Bringing State-Owned Electricity Companies within the IBC Ambit

[Aradhana Parmeshwar is a 4th year student pursuing her B.A. L.L.B (Hons.) at WBNUJS, Kolkata]

On 8 November 2021, in a letter written to the Secretary, Department of Legal Affairs, the Ministry of Power clarifiedthat the Corporate Insolvency Resolution Process (‘CIRP’) can be initiated against state-owned electricity distribution and generation companies. The communication was in pursuance of a case filed at the Madras High Court by Tamil Nadu Generation and Distribution Company (‘TANGEDCO’). TANGEDCO had contended the initiation of CIRP proceedings against it, on grounds of it being a government company. This article seeks to analyze the findings of the Madras High Court and the Ministry of Power with respect to TANGEDCO’s arguments that it should be exempted from section 9 of the Insolvency and Bankruptcy Code, 2016 (‘the IBC’) and the jurisdiction of the National Company Law Tribunal (‘NCLT’). It further examines the jurisprudence on the applicability of insolvency proceedings under the IBC to government companies.

Analysing TANGEDCO v. Union of India

The issue before the Madras High Court, in the case of TANGEDCO v. Union of India[i] was whether TANGEDO, a government-owned enterprise, was subject to the jurisdiction of the NCLT with respect to insolvency proceedings initiated against TANGEDCO. The arguments put forth by TANGEDCO were two-fold; first, being a company substantially owned by the government, it could not be made the subject of insolvency proceedings. Second, reliance was placed on section 86(1)(f) of the Electricity Act, 2003 which provides for the adjudication of disputes between distribution licensees (‘discoms’) and generating companies by the respective State Electricity Regulatory Commission. Since the matter was regarding the generation of electricity by TANGEDCO, it was asserted that the Electricity Act, being a special statute, would prevail over the Companies Act, 2013 and the IBC.  

The High Court quashed both arguments put forth by TANGEDCO, the first on the grounds that neither the Companies Act nor the IBC expressly exempts the initiation of insolvency proceedings against a government company. On the second issue, the Court held that as South India Corporation Pvt. Ltd. was a creditor of TANGEDCO, as opposed to a licensee or generation company, it did not fall within the ambit of disputes contemplated by section 86(1)(f). Thus, in the absence of conflict the Electricity Act vis à vis the Companies Act and the IBC, the NCLT would ordinarily have jurisdiction over any dispute arising in pursuance of insolvency proceedings instituted by a creditor.

In its letter to the Ministry of Law and Justice, the Ministry of Power shed further clarity on the first argument, that is, TANGEDCO’s immunity from insolvency proceedings due to its status as state-run company. It stated that government companies as under section 2(45) of the Companies Act would fall under the section 3(7) of the IBC, which defines a “corporate person” as, inter alia, a company as defined in section 2(20) of the Companies Act. Section 2(20) refers to any company incorporated under the Companies Act, 2013 or any previous company law, thereby including government companies under section 2(45). Moreover, the Ministry of Power clarified that “TANGEDCO cannot be categorised as a government body formed by way of statute for performing sovereign government function”. This elucidation was in pursuance of judicial precedent exempting companies performing a sovereign function from the scope of insolvency proceedings. The same will be examined in the subsequent section.

Applicability of Insolvency Proceedings to Government Companies

While neither the IBC nor the Companies Act provides for an exemption to insolvency proceedings initiated against Government companies, an exception has been carved out by way of case law.

In June 2019, the case of Harsh Pinge v. Hindustan Antibiotics Limited[ii] was brought before the Mumbai Bench of the NCLT, wherein the CIRP proceedings were initiated against Hindustan Antibiotics Limited, the corporate debtor. The judicial member of the Bench held that CIRP proceedings could not be initiated against a government company that functioned as an instrumentality of the state. This would constitute an attempt to lift the corporate veil of the company and amount to instituting insolvency proceedings against the government and the President of India, which is ultra vires the Constitution. Thus, even in the absence of an express exemption, the Bench held that government companies representing the executive authority of the State, would be exempt from IBC proceedings. Presumably, the rationale behind this position is that the public interest for which such a company was established would be adversely affected if the company were to undergo insolvency proceedings. Notably, the technical member of the Bench deviated from this stance, holding that CIRP proceedings could be instituted against government companies that were an instrumentality of the State.

In November 2019, in Hindustan Construction Company v. Union of India, the Supreme Court addressed the issue, through a distinction between section 3(7) and section 3(23) of the IBC. As discussed, section 3(7) defines a “corporate person”, including a company under section 2(20) of the Companies Act. On the other hand, section 3(23) defines a “person”, which includes “any other entity established under a statute”. The Supreme Court held that government companies falling within the ambit of section 2(20) of the Companies Act would consequently come under section 3(7) of the IBC. However, government companies that perform sovereign functions would fall under section 3(23) of the IBC. Such companies cannot be subjected to insolvency proceedings or winding up under the IBC, since they are governed by a specific statute. In this regard, it is pertinent to note that the exemption and reasoning carved by the Supreme Court is tailored towards entities established by way of a specific statute. With respect to government companies established under the Companies Act but performing sovereign functions, the determination of the same seems to be left to the discretion of the courts on a case by case basis, in order to ascertain the applicability of the IBC to such companies. The decision of the Supreme Court has since been followed by the High Courts of Bombay, Gauhati,[iii] and Delhi.

Conclusion

A perusal of the existing jurisprudence on the subject leads to the conclusion that further clarity is required in determining the applicability of the IBC to government companies functioning as an instrumentality of the State, while established under the Companies Act, 2013, such as Hindustan Antibiotics Limited. There exists a divergence in the reasoning employed by the Supreme Court and the NCLT, with the former creating an exemption on technical grounds, that is, the existence of a specific statute. The NCLT, however, emphasized the aim of serving a public interest, the existence of which is not contingent on governance by a specific statute. In the absence of a provision codified in the IBC akin to section 462 of the Companies Act, which allows for the Central Government to exempt classes of companies from any of its provisions on account of public interest, the task of determining which government companies perform sovereign functions and are consequently beyond the IBC ambit, falls to the judiciary. However, the clarification by the Ministry of Power has set a high threshold for the same and is a welcome step for creditors to recover dues from debt-ridden state-discoms.

Aradhana Parmeshwar

[i] W.P. No. 19785 of 2021.

[ii] C.P. (IB) 2482 of 2018.

[iii] (2021) 4 GLT 693.

 

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