Initiation of Proceedings against a Government Company: Shattering the questionable Conundrum under IBC

Introduction

Section 238 of the Code is a non-obstante clause in the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘the code’) which does not incorporate any distinct limitation from the Constitution to impose a complete bar on the resolution of government companies. However, the present code does not have any provision related to exemption of such an application. Contrary to Section 462 of the Companies Act, 2013 which allows the Central Government to exempt the application of any provision of the Companies Act in the case of a particular class of companies in light of public interest, the current code has failed to provide a direct clear-cut provision for the same.

The Insolvency Law Committee of 2018 in its Report had unanimously agreed that introduction of such a section will be beneficial for relaxing the procedure under the Code for certain classes of companies, including for MSMEs, under the aegis of public interest while preserving the scheme and objective of the Code. On perusal of this, an exemption has been carved out in Section 29A of the Code to allow promoters in MSMEs to submit a resolution plan in the event that they are not willful defaulters. However, there is no exemption in the provisions of the Code that requires lifting of the corporate veil in the case of a government company to disregard an insolvency plea. Government companies and private companies are placed in the same pedestal under the ambit of the Code. Therefore, the decision of the technical member of the tribunal appears to be the correct law and should be endorsed in the future.

Section 2(45) of the Companies Act, 2013 defines ‘Government Company’ as 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. Section 3(7) of the IBC defines ‘Corporate Person’ as 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.

Henceforth, from a parallel reading of the definitions of Corporate Person and Government Company under IBC and Companies Act, it can be summarized that the applicability provision of IBC is clear on this issue. There is no specific exemption for Government Companies under 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.

Interpreting the Dilemma: Government Entities vs Government of India

In the landmark judgment of Harsh Pinge vs. Hindustan Antibiotic Limited, the two members of the National Company Law Tribunal (NCLT) Mumbai bench have laid down contrary opinions concerning the admission of an insolvency plea by an operational creditor against Hindustan Antibiotics Limited. The operational creditor in the instant case was a senior employee of the concerned company against which there were certain pending salary and gratuity dues. The employee duly followed the statutory mechanism in section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate the petition before the NCLT. The primary contention in the case was whether an insolvency proceeding could be undertaken against a government company, the entire shareholding of which is held by the Government of India. Resultantly, the two-member bench pronounced an order stating that insolvency proceedings cannot be initiated against a government company by an operational creditor.

Moreover, in the infamous matter of Western Coal fields Ltd vs Special Area Development Authority, it was held that even though the entire share capital of the appellant-companies has been subscribed by the Government of India, it cannot be predicted that the companies themselves are owned by the Government of India. The companies, which are incorporated under the Companies Act, have a corporate personality of their own, distinct from that of the Government of India. The lands and buildings are vested in and owned by the companies and Government of India only owns the share capital. Hence, CIRP cannot be initiated against them.

It is pertinent to mention that the concept of Government Companies is subsumed in the definition of Corporate Person under the IBC. The same was also held in the case of Hindustan Construction Company Limited vs Union of India wherein it was widely expressed that the IBC is applicable to Government Companies. However, such applicability has to be seen in the light of whether the Company is performing any sovereign functions and if the answer is yes, 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 but otherwise such Government Company can be brought under the purview of IBC.

Conclusion

The Hon’ble Supreme Court has time and again tried to settle the position of Government entity or a government company with respect to the corporate insolvency resolution process under Insolvency and Bankruptcy Code, 2016. After reiterating and discussing various judgments of the courts and tribunals, it can be concluded that the position of such undertaking(s) still possess a lacunae in our Insolvency and Bankruptcy Code. Even though a CIRP can be initiated against a government entity, however, notwithstanding the corporate debtor as an instrumentality of the State. It clearly shows the divergent opinions and a direct clarification from the appellate adjudicatory bodies is required as to the position of law.

Furthermore, the Hon’ble Supreme Court has acknowledged ‘government company’ as defined in section 2(45) of Companies Act, 2013 to be subsumed in the definition of ‘company’ as defined under section 2(20) of the enacted legislation. Therefore, the CIRP process can be initiated against a government company by virtue of it being covered under the first part of ‘corporate person’ as provided in section 3(7) of the IBC.

Sources-

https://nclt.gov.in/sites/default/files/Interim-order-pdf/HARSH%20PINGE%20CP-2482-2019%20NCLT%20ON%2016.07.2019%20INTERIM.pdf

https://indiankanoon.org/doc/791627/

https://indiankanoon.org/doc/102230863/

Author Bio

Qualification: Student- Others
Company: Diksha Dadu is a 4th year BBA.LL.B(H) student at Amity Law School, Noida. She is currently pursuing CS Executive Level from ICSI.
Location: New Delhi, Delhi, India
Member Since: 02 May 2021 | Total Posts: 2

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