The initiation of Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (Code) against Government-owned companies has been a contentious issue. At the heart of the debate lies the tension between corporate accountability and the protection of sovereign functions in the context of Government-owned companies, which often straddle the line between functioning as commercial entities and discharging public or sovereign duties. This article delves into the evolving legal landscape, judicial trends, and the implications of subjecting Government-owned companies to insolvency proceedings.
Various Courts and Tribunals in India have interpreted the provisions of the Code to determine when such companies may be subject to insolvency proceedings. In Harsh Pinge v. Hindustan Antibiotics Ltd1, the National Company Law Tribunal (NCLT), Mumbai, rendered a split verdict on whether insolvency proceedings could be initiated against a Government-owned company. The judicial member observed that Hindustan Antibiotics, a company wholly-controlled by the Government and engaged in producing affordable life-saving drugs for economically weaker sections, was an instrumentality of the State, and admitting the company into CIRP would be akin to placing the Government of India under insolvency, contrary to public interest. The technical member, however, dissented, reasoning that Section 3(7) of the Code, which defines a 'corporate person', does not exclude Government-owned companies and adjudicating authorities should not introduce exemptions where the legislature has made none2 – since such companies are incorporated under the Companies Act, they fall squarely within the scope of the Code. Although the insolvency petition to admit Hindustan Antibiotics into CIRP was dismissed by the judicial member, the conflicting interpretations led to further litigation, and the company's writ petition in the Bombay High Court (Hindustan Antibiotics Ltd v. Union of India3) remains pending.
In Hindustan Construction Company Ltd v. Union of India4, the Supreme Court of India clarified the applicability of the Code to Government-owned companies and held that such companies, as defined under Section 2(45) of the Companies Act, 2013, are included within the definition of 'corporate person' under Section 3(7) of the Code. Consequently, the provisions of the Code apply to such companies unless expressly exempted. However, the Supreme Court introduced the 'sovereign function exception' for entities like the National Highway Authority of India (NHAI) which perform non-delegable sovereign functions. The Court held that such companies cannot be taken over by a resolution professional nor be wound up under the Code, since allowing insolvency proceedings against such entities would disrupt essential Governmental functions. This 'sovereign function exception' has since become a cornerstone for determining the applicability of the Code to Government entities.
Reaffirming the view adopted by the Supreme Court, the Madras High Court inTamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) v. Union of India5 held that Government-owned companies are not exempt from proceedings under the Code unless explicitly excluded by the statute. It rejected arguments invoking the Electricity Act, 2003, holding that the absence of a conflict between the Electricity Act and the Code allowed insolvency proceedings to proceed under the latter.
The Supreme Court's decision inHindustan Construction has proved as a guide for subsequent NCLT decisions wherein challenges to the maintainability of insolvency petitions on the ground of the corporate debtor being a Government entity were rejected. In this context, some of the noteworthy decisions of NCLT are as follows:
- Satish Agro Industries v. Maharashtra Agro Industries Development Corporation Ltd:6 The NCLT, Mumbai, reiterated that Government-owned companies are subject to the provisions of the Code, citing the absence of any statutory exemption.
- Satya Narayan Sharma v. NBCC Ltd:7 The Tribunal relied on Hindustan Construction to hold that NBCC, despite being a Government-owned company, fell under the definition of a 'corporate person' and was therefore subject to insolvency proceedings.
- Chevrox Construction Pvt Ltd v. Bridge and Roof Co (India) Ltd:8The NCLT, Kolkata, reaffirmed that the Code draws no distinction between private and Government-owend companies for the initiation of insolvency proceedings. While the CIRP was later set aside due to settlement, the Tribunal's position on maintainability remained unchallenged.
- Ramjee Power Construction Ltd v. Jharkhand Bijli Vitran Nigam Ltd:9 The NCLT relied on Hindustan Construction to assert that State Government undertakings incorporated under the Companies Act are subject to the Code.
While the jurisprudence is clear that Government-owned companies are not immune to insolvency proceedings since they are not explicitly exempted under the Code unless they are engaged in sovereign or non-delegable functions, this approach raises concerns about the potential erosion of sovereign functions. Even though the Supreme Court's nuanced reasoning inHindustan Construction provides a critical safeguard against the erosion of sovereign functions while ensuring corporate accountability and financial discipline, the challenge lies in delineating the scope of what constitutes sovereign function. As Courts and Tribunals under the Code continue to interpret these provisions, a delicate balance must be maintained between corporate responsibility and accountability of Government-owned companies and safeguarding the State's ability to discharge its sovereign duties. This evolving jurisprudence underscores the Code's role in promoting financial discipline across the entire spectrum of corporate entities in the country while respecting the unique status of Government-owned companies in the country's socio-economic fabric.
Footnotes
1. 2019 SCC Online NCLT 24025 (para 11)
2. 2019 SCC Online NCLT 24025 (para 3)
3. Writ Petition (Civil) No. 11366 of 2019
4. (2020) 17 SCC 324 (paras 24 & 70)
5. 2021 SCC OnLine Mad 5705 (paras 2 & 4)
6. 2021 SCC OnLine NCLT 3109 (para 17)
7. 2023 SCC OnLine NCLT 19659 (para 22)
8. MANU/NC/2663/2024 (para 15)
9. 2024 SCC OnLine NCLT 1746 (para 9.8)
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