2019 (8) TMI 530 - Tri - Insolvency and Bankruptcy

Government Company Exempt from CIRP under IBC Ruling

The majority opinion in the case concluded that initiating Corporate Insolvency Resolution Process (CIRP) against a Government Company, as an ... Corporate Insolvency Resolution Process - instrumentality of the State / State as 'other authorities' under Article 12 - operational debt and default - maintainability of Section 9 proceedings - public purpose / public interest - doctrine of lifting the corporate veilInstrumentality of the State / State as 'other authorities' under Article 12 - doctrine of lifting the corporate veil - public purpose / public interest - Whether the Corporate Insolvency Resolution Process can be initiated against the Corporate Debtor, a wholly Government owned company alleged to be an instrumentality/alter ego of the State - HELD THAT: - One Member held that where a company is in substance an instrumentality or alter ego of the State (the entire shareholding being vested in the President of India and the company serving a public purpose), initiating CIRP would effectively initiate insolvency against the State, defeat the public purpose and is impermissible; accordingly, CIRP could not be initiated against such a Government company. The same Member reasoned that the corporate veil must be lifted to identify who stands behind the corporate form and that application of the Code to an instrumentality of the State would create chaos and undermine constitutional and public interest considerations, including the Government's continuing role in reviving sick undertakings. The other Member disagreed, observing that the statutory definition of 'corporate person' and 'corporate debtor' under the Code is unqualified (except as to financial service providers), that Article 12 or the characterisation of a body as a State instrumentality does not, by itself, exclude application of the Code, and that writ jurisdiction remains available but does not oust the statutory remedy under Section 9. The disagreeing Member relied on statutory scheme, precedents admitting CIRP against public sector undertakings, and the limited scope of the Adjudicating Authority under Section 9 to examine debt, default and existence of dispute, concluding that allowing an exclusion would leave creditors remediless and frustrate the Code's object.The Tribunal admitted the Section 9 petition and proceeded with CIRP notwithstanding the contention that the Corporate Debtor is an instrumentality of the State; the view that CIRP cannot be initiated against such a Government company was rejected by the Member who admitted the petition.Operational debt and default - maintainability of Section 9 proceedings - Whether the petition under Section 9 discloses an operational debt, default and absence of a pre existing dispute so as to require admission of the application - HELD THAT: - The Member admitting the petition applied the statutory tests under Section 9 (and the principles in Mobilox Innovations), namely whether an operational debt exists, documentary evidence shows the debt is due and payable, and there is no pre existing dispute or record of such dispute. That Member found the Petitioner had furnished the demand notices, bank certificate and affidavit required by Section 9(3), the Corporate Debtor had not raised a substantive dispute as to liability or default, and therefore the application was complete and satisfied the conditions for admission under Section 9(5). Reliance was placed on the Code's definitions of corporate person, corporate debtor and operational debt and on earlier decisions admitting insolvency petitions against public sector undertakings, and it was held that Section 238 and the Code's scheme do not yield to the claim that other labour or gratuity statutes preclude initiation of CIRP under Section 9.The petition satisfied the statutory conditions of debt, default and absence of dispute and was admitted under Section 9, commencing the corporate insolvency resolution process.Final Conclusion: The Tribunal admitted the petition filed under Section 9 against Hindustan Antibiotics Limited, holding that the petition met the statutory requirements for initiation of CIRP; the contention that a wholly government owned company, characterised as an instrumentality of the State, is immune from CIRP was rejected by the Member admitting the petition despite a contrary view recorded by the other Member. The petition is therefore admitted and CIRP is ordered to commence. Issues Involved:1. Whether CIRP can be initiated against a Government Company which is an instrumentality of the state under Article 12 of the Constitution of India.2. Whether the IBC is applicable to the Government Company and serves the objective for which it is enacted.3. Whether the preamble of the Constitution of India, which includes the word 'socialistic,' has any bearing on this petition.4. Whether the admission of the Petition defeats the public purpose.Issue-wise Analysis:Issue 1 & 2: Applicability of CIRP to Government Company- The tribunal examined whether CIRP can be initiated against a Government Company, which is an instrumentality of the state. The judgment referenced the concept of instrumentality of the state as elaborated in 'R.D. Shetty Vs. International Airport Authority of India (AIR 1979 SC 1628),' stating that government corporations, though distinct legal entities, are subject to the same limitations as the government.- It was concluded that initiating CIRP against the Corporate Debtor, a Government Company, is impermissible as it would effectively mean initiating CIRP against the Government of India, which is not envisaged under the IBC. The tribunal noted that the law does not explicitly exempt Government Companies from CIRP, but their status as instrumentalities of the state implies such an exemption.- The tribunal suggested that the petitioner could seek alternate remedies in civil court or under Articles 226 or 32 of the Constitution of India.Issue 3 & 4: Impact of Socialistic Principles and Public Purpose- The tribunal referenced the judgment in 'Excel Wear and Ors Vs Union of India and Ors,' which discussed the concept of socialism and the balance between state ownership and private interests. It emphasized that the survival of a government company serving public interest cannot be jeopardized by CIRP.- The tribunal argued that Government Companies are incorporated to serve public purposes, often at the cost of incurring losses, and the Government of India takes steps to revive such companies and pay dues to employees.- Admitting the petition would defeat the public purpose and contravene the Constitution's preamble, which includes the word 'socialistic.' The tribunal concluded that the public interest prevails over the provisions of IBC, and hence, the petition fails on these grounds.Separate Judgment by Member (Technical):- The dissenting opinion by Member (Technical) disagreed with the majority view, emphasizing that the debt and default are evident, and no dispute was raised by the Corporate Debtor. The dissenting opinion referenced the Supreme Court's decision in 'Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited,' which outlined the conditions for admitting a Section 9 application.- The dissenting opinion argued that the provisions of the Code apply to the Corporate Debtor, a company incorporated under the Companies Act, and that the Code does not exclude public sector/government undertakings.- It was noted that other NCLT benches have entertained CIRP petitions against public sector undertakings, and the Code's provisions should not be diluted.- The dissenting opinion concluded that the petition should be admitted, as the debt and default were established, and the statutory remedy provided under the Code should be available to the petitioner.Conclusion:- The majority opinion dismissed the petition, holding that CIRP cannot be initiated against a Government Company, as it would contravene the Constitution and public interest.- The dissenting opinion favored admitting the petition, emphasizing the applicability of the Code to the Corporate Debtor and the established debt and default.