Whether a government company can be subjected to insolvency under IBC

The NCLT Mumbai Bench has, in the case of Harsh Pinge Vs Hindustan Antibiotics Limited, dismissed the application by operational Creditor under Section 9 of the IBC, on the ground that the Corporate Debtor i.e. Hindustan Antiboitics Ltd being a Government Company, is an instrumentality of the State and CIRP – Corporate Insolvency Resolution Process cannot be initiated against it.

The issues framed for consideration and findings are as follows:

(i) Whether CIRP can be initiated against a Govt. Company which is an instrumentality of the state as covered by many judgments of the Hon’ble Apex Court under Article 12 of the Constitution of India;

(ii) Whether the IBC is an answer for the Petitioner and whether the admission of the Petition serves the objective for which the IBC is enacted;

(iii) Whether the preamble of the Constitution of India which includes the word “socialistic” has any bearing on this petition and;

(iv) Whether the admission of the Petition defeats the public purpose.

In coming to this conclusion on points (i) and (ii), the learned Bench opined as follows:

“In view of the above findings, I am of the considered view that the CIRP process cannot be initiated against an instrumentality of the state. To say these words, I have made an attempt to lift the corporate veil of the Corporate Debtor to see who is behind the same and I found that it is none other than Govt. of India, in the name of President of India. Initiating CIRP process against the Corporate Debtor practically amounts to initiating CIRP process against the Govt. of India which is impermissible under the Constitution/Law. The law makers while enacting the IBC appears to have not envisaged such a situation otherwise they would have exempted Govt. Companies from the CIRP process as the application of the Code on the said Govt. Companies would create a chaos and defeat the very intent for which IBC is brought into existence. At the same time there is also another way looking at it and that is, there is no reason even to expressly exempt the Govt. Companies because it is an instrumentality of the state and de-horsing the corporate character and independent entity, there is everything to say that the Govt. Companies are an instrumentality of the state or rather we can say that there an alter ego of the state itself and the result of the same is that the IBC cannot interfere with the state owned undertakings”

If we decipher the reasons for the decision, the following salient points emerge:

  • The Corporate Debtor is an instrumentality of the State and an alter ego of the State itself
  • Lifting the Corporate veil, the Shareholder of the Corporate Debtor is the President of India
  • Initiating CIRP process against the Corporate Debtor practically amounts to initiating CIRP process against the Govt. of India which is impermissible under the Constitution/Law
  • The law makers while enacting the IBC appears to have not envisaged such a situation otherwise, they would have exempted Govt. Companies from the CIRP process as the application of the Code on the said Govt. Companies would create a chaos and defeat the very intent for which IBC is brought into existence

In respect of issues (iii) and (iv), the reasons for coming to the conclusions are as follows:

“From the above it is clear that irrespective of the fact whether a company is earning profits or not and has the ability to pay debts or not, the survival of the company cannot be put in jeopardy and in view of the fact that the CIRP process virtually creates a situation where the activities of the company goes into the hands of a Resolution Professional. Here is a case merely because an employee who served the company for several years and had grown from the bottom to the top level not winding his long association with the Company which provided him bread and butter for so many years, had filed the above petition just because the undertaking is not presently in a position to pay his dues? Does it mean that there is some Debt and there is a Default and the CIRP can be initiated against a Government Company which is catering to the requirements poor people at large by producing medicines at an affordable price? The answer has to be no. The reason for the same is that the Govt. Companies though incorporated as a corporate entity are not wholly created for the intent of making Crores and Crores of profit by creating huge industrial facilities. The real object is to serve the public purpose even at the cost of incurring losses. The Govt. of India takes the call at the appropriate time and would make all the possible efforts to revive the company and pay dues to all its employees. Therefore, the admission of the petition would defeat the provisions of Constitution of India which is impermissible under Law. The Constitution of India and its preamble partakes and prevails over the provisions of IBC and hence the Petition thoroughly fails on the above ground. In view of the above, the points No. (iii)& (iv) are answered against the Petitioner as the Respondent is a Government Undertaking and initiating insolvency process against it would be against public interest. Another important point that requires to be seen from another angle is that several important Government Companies, like, Mazagon Dock Shipbuilders, Bharat dynamics Limited, Hindustan Aeronauticals Limited, Bharat Heavy Electricals Limited, and Bharat Electronics Limited which produces highly sensitive, military products. If at all a Petition under IBC is allowed to be maintained against any of these Companies, very sensitive data or information will be leaked out and the same would create chaos. Therefore, the constitutional law doesn’t permit any Insolvency Petition being maintained against a Government Undertaking owned by the President of India.”

The reasons for conclusions specified in the Order are, to say the least, are opinions not backed by any legal tenet.  The equating of initiating CIRP proceedings against a Government Company with CIRP proceedings against Government of India is not at all correct.  Further it was mentioned that the law makers while enacting the IBC appears to have not envisaged such a situation otherwise, they would have exempted Government Companies from CIRP process and the application of code on the Government companies would create chaos and defeat the very intent for which IBC is brought into existence.  This also is purely an expression of personal view without an iota of legal backing under the IBC or the BLRC Report and other documents connected with the framing of Insolvency and Bankruptcy Code.

Now let us look into the Code and see whether the Code makes any distinction between Government Companies and other Companies in the application of the Code.

Relevant portion of Section 2 of the IBC, 2016 dealing of the Application of the Code reads as under:

2. Application. –

The provisions of this Code shall apply to—

(a) any company incorporated under the Companies Act, 2013 (18 of 2013) or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009);

(d) such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf —–“

Section 3(7) of the IBC defines “corporate person” means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

Section 3(8) defines Corporate Debtor – means a corporate person who owes a debt to any person

Further, Section 2(20) of the Companies Act, 2013 defines a Company as – ” means a company incorporated under this Act or under any previous company law. Similarly Section 2(45) of the Companies Act, 2013 defines Government Company as – means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company

From a reading of the definitions of Corporate Person under IBC and Company and Government Company under the Companies Act and the applicability provision of IBC it is clear there is no specific exemption for Government Companies from the IBC.  Section 2(1) categorically states that the Code applies to all Companies incorporated under Companies Act, 2013 or under any other previous Company Law.

While dealing with the Case of of Harsh Pinge Vs Hindustan Antibiotics Limited the Tribunal has not reviewed any prior judgments / precedents nor other it material of judicial importance to the conclusion it did.  The Tribunal could have surveyed the precedents and made a reasoned argument for the conclusions it arrived.

Whether Government Company as an Instrumentality of State

Let us first review the judicial precedents dealing with the issue of whether a Government Company is an instrumentality of State.

Employees of Government Companies are not civil servants and so not entitled o the protection offered by Article 311 of the Constitution – Pyarelal Sharma Vs Managing Director J & K Industries Ltd (1990) 67 Com Cases 195; AIR 1989 SC 1854.

A Company Limited by Guarantee and incorporated under the provisions of the 1956 Act and over which the Central Government exercises some degree of control under the Articles of Association is not a public body or a public authority and is not a local or other authority within the meaning of Article 12 of the Constitution. S K Mukherjee Vs Chemical and Allied Products Export Promotion Council (1961)31 Com Cases 733 Cal

A Government Company being not a department of the State, its officers and employees are not public servants.  Mohd. Hadi Raja Vs State of Bihar (1998) 93 Com Cases 362.

In Heavy Engineering Mazdoor Union Vs State of Bihar (1969) 39 Com Cases 905 ; AIR 1970 SC 82, the Supreme Court while holding that the Government Company will ordinarily be presumed not be a servant or agent of the State, has also observed that inference may be drawn that such company is an agent of the Government, if in substance, it also performs government functions.

A Company incorporated under the Companies Act cannot be regarded as the State merely because the Central Government exercises certain powers under its memorandum and articles of association. S K Mukherjee Vs C & AP Export Promotion Council

It has been held that Steel Authority of India Ltd, though wholly owned by the Government of India has, by virtue of incorporation  under the Companies Act, a separate personality of its own, distinct from that of the Government of India Steel Authority of India Ltd Vs Shri Ambica Mills Ltd (1998) 92 Com Cases 120 ; (1998) 3 Comp LJ 23; (1998) 16 SCL 429 Supreme Court.

A Government Company is an authority amenable to the writ jurisdiction of the High Court.  This is to be decided giving cumulative effect to all the factor such as the objectives, functions, its management and control, the financial aid received by it, its functional control and administrative control, the extent of domination by the Government and also whether the control of the Government over it is merely regulatory Balmer Lawrie and Co Ltd Vs Partha Sarathi Sen Roy (2012) 178 Com Cases 297.

In Central Inland Water Transport Corporation Limited Vs Boorja Nath Ganguly (1986) 60 Com Cases 797 the Supreme Court held:

By the express terms of Article 12 the expression “the State” includes –

(1) the Government of India, G (2) Parliament of India (3) the Government of each of the States which constitute the Union of India, (4) the Legislature of each of the States which constitute the Union of India, (5) all local authorities within the territory of India, (6) all local authorities under the control of the Government of India, (7) all other authorities within the territory of India, and (8) all other authorities under the control of the Government of India.

There are three aspects of Article 12 which require to be particularly noticed. These aspects are

(i) the definition given in Article 12 is not an explanatory and restrictive definition but an extensive definition,

(ii) it is the definition of the expression “the State” and not of the term “State” or “States”, and

(iii) it is inserted in the Constitution for the purposes of Parts III and IV thereof.

A corporation mar be created in one of two ways. It may be either established by statute or incor- porated under a law such as the Companies Act 1956 or the Societies Registration Act 1860. Where a Corporation is wholly controlled by Government not only in its policy making but also in carrying out the functions entrusted to it by the law establishing it or by the Charter of its incorporation, there can be no doubt that it would be an instrumentality or agency of Government. But ordinarily where a corporation is established by statute, it is autonomous in its working, subject only to a provision, often times made, that it shall be bound by any directions that may be issued from time to time by Government in respect of policy matters. So also a corporation incorporated under law is managed by a board of directors or committee of management in accordance with the provisions of the statute under which it is incorporated. When does such a corporation become an instrumentality or agency of Government?”

After considering various factors and the case law on the subject, the Court thus summed up the position :

It will thus be seen that there are several factor which may have to be considered in determining whether corporation is an agency or instrumentality of Government. We have referred to some of these factors and they may be summarised as under :

  • Whether there is any financial assistance given by the State, and if so what is the magnitude of such assistance
  • whether there is any other form of assistance, given by the State, and if so, whether it is of the usual kind or lt is extraordinary,
  • whether there is any control of the management and policies of the corporation by the State and what is the nature and extent of such control,
  • whether the corporation enjoys State conferred or State protected monopoly status and whether the functions carried out by the corporation are public functions closely related to governmental functions.

This particularisation of relevant factors is however not exhaustive and by its very nature it cannot be, because with increasing assumption of new tasks, growing complexities of management and administration and the necessity of continuing adjustment in relations between the corporation and Government calling for flexibility, adaptability and innovative skills, it is not possible to make an exhaustive enumeration of the tests which would invariably and in all cases provide an unfailing answer to the question whether a corporation is governmental instrumentality or agency. Moreover even amongst these factors which we have described, no one single factor will yield a satisfactory answer to the question and the court will have to consider the cumulative effect of these various factors and arrive at its decision on the basis of a particularised inquiry into the facts and circumstances of each case.”

In Virendra Kumar Srivastava v. U.P. Rajya Karmachari Kalyan Nigam and Anr. AIR 2005 SC 411, Supreme Court court held, that in order to examine whether or not an authority is a State within the meaning of Article 12 of the Constitution, the court must carry out an in depth examination of who has administrative, financial and functional control of such a company/corporation, and then assess whether the State in such a case is only a regulatory authority, or if it has deep and pervasive control over such a company/corporation, whether such company is receiving full financial support from the government, and whether administrative control over it has been retained by the State and its authorities, and further, whether it is supervised, controlled and watched over by various departmental authorities of the State, even with respect to its day-to-day functioning. If it is so, then such company/corporation can be held to be an instrumentality of the State under Article 12 of the Constitution and therefore, will be amenable to the writ jurisdiction of the High Court under Article 226 of the Constitution.

A Seven-Judge Bench of Supreme Court in Pradeep Kumar Biswas v. Indian Institute of Chemical Biology & Ors. (2002) 5 SCC 111 held, that while examining such an issue, the court must bear in mind whether in the light of the cumulative facts as established, the body is financially, functionally and administratively, dominated by, or is under the control of the Government. Such control must be particular to the body in question, and must be pervasive. If it is found to be so, then the body comes within the purview of State within the meaning of Article 12 of the Constitution. On the other hand, when the control exercised is merely regulatory, whether under a statute or otherwise, the same would not be adequate, to render the body a State.

In Ramana Dayaram Shetty v. International Airport Authority of India & Ors. AIR 1979 SC 1628, wherein it was held that a corporation can be said to be an instrumentality or agency of the government therein under certain conditions, and the same are summarised below :

“(1) One thing is clear that if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government.

(2) Where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with governmental character.

(3) It may also be a relevant factor … whether the corporation enjoys monopoly status which is State-conferred or State-protected.

(4) Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality.

(5) If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government.

In view of the above precedents, it is clear that for a Government Company to be an instrumentality of State the factors as enumerated in the various judgments are to be considered and an decision has to be arrived based on fact.

The Supreme Court had, in the case of Hindustan Construction Company Limited Vs Union of India – WP Civil 1074 / 2019,  the occasion to deal with the issue of whether Government Companies are covered under the Provisions of IBC.

Relevant Paras of the said Judgment are reproduced below:

57. As correctly argued by the learned Solicitor General, Shri Tushar Mehta, the first part of ‘corporate person’, as defined in Section 3(7) of the Insolvency Code, means a company as defined in Clause 20 of Section 2 of the Companies Act 2013.

Sections 2(20) and 2(45) of the Companies Act, 2013, which define ‘company’ and ‘Government company’ respectively, are set out hereinbelow:

“2(20). “company” means a company incorporated under this Act or under any previous company law;” “2(45). “Government company” means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.”

58. From a reading of the aforesaid definition, Shri Tushar Mehta is clearly right in stating that the three entities who owe monies under arbitral awards to the Petitioner No.1, being Government companies, would be subsumed within the first part of the definition.

59. It is clear from a reading of the Statement of Objects and Reasons of the NHAI Act, that the development and maintenance of national highways is a government function that falls within Entry 23 of List I of the Seventh Schedule to the Constitution of India. Further, under Section 5 of the National Highways Act, 1956, the Central Government may direct that any function in relation to the development or maintenance of national highways shall also be exercisable by any officer or authority subordinate to the Central Government. Under this provision, the function of execution of activities relatable to national highways was earlier delegated to the State Governments under an “agency system”. Though the system worked through the State Public Works Departments for a period of 40 years, as difficulties were experienced, the Centre itself decided to take over development and maintenance of the national highways system through the creation of a national highways authority.

Under Section 3 of the aforementioned Act, the Authority shall be a body corporate which shall consist of a Chairman and six 77 full-time members, together with six part-time members, all appointed by the Central Government. The assets and liabilities of the Central Government in relation to national highways are then transferred to the Authority under Section 12. Under Sections 14 and 15, contracts that can be made on behalf of the Authority can only be made, if they exceed a certain value, after previous approval by the Government. Section 16 deals with the functions of the Authority, which makes it clear that these are governmental functions to be carried out only by the Government or by its agent appointed in this behalf.

62. Under Section 19, the budget prepared for the Authority has to be sent to the Central Government, capital and grants to the authority being made by the Central Government into the fund of the Authority (see Sections 17 and 18 of the NHAI Act supra). Likewise, an annual report is to be given to the Central Government under Section 22. Accounts and audit have to be made in consultation with the Comptroller and Auditor General of India, and furnished to the Central Government, which have then to be laid before the 78 Parliament [see Sections 22 to 24 of the NHAI Act (supra)]. Under Section 33, the Central Government can issue directions on questions of policy, which would then be binding on the Authority.

63. From a conspectus of the above provisions, what is clear is that NHAI is a statutory body which functions as an extended limb of the Central Government, and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. For all these reasons, it is not possible to accede to Dr. Singhvi’s argument to either read in, or read down, the definition of ‘corporate person’ in Section 3(7) of the Insolvency Code.

On an analysis of the Judgment of the Supreme Court in Hindustan Construction Company Limited Vs Union of India, we can draw the following conclusions:

  • Government Companies are subsumed in the definition of Corporate Person under IBC
  • The IBC is applicable to Government Companies
  • However, the applicability of IBC to Government Companies has to be seen in the light of whether the Company is performing any sovereign functions and if so then such a Company cannot be brought under IBC. In fact, the Supreme Court was consistent in its application of the principles enunciated in the earlier judgments in determining whether a Government Company is an instrumentality of State.  If a Government Company is an instrumentality of the State, then IBC will not be applicable to it otherwise, such Government Company can be brought under the purview of IBC.

However, while the Supreme Court surveyed the surrounding circumstances in coming to its conclusion, it did not specifically mention any principles or guidance for determination of whether the Government Companies are covered under IBC.

May be, we have to wait some more time before the matter gets clarified.

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