Can Government Companies be Brought under the Aegis of the IBC?

[Shradha Sharma is a banking and finance lawyer at a law firm in India]

Government companies are defined under section 2(45) of the Companies Act, 2013 (“Act”) to mean any company in which not less than 51 percent of the paid-up share capital is held by the central government or state government(s), or partly by the central government and partly by one or more state governments, and includes the subsidiary of such government companies. By virtue of section 2(20) of the Act, the definition of “company” shall include government companies, as such companies are incorporated under the provisions of the Act.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) under section 2 states that it shall be applicable to any company incorporated under the provisions of the Act or under any previous company law and includes companies governed by any special legislation, except to the extent that the provisions of the special legislation are inconsistent with the provisions of the IBC. Further, section 3(7) of the IBC defines a “corporate person” to include any company as defined in section 2(20) of the Act.

An interpretation of the above definitions leads us to the inference that government companies are not expressly exempted from the applicability of the IBC. However, there are judicial precedents which hold that government companies that perform sovereign functions would fall within the ambit of the definition of “person” under section 3(23) of IBC and, by virtue of being governed by special statute, the IBC will not apply to them.

In Hindustan Construction Company Limited v. Union of India, debts were due from government entities such as National Highways Authority of India (“NHAI”), National Hydroelectric Power Corporation Limited, National Thermal Power Corporation Limited and Public Works Department, as the petitioner company was acting as the contractor in several infrastructure projects. The dilemma of the petitioner was the lack of a level playing field, as such government entities can initiate resolution process against the petitioner but the same was not maintainable vice versa. Hence, the petitioner challenged the constitutional validity of the IBC as being violative of Articles 14 and 19(1)(g) of the Constitution of India. The Supreme Court held that government companies would be subsumed within the ambit of the IBC by virtue of sections 2(20) and 2(45) of the Act read with section 3(7) of the IBC. However, government bodies such as the NHAI, which function as an extended limb of the central government carrying sovereign functions, cannot be construed to be a corporate person which can be taken over by a resolution professional or wound up under the IBC. Therefore, the Supreme Court drew a distinction between the treatment of ‘government bodies’ and ‘government companies’ under the aegis of the IBC.

This dichotomy was recently discussed by the Madras High Court in TANGEDCO v Union of India. The question related to whether a company that is substantially owned by the government is amenable to the jurisdiction of the National Company Law Tribunal (“NCLT”) in insolvency proceedings. The High Court reiterated that neither the Act nor the IBC provides for an exemption to companies substantially owned by the government from being subject to insolvency proceedings. TANGEDCO defended its arguments by stating that it should be governed by the special statute i.e., the Electricity Act, 2003 and, therefore, disputes with South India Corporation Private Limited (respondent no. 2) should fall under the purview of section 86(1)(f) of the Electricity Act, 2003. The said statutory provision states that the State Electricity Regulatory Commission (SERC) shall have the power to adjudicate disputes between licensees and generating companies and to refer any disputes to arbitration. The High Court rejected this argument based on the fact that respondent no. 2 is not a licensee and, therefore, this enabling provision in favour of the SERC to adjudicate disputes will not be applicable. Therefore, in the absence of conflict of the special law vis-à-vis the Act and IBC, the NCLT would ordinarily have jurisdiction over such disputes arising in pursuance of insolvency proceedings instituted by a creditor.

Further, in reference to the above case, the Ministry of Power in its letter to the Department of Legal Affairs, has affirmed that as far as the question of applicability of the IBC to state-owned (power) distribution and generation companies like TANGEDCO is concerned, it is clear that it is a government company as defined under section 2(45) of the Act and, therefore, it would fall within the purview of section 3(7) of the IBC. It is not a government body formed by way of a statute for performing sovereign government function and, therefore, cannot seek exemption from insolvency proceedings.

It is pertinent to note that such judicial precedents are encouraging considering the pervasive negative impact the outstanding dues of distribution companies (DISCOMS) have had on the power sector. According to recent statistics on PRAAPTI (Payment Ratification and Analysis in Power Procurement for Bringing Transparency in Invoicing of Generators) portal, the total outstanding dues owed by DISCOMS to power producers rose by 1.3 % year on year to INR 1,13,227 crores in December 2021 and the overdues stood at INR 1,01,436 crores. Amidst the pandemic, the Government had undertaken steps such as waiver of penal charges on late payment of dues and liquidity infusion to the tune of INR 90,000 crores by way of loans from Power Finance Corporation of India (PFC) and Rural Electrification Corporation of India (REC). Despite the encouraging steps undertaken, DISCOMS have not been able to alleviate the financial stress.

To conclude, it is evident from the above analysis that the onus to determine whether the IBC will be applicable to the government entities is on the judiciary, dependent on a case-to-case basis. However, such judicial decisions and affirmations by the government instills the fear of insolvency for the DISCOMS whereas, on the contrary, it assures the creditors of fair chances of recovery of debts.

Shradha Sharma

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