By Abhishek Wadhawan
Understanding the Debate
The Insolvency & Bankruptcy Code, 2016 is an economic legislation enacted with the aim of helping distressed companies by balancing the interests of all stakeholders. But not all corporate debtors, private and government, can be treated as the same due to difference in objectives, mission, profits etc.
The issue regarding whether a Corporate Insolvency Resolution Process can be started against a Government Company under the Insolvency & Bankruptcy Code, 2016 has been bothering the National Company Law Tribunals and the Courts alike.
This debate was further fueled after the decision by National Company Law Tribunal, Mumbai Bench in the matter of Harsh Pinge v. Hindustan Antibiotics Limited [1] wherein the judicial member and the technical member of the bench had differences of opinions. While the judicial member opined that a bankruptcy proceeding cannot be started against Hindustan Antibiotics Limited since the entire share capital of was held by the government, it was an instrumentality of the State.[2] Further, he also noted that the government company was set-up with the aim of serving the public purpose and initiating a Corporate Insolvency Resolution Process against it would have affected the social fabric of the Constitution. On the other hand, the technical member opined that even a Government Company is a corporate debtor under the meaning of Section 3(7) Insolvency & Bankruptcy Code, 2016[3] and there is no provision in the Constitution or the insolvency laws of India that creates a bar on initiating an insolvency proceeding against a government company.[4]
The real legal issue that emerges out of this legal debate is whether a Government Company falls within the definition of a corporate debtor Insolvency & Bankruptcy Code, 2016 which is the focus point of this article.
Has the Supreme Court solved the Conundrum?
It is often observed in the legal fraternity that the Supreme Court of India has ended the conundrum regarding insolvency of a Government Company by its decision in the Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors.[5] While dealing with the constitutionality of Section 87 of the Arbitration & Conciliation Act, 1966, the Supreme Court of India also made reference to the issue as to whether or not the Government Companies fall within the ambit of Insolvency & Bankruptcy Code, 2016.
Public Sector Undertakings (government companies) refer to those companies wherein the government has a high share in the capital of the business and statutory bodies are those organisations formed by the government through enactment of a special statute. Supreme Court took the aid of this distinction and held that government companies are the ones which are formed and registered under Section 2(20) of the Companies Act, 2013[6] and all the companies registered under this section are deemed to be a corporate person under Insolvency & Bankruptcy Code, 2016.[7] On the other hand, statutory bodies are formed by a special statute of the government and hence do not fall within the ambit of the Insolvency & Bankruptcy Code, 2016. Thus, by taking aid of literal interpretation of Section 3(7) and Section 3(8) of the Insolvency & Bankruptcy Code, 2016, the Supreme Court held that a Corporate Insolvency Resolution Process can be started against a Government Company however, not against a statutory body.
Prima-facie it seems that the Supreme Court has solved the present conundrum through its decision in the Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors., but the precedent shall have far-reaching consequences in the legal field. This is owing to the lack of guidelines and proper legal provisions related to insolvency of government companies and statutory bodies.
Existing Lacuna and a Proposed Solution
The rationale for not including statutory bodies within the scope of Insolvency & Bankruptcy Code, 2016 was that these statutory bodies often perform the functions of the state and if it may be allowed that these statutory bodies may undergo an insolvency proceeding, then the public purpose shall be affected. While applying this rationale, the Supreme Court did not recognise that many times even the government companies perform important functions of the state and an insolvency proceeding against these essential government companies may hamper the service of the public.
The Supreme Court could have further elaborated the distinction between the government companies based on the essential and non-essential functions performed by them. The present lacuna is the absence of such guiding principles for the National Company Law Tribunals facing the issue of initiation of a Corporate Insolvency Resolution Process against a Government Company. To solve this lacuna, reference may be made to the earlier decisions of the Supreme Court dealing with the issue of whether a Government Company is an instrumentality of the state or not.
The test of instrumentality of government states that if a body or organisations falls within the meaning of ‘other authorities’ of Article 12 of the Constitution[8], then the organisation would be a State.[9] While earlier only the statutory bodies were considered to be an instrumentality of the State, it was for the first time in Som Prakash v. Union of India, wherein the Supreme Court declared Bharat Petroleum Corporation, a government company to be an instrumentality of the state as it was involved in an essential function of the government.[10]
Reference must be made to Ajay Hasia v. Khalid Mujib wherein the Supreme Court authoritatively held that the concept of instrumentality of the government is not limited to a statutory corporation but may also include a company or a society.[11] In case of government companies, one must see through the corporate veil, to ascertain if behind the veil, there is an agency of the State.[12]
After taking into consideration the above-mentioned judgments of the Supreme Court, it may be stated that various government companies are set-up with the aim of performing a few essential functions of the government. Socialism is a major and a basic characteristic of the Indian Constitution which aims at serving the public purpose. These government companies may not be set up with the objective of earning profits but for public service and in such cases many government companies often face losses. Often, the government has to infuse huge funds into these government companies to meet these losses and meet their operational fund requirements. In case, insolvency proceedings are allowed against these government companies that may perform the essential functions, then the public purpose shall be compromised with. A government company may be an agency of the government when it performs an essential function of the government.[13] For instance, the government company- Hindustan Antibiotics Limited involved in Harsh Pinge v. Hindustan Antibiotics Limited[14] was set up with the main aim of proving antibiotic medicines to the people at a lesser rate which were otherwise inaccessible to the marginal class. In such a scenario, an insolvency proceeding against such a government company shall only serve the purpose to cause hardships in public service. Thus, before taking a decision regarding whether a particular government company is an instrumentality of state or not, important factors such as the function performed by the company, objectives and functions of establishment, share capital of the government and its financial assistance and deep and pervasive state control must be taken into consideration.[15] By applying such a principle of law and these considerations, government companies performing essential functions like Bharat Petroleum Corporation Limited, Oil and Natural Gas Corporation Limited, State Bank of India may be saved from being dragged to the insolvency proceedings unnecessarily to hamper public good.
Further the argument that if the insolvency proceedings are not initiated against government companies, then a lot of creditors will lose their money and the government companies may faulter with the money of the creditors does not hold much correctness in the practical world. This argument is flawed as the government regularly ensures that the funds of all the government companies are maintained and hence the money of the creditors is safeguarded.
Conclusion: The Final Remark
The objectives of the Insolvency & Bankruptcy Code, 2016 are two-fold in nature, on one end, it tries to ensure that corporate debtors remain a going concern and on the other hand ensures that the money invested and lent by the creditors is secured till a certain extent. On the contrary, the objectives of various government companies are to provide public service through performing essential functions of the government. While the decision of the Supreme Court in Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. has held that all the government companies fall within the definition of corporate debtor under Section 3(7) of Insolvency & Bankruptcy Code. In essentiality, government companies serving the public with essential functions of the government should not be brought within the ambit of Insolvency & Bankruptcy Code to ensure that public purpose is not destroyed.
The future of insolvency processes against government bodies and organisations shall always remain uncertain till the time proper guidelines are framed by the Parliament in this regard.
The author is currently a second-year student of B.B.A. LL.B. (Hons.) at Gujarat National Law University, Gandhinagar. He possesses a great inclination towards Corporate Law and especially Insolvency Law.
[1] Harish Pinge v. Hindustan Antibiotics Limited, C.P. (IB) 2482/MB/2019 order dated 16.07.2019.
[2] R.D. Shetty v. International Airport Authority, 1979 SCR (2) 1014.
[3] Insolvency & Bankruptcy Code, 2016, § 3(7), No. 31, Acts of Parliament, 2016 (India).
[4] Harish Pinge v. Hindustan Antibiotics Limited, C.P. (IB) 2482/MB/2019 order dated 16.07.2019.
[5] Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors, 2019 SCC OnLine SC 1520.
[6] Companies Act, 2013, § 2(20), No. 18, Acts of Parliament, 2013 (India).
[7] Insolvency & Bankruptcy Code, 2016, § 3(7), No. 31, Acts of Parliament, 2016 (India).
[8] India Const. art. 12.
[9] Sukhdev Singh v. Bhagatram, AIR 1975 SC 1331.
[10] Som Prakash v. Union of India, AIR 1981 SC 212.
[11] Ajay Hasia v. Khalid Mujib, AIR 1981 SC 487.
[12] Central Inland Water Transport Corporation v. Brojo Nath, AIR 1986 SC 1571.
[13] Heavy Engineering Mazdoor Union v. State of Bihar, AIR 1970 SC 82.
[14] Harish Pinge v. Hindustan Antibiotics Limited, C.P. (IB) 2482/MB/2019 order dated 16.07.2019.
[15] Balmer Lawrie & Co. Ltd. v. Partha Sarathi Sen Roy, (2012) 178 Com Cases 297.
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