistered under the Companies Act,
1956 which is not carrying over anybusiness activity or operation on or afterthe 1st April, 2008 and includes acompany which has not raised its paid
up capital as provided in sub sections (3)and (4) of section 3 of the CompaniesAct, 1956. Section 560 deals with.
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CROSS-BORDER INSOLVENCY IN INDIA
There is no mechanism under the Companies Act, 1956;
The question of choice of law arises in all cross-border
transactions due to (1) development of international tradein which inter-country debtor-creditor relations across the
border develops; (2) development of transnational andmultinational institutions through building up trans borderorganizational structure through permanentestablishment, branches or franchises; (3) developmentof organizational relations through chain of organizationstructure of subsidiaries, and joint venture and finally (4)development of complexities in modern businessrelations.
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UNCITRAL MODEL INSOLVENCY LAW STILL UNDER
DISCUSSION
The UNCITRAL came out with a Model Law on Cross-Border Insolvencynegotiated among more than 40 countries representing a broadspectrum of differing legal systems.
The law applies in the following situations where:
(1)assistance is sought in a state by a foreign court or a foreignrepresentative in connection with a proceeding under thedomestic law of a state;
(2) assistance is sought in a foreign state in connection with aproceeding under the domestic law of a state;
(3). a foreign proceeding and a proceeding under the domestic lawof a state in respect of the same debtor are taking placeconcurrently; or
(4) creditors or other interested persons in a foreign state have an
interest in requesting the commencement of, or participating in, a
proceeding under the domestic law of the state.
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REASONS FOR DELAYS IN
LIQUIDATIONS-I Time consumption between the order of BIFR/ AAIFR
under SICA Act and consequential proceedings before theHigh Court prior to passing a winding up order - time takenmore than 5 years- resulting in deterioration of the value of
the properties and destruction of the books of accountsand other important records ;
Statement of Affairs NOT FILED - takes a plea of their resignation/s much prior to the winding up as a pretextUltimately, the liquidator is put to wait for consolidatinginformation so gathered by him in absence of any
cooperation from the ex-management. In certain cases, thedirectors have absconded. To trace them out, the OfficialLiquidator has even gone to the extent of obtaining RedCorner Notice.
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REASONS FOR DELAYS IN
LIQUIDATIONS-II Defective Statement Affairs (SOA);
Inadequate details of properties and failure to furnish documents/titledeeds;
Creation of third parties interests;
Improper valuation reports; Ineffective security protections provided to properties;
Conflicting interests ofRevenue authorities;
Debtors interested in protracted litigations;
Workmen illiteracy/lack of knowledge about liquidations;
lack of cooperation from creditors;
Lack of adequate and skilled manpower in the offices ofO
Ls; Re-adjudication of claims again and again;
Other issues like execution of decrees etc.
Inadequate powers to the Liquidators
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CONSTITUION OF HIGH LEVEL EXPERT COMMITTEES
In the year1999, the Government of India set up a high level
committee headed by V.B. Balakrishna Eradi, J., for remodeling
the existing laws relating to insolvency and winding up of
companies and bringing them in time with the internationalpractices in this field.
In 2001, the Report of the Advisory Group on Bankruptcy Laws,
called the N L Mitra committee, made several
recommendations on bankruptcy law reforms, the first among
which was consolidation of bankruptcy laws into a separate
code. However, no legislative steps have still been taken in this
regard.
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IMPLEMENTION OF JUSTICE ERADI COMMITTEE REPORT ON
LIQUIDATIONS
Companies Act, 1956 has been amended to constitute NCLT
and NCALT Integration of jurisdiction ofCompany Court (High
Court), BIFR/AIFR and CLB:
Object to avoid delays in liquidation of companies from one stage to
other; Simplification of Liquidation procedure;
Integration of expertise;
Introduction of Private Liquidators;
However, the implementation of amended provisions were delayed
due to the reason of pending case before the constitution Bench of
Supreme Court.
Future ofCorporate Insolvency Laws in India- Needed a lot of studyand effort to suggest a comprehensive legislation covering various
deficiencies in the current set up of laws.
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Transmission of Proceedings from
High Court to Tribunal BACK DROP Section 448 of the Act: control of Central Government over
Liquidators - Office of the Official Liquidator attached to the HighCourt of the State.
Central Government retains administrative control but statutory
control is vested with the High Court concerned Section 457/ -Rule 291 of the Companies ( Court) Rules, 1959 mandates theliquidator to collect Central Government Commission on eachand every stage of the liquidation out of the realized assets inrespect of the companies in liquidations.
Interference into the administration of justice: ITAT vs. V.K.
Agarwal, AIR 1999 SC 452: MANU/SC/0807/1999.
*** The Office of the OL will be attached to NCLT on the date of
its establishment
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Necessary amendments to the
Companies Act, 1956 vide
Companies (Amended) Act, 2002
The various provisions ofChapters IB and IC of the Act (sections10FB,
10FD, 10FE, 10FF, 10FL(2), 10FO, 10FR(3), 10FT and 10FX) are
brought on to the statute to establish the NCLT and NCLAT by way of
ordinance and later it became an act basing upon the Justice Eradi
Committee Report but provisions remained ineffective until this date.
Madras Bar Association challenged the enactment challenging the
constitutional validity ofChapters 1B and 1C of the Companies Act,
1956(Act for short) inserted by Companies (Second Amendment)
Act 2002 (Amendment Act for short) providing for the constitution of
National Company Law Tribunal (NCLT or Tribunal) and National
Company Law Appellate Tribunal (NCLAT or Appellate Tribunal) upheld by High Court vide Order dated 30-03-2004 in WP No. 2198/
2003.
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Main object behind the
amendment -I To combine the powers of the CLB under the Companies Act,
1956, BIFR and AAIFR under the Sick Industrial Companies(Special Provisions) Act, 1985 as also the jurisdiction and powersrelating to winding-up presently vested in the High Courts;
Establishment of NCLT and NCLAT will have the followingbeneficial effects:
(i) reduce the pendency of cases and reduce the period ofwinding-up process from 20 to 25 years to about two years;
(ii) avoid multiplicity of litigation before various fora (HighCourts and quasi-judicial Authorities like CLB, BIFR andAAIFR) as all can be heard and decided by NCLT;
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Main object behind the
amendment -II (iii) the appeals will be streamlined with an appeal
provided against the order of the NCLT to an appellate
Tribunal (NCLAT) exclusively dedicated to matters
arising from NCLT, with a further appeal to the SupremeCourt only on points of law, thereby reducing the delay
in appeals; and
(iv) with the pending cases before the Company LawBoard and all winding-up cases pending before the
High Courts being transferred to NCLT, the burden onHigh Courts will be reduced and BIFR and AAIFR could
be abolished.
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Verdict on the formation of NCLT
and NCLAT Supreme Court
Vide Judgment dated 11-05-2010 in Civil Appeal No. 3067 of
2004: Upheld the legislative power of the Parliament to
constitute the NCLT and NCALT while imposing certain
conditions inter alia that:
Independency of Judiciary to be protected;
Eligibility conditions for appointment of Members and
their tenure shall be modified;
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Meaning ofTribunalThe Franks Committee also defined Tribunal rather negatively as
follows:
Tribunals are not ordinary courts, but neither are they
appendages to Government Departments. We consider thatTribunals should properly be regarded as machineryprovided by Parliament for adjudication rather than as part of themachinery of administration. The essential point is that in
all these cases parliament has deliberately provided for adecision outside and independent of the Department concerned,either at first instance, . or an appeal from a decision ofa Minister or an Official in a special statutory position. Although
the relevant statutes do not in all cases expressly enact thatTribunals are to consist entirely of persons outside theGovernment Service, the use of the term tribunal in legislationundoubtedly bears this connotation, and the intention of Parliament to provide for the independence of Tribunal is clearand unmistakable.
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What elders say about the
changes: The science of legislation, is like that a medicine, in
one respect, that it is far more easy to point out whatwill do harm, than what will do good.
C.C.Cotton (1780-1832), Lacon, 1820, Vol.I.DXXIX
Changes in the law come more or less like changesin automobiles, radios or bombers we learn byexperience --by trial or error.
Julius Henry Cohen Rent control, after WorldWar I recollections, New York University LawQuarterly Review, 1946, P. 272.
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THANKS
TO
ALL PARTICIPANTS AND THE
STAFF OF NALSAR