Whether an Insolvency Proceeding can be initiated against a Government Company- an Analysis

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In a recent case of Harsh Pinge vs. Hindustan Antibiotic Limited, dealt by National Company Law Tribunal (NCLT) Mumbai, a two-member bench pronounced an order stating that insolvency proceedings cannot be initiated against a government company by an operational creditor.

The application under section 9 of the Insolvency and Bankruptcy Code (IBC), 2016 was filed by a senior employee of Hindustan Antibiotic Company Limited. He, as an operational creditor, filed the application against the Hindustan Antibiotic Company Limited (Corporate Debtor). The application was filed by the employee as he did not receive the outstanding salary and gratuity from the employer.

The matter of this case puts a challenge before the NCLT because the subject-matter of the case was an untouched matter and without any precedent. Therefore, the NCLT was hesitant in the admission of the application for Commencement of Insolvency Resolution Process (CIRP) against the government company.

The argument that arose in the NCLT was to whether admit the application or not. However, the judicial member gave his opinion that the Operational Creditor should not initiate CIRP because the Corporate Debtor is a government company. The reasoning upon which the NCLT relied was that the government company is an ‘instrumentality of state’ and cited a landmark judgment of R.D. Shetty which states that- “if the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of Government.” Thus it could be concluded from this judgment that if the majority shares of the company are held by the government then the company acts as an alter ego of the government; which means that the government company is an instrumentality of state.

On the contrary, the view taken by the technical member of the NCLT was totally a different view. The facts stated by the technical member are as given below-

  • There is no constitutional provision that puts a bar on an application for initiating CIRP against a government company.
  • ‘Corporate Person’ as defined under section 3(7) of the IBC and 2(20) of the Companies Act, 2013 shows that government company i.e. Hindustan Antibiotic Company Limited falls under the definition of Corporate Debtor.
  • Legislature has made no differentiation between a government company and other companies. This shows that all types of companies fall under one head.
  • In the case of Swiss Ribbons, the constitutional validity of the IBC was upheld which indicates that the IBC violates and contravenes no provision of the constitution.

Regarding the instrumentality of the state, it would be wrong to say that a government company is an alter ego of the state. It should also be clear that a government company is not a statutory company that can only be created by passing of a statute in the parliament. The basic and sole purpose of incorporating a company is to undertake commercial activities in the country. To support this, it has been stated in the case of Western Coal fields Ltd. vs. Special Area Development Authority that- ‘even though the entire share capital of the appellant-companies has been subscribed by the Government of India, it cannot be predicted that the companies themselves are owned by the Government of India. The companies, which are incorporated under the Companies Act, have a corporate personality of their own, distinct from that of the Government of India. The lands and buildings are vested in and owned by the companies; the Government of India only owns the share capital’.

Further, if the intention of the IBC would have been to exempt government companies from CIRP, then it would have issued a notification for it in the same way the Insolvency Law Committee Report has notified for relaxing the procedure of CIRP of certain classes of companies including MSMEs. Therefore, it shows that the legislature has no intention to exempt government companies from CIRP.

Hence it could be very rightly said that the NCLT was wrong in denying the application of the Operational Creditor under section 9 of the IBC in the case of Harsh Pinge vs. Hindustan Antibiotic Limited. NCLT has wrongly interpreted the purpose and intention of the code IBC. NCLT is not supposed to be a spectator of a government company destroying itself and misusing the stakeholders’ funds and investments. This would result in failure of the very purpose of the code IBC. NCLT shall not make any distinction between a government company and other companies unless an exception for the same is provided or notified by the Insolvency Law Committee Report or any authority.

-Ayushi Mishra Student Reporter, INBA