Can Insolvency Proceedings Be Initiated Against Public Sector Undertaking/Government Companies?

[By Shantanu Lakhotia]

The author is a student of Jindal Global Law School, Sonipat.

Introduction

Recently, a judgement delivered by a 3-judge bench of the Supreme Court of India has been hailed by the legal fraternity as it cleared a mischief revived by the Parliament in the realm of arbitration law. In the matter of Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors.[i](“HCC case”), the Supreme Court struck down Section 87 of the Arbitration and Conciliation Act (“A&C Act”). The said provision was inserted by the Parliament vide the Arbitration and Conciliation Amendment Act of 2019 provided for an automatic stay of arbitral award under Section 36 of the A&C Act once an appeal was filed under Section 34 of the A&C Act. This in turn was bound to lead to delays in enforcement of the arbitral awards, which had been a longstanding complaint of businesses with the A&C Act. It took the Parliament 19 years to cure this mischief of ‘delayed justice’ vide the Arbitration and Conciliation Amendment Act of 2015.

However, in addition to laying down the law in the dominion of arbitration, the judgement has provided a clarification to the position of law in the realm of insolvency law that seems to have been overshadowed.  The Supreme Court in HCC case had resolved the controversy as to whether Public Sector Undertaking/Government of Companies (“PSU/Govt. companies”) are amenable to the Insolvency and Bankruptcy Code, 2016 (“the Code”). The controversy in regard to this had already been expressly adjudicated upon by the National Company Law Tribunal (“NCLT”) as well as the National Company Law Appellate Tribunal (“NCLAT”), wherein both the tribunals along with the Supreme Court had answered the question in the affirmative. Astonishingly, the High Court of Bombay has decided to embark on a quest to find an answer to the controversial question as to the jurisdiction of NCLT and NCLAT to declare PSU/Govt. companies as insolvent, neglecting the fact that the answer has already been answered by the Supreme Court of India in affirmative in the matter of HCC. The present article explains the position of the Supreme Court in the matter and will provide a comment about the correctness of the same. The article will further comment upon the jurisdiction of the High Court of Bombay to re-adjudicate a question of law, already been decided by the Supreme Court of India.

Judgement of the Supreme Court

In the matter of HCC case, the Supreme Court had to decide on a Constitutional challenge made to the Code as being arbitrary and discriminatory, due to the fact that even though the Petitioner company can be proceeded against by their creditors (which can include statutory bodies or PSU’s) under the Code the Petitioner cannot move against their debtors like National Highway Authority of India (“NHAI”), National Thermal Power Corporation Ltd., IRCON International Ltd.,  National Hydropower Corporation Ltd. which are statutory bodies or PSU’s. Hence, the essential question to be decided was whether Corporate Insolvency Resolution Proceedings (“CIRP”) can be initiated against a PSU/Govt. Company?

The Supreme Court while agreeing with argument put forth by the Solicitor General of India, held that even though the, definition of ‘government company’ is provided in Section 2(45) of the Companies Act, 2013 (“Company Act”), the definition of ‘government company’ would be subsumed in the definition of ‘company’ as provided in Section 2(20) of Company Act, and hence insolvency proceedings against Government company can be initiated by virtue of it being covered under the ambit of Section 3(7) of the Code.

However, the Supreme Court had further gone on to hold that statutory bodies, like the NHAI which “functions as an extended limb of the Central Government and performs governmental functions” cannot be taken over by a resolution professional or by any other corporate body and neither can such Authority be wound-up under the Code. Therefore proceedings against NHAI under the Code are not possible.

The Court in addition to the above-mentioned points had provided certain other reasons for dismissing the constitutional challenge made to the Code, however, for the purpose of this article the same has not been delved into, as it is not related to the topic of the article.

Analysis of Supreme Court’s judgment 

The apparent overshadowing of the clarification considering the position of law in terms of initiating insolvency proceedings against government companies is clear from the fact, that even though the Supreme Court has laid the law in the matter and thus binding on all Courts of India by virtue of Article 141 of the Constitution of India, the Bombay High Court, in the matter of Hindustan Antibiotics Ltd & Anr. v. Union of India & Ors.[ii], has taken up the task of clearing the insolvency law-based controversy again, based on the reasoning that in the Hindustan Construction Company Ltd. case, “pertinently therein, the issue of constitutional validity of Section 87 of Arbitration and Conciliation Act, 1996 was considered and decided[iii]. At this point of time, it must be noted that the Supreme Court has provided the answer in the affirmative as to whether CIRP can be initiated against PSU/Govt. Companies and that the Bombay High Court should not embark on the quest of an already discovered position of law.

The NCLT Bombay Bench in the matter of Lark Chemicals Pvt. Ltd. v. Goa Antibiotics & Pharmaceuticals Ltd.[iv], the NCLAT in the matter of West Bengal Essential Commodities Supply Corporation Ltd. v. Bank of Maharashtra[vas well as the Supreme Court, from a theoretical viewpoint of law were right at holding that CIRP can be initiated against PSU/Govt. Companies as under Section 3(7) of the Code, the only exception provided for ‘corporate’ person is that for financial service provides. Furthermore, it is pertinent to note that the Companies Act, 2013 in Section 462 provides for classes of companies that are exempt from the provisions of the Company Act in public interest, and the Government has through various notifications used this provision for relaxation of norms for PSU’s. Provisions along the similar line are found in other laws of India such as Competition Act, Banking Regulation, Customs Act etc. It is pertinent to note that even though in the Report of the Insolvency Law Committee on 2018[vi] at point 26.4, recommended the introduction of such a section in the Code, the government for reasons unknown did not bring about such a provision through the Insolvency and Bankruptcy Code Amendment Act of 2019, hence, in a way they have consciously made the decision not to protect PSU/Govt. Companies from the clutches of CIRP proceedings under the Code.

Nonetheless, the possible consequences flowing from such a decision is disastrous. In certain cases, PSU/Govt. Companies are formed for the purposes of public interest and not for making profits for example, in the matter of Harsh Pinge v. Hindustan Antibiotics Ltd[vii]. In this case, the corporate debtor i.e. Hindustan Antibiotics Ltd. was formed to ensure the availability of life saving drugs at an affordable price to the weaker section of the society. It needs to be realized that a company with charitable objects, as has been provided in Section 8 of the Companies Act, 2013, by falling within the contours of Section 2(20) of the Companies Act, 2013 is still amenable to the jurisdiction of insolvency courts of India, by virtue of Section 3(7) of the Code. Hence, in cases such as this when the PSU/Govt. Companies serves a public interest, the Supreme Court of India, should have laid down guidelines under Article 142 of the Constitution, to protect such PSU/Govt. Companies from the clutches of Code, with the direction that the Government should ensure that they infuse enough capital into the company to run properly and carry out the public interest goal for which it was formed as well as see to it that such companies to do not borrow left, right and center without any accountability.

In addition to this, the Supreme Court via its decision, has left the question open as to when these PSU/Govt. companies are admitted for CIRP, by virtue of Section 29A of the Code, does the Government of India or the Government of the State, whomsoever is holding the majority share in the particular PSU/Govt. companies become an illegible resolution applicant?

Conclusion

Even though the decision of the Supreme Court in regards to the question of law is correct from a theoretical standpoint of law, however, the practical consequences flowing from the decision would lead to a perturbed situation wherein the government will be wary of constituting PSU/Govt. companies for public interest, and instead will be focused in ensuring that such companies are profit making, which is disastrous for a country like India, being an archetypal welfare state. The government should bring about an amendment to Section 29A to ensure that the government is excluded from the restriction of the said provision, in order to allow the government to provide for a resolution plan, and not wait for the company to go into liquidation or into the hands of a third party in order to do the same.

End Notes

[i] Hindustan Construction Company Ltd. & Anr. v. Union of India and Ors., 2019 SCC OnLine SC 1520

[ii] Hindustan Antibiotics Ltd. & Anr. v. Union of India & Ors., IA No. 1 of 2019 in W.P No. 11366 of 2019 (Bombay High Court)

[iii] Supra at pg. 7 and 8

[iv] 2017 SCC OnLine NCLT 10427

[v] 2017 SCC OnLine NCLAT 428

[vi] Report of the Insolvency Law Committee 2018, para 26 at pg. 68 can be accessed at (http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf)

[vii] Harsh Pinge v. Hindustan Antibiotics Ltd. C.P. (IB) 2482/2018

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