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Insolvency of Government Owned Companies 

Introduction 

In 2016, with the birth of the Insolvency and Bankruptcy Code, 2016 (“IBC”), for the first time in its history, the country witnessed a comprehensive legislation which provided for a consolidated insolvency regime, whether it be for companies, partnership firms or individuals. 

This article discusses the applicability of IBC to companies in which the Government of India has a stake. 

What the law does not say 

The provisions of IBC are applicable to all companies incorporated under the Companies Act, 2013 (“Companies Act”), with the exception of financial service providers1. Thus, the only companies in India to which the insolvency regime under the IBC does not apply are companies which are providing financial services such as Banks, Financial Institutions, Insurance Companies etc. 

Pertinently, IBC does not carve out any exception or exclusion for companies in which the Government of India has a stake, more commonly referred to as Government Companies2 or Public Sector Undertakings. 

Judicial Trend 

Given that the insolvency regime is a stringent mechanism which is very creditor centric, it seemed almost comforting to assume that there would be protection granted to Government Companies. Remarkably, that is not the case, and the Apex Court has had occasion to clarify this in 20203 under a detailed order that makes for a very appealing read. 

In the case of Hindustan Construction Company Limited (supra), the Supreme Court has clarified that the provisions of IBC are applicable to Government Companies. In doing so, the Court has drawn a careful distinction between Government Companies incorporated under Companies Act as against Government Companies established under a statute. Protecting the interest of the State, the Court has rightly held that a company which is performing any sovereign functions or is an instrumentality of the State cannot be subjected to the provisions of IBC. 

Prior to the Supreme Court Order in the case of Hindustan Construction Company Limited, the National Company Law Tribunal, Mumbai Bench (“NCLT”) witnessed a divided Bench on this issue, with one Member holding that a Government Company can well be subjected to IBC if a debt and default was established and the other Member holding Government Companies are 

instrumentalities of the State and IBC proceedings against a Government Company would effectively mean insolvency proceedings against the Government. 

A similar issue came for consideration before the Madras High Court4 when the debtor in question was the Tamil Nadu Generation and Distribution Corporation Limited. Keeping in line with the view of the Supreme Court, the Madras High Court has also held that the IBC has no exemption for Government Companies. 

Conclusion 

It is a welcoming trend as often Government Companies delay and/or defaults in making payment of legitimate dues of their vendors on account of either bureaucratic systems adopted by them or due to tedious processes followed by them for approval of payments. Consequently, a lot of financial pressure is exerted on their vendors leading to either delay in the execution of the projects due to strain on the cashflows or at times the vendors are pushed into insolvency. While the judgments have paved way for initiation of insolvency proceedings against Government Companies, it is yet to be seen how frequently this will be opted for by their vendors as Government Companies are a major and at times, the only source of work and income for them. 

Dhiraj Mhetre

Partner

Sakate Khaitan

Senior Partner

Smiti Tewari

Associate Partner

Tanushri Kejriwal

Associate
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