CIRP against Government Companies: Has Supreme Court Settled the Debate?

[Soumyajit Saha is a 3rd year B.A. LL.B student at National University of Study and Research in Law, Ranchi]

Last year, in Harsh Pinge v. Hindustan Antibiotics Limited, the judicial member of the National Company Law Tribunal (NCLT), Mumbai Bench dismissed the petition filed under section 9 of Insolvency and Bankruptcy Code, 2016 (IBC). This was on the ground that corporate debtor, being a government company, is an instrumentality of the State and that a corporate insolvency resolution process (CIRP) cannot be initiated against the corporate debtor. However, the technical member took a different stance and was of the opinion that the corporate debtor, being a company incorporated under the Companies Act, 1956, is a corporate person within the meaning of section 3(7) of the IBC. Therefore, the CIRP can be initiated against the government company, notwithstanding that the corporate debtor is an instrumentality of the State. With both the members adopting divergent opinions, it required a clarification from the appellate adjudicatory bodies as to the position of law.

Analysis of the Supreme Court’s Decision

In November last year, the Supreme Court in Hindustan Construction Company Limited and Another v. Union of India and Others, while dealing with petitions challenging the constitutional validity of section 87 of the Arbitration and Conciliation Act, 1996, also addressed the ambit of ‘corporate person’ under section 3(7) of the IBC as to whether public sector undertakings (PSUs) are amenable to the IBC. It is worth mentioning that the judicial member in Harsh Pinge opined that legislators while enacting the IBC did not envisage a situation wherein the CIRP process would be initiated against government companies; otherwise, the law makers would have exempted government companies from the CIRP process. To the contrary, the Supreme Court in Hindustan Construction held that government companies would definitely fall within the definition of ‘corporate person’ and ‘corporate debtor’ under sections 3(7) and 3(8) of the IBC, whereas government bodies, being statutory authorities, would be exempted from IBC. In order to justify the decision, the Court adopted a literal interpretation of sections 3(7) and 3(23) of the IBC. Based upon a literal meaning of the preceding provisions, the Court drew a distinction between PSUs incorporated under section 2(20) of Companies Act, 2013 (or even the erstwhile Companies Act, 1956) and PSUs that are established under a statute as provided in section 3(23)(g) of the IBC.

Furthermore, the Supreme Court acknowledged the fact that ‘government company’ as defined in section 2(45) of Companies Act, 2013 would be subsumed in the definition of ‘company’ as defined under section 2(20) of that 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. The Court added that NHPC, NTPC and IRCON, being PSUs are government companies as they are incorporated under the Companies Act, and they would be subsumed within the first part of section 3(7) of the IBC. However, the Supreme Court also laid down that not all PSUs would fall within the rigours of IBC as in the case of statutory bodies like NHAI, which was established under the National Highways Authority of India Act, 1988 and also the fact that it performs sovereign functions of constructing national highways. Notably, the views expressed by the technical member in Harsh Pinge is contrary to the foregoing conclusion drawn by the Supreme Court. In order to validate the initiation of CIRP against PSUs, the technical member seems to have adopted a universal view and stated that legislature has not created any exception to the public sector or government undertakings. However, the Supreme Court was spot-on in laying down a distinction between PSUs or government companies incorporated under the Companies Act and PSUs established under a specific statute

CIRP against Hindustan Antibiotics Limited (HAL)

Now, the question arises whether Hindustan Antibiotics Limited (HAL), the Corporate Debtor in Harsh Pinge case should be regarded as a government company. Answering this in the affirmative, the author is of the opinion that since HAL is a company registered and governed under the provisions of Companies Act, 1956, it would be fall within the ambit of ‘corporate person’ as defined in section 3(7) of the IBC. Pursuant to the above findings, it can be safely concluded that CIRP proceedings can be initiated against HAL as it is government company and not an entity or PSU established under a specific statute.

Conclusion

It is pertinent to note that the Supreme Court has laid down the correct law by virtue of a literal interpretation of the provisions in the IBC. However, there lies a lacuna in the IBC, as the law failed to protect government companies established in the interest of public from the clutches of insolvency proceedings. Nevertheless, the Supreme Court has settled the debate on the initiation of CIRP process against government companies, at least for the time being.

Soumyajit Saha

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