2021 (9) TMI 89 - HC - Insolvency and Bankruptcy

Constitutional validity of some of the provisions of the Insolvency and Bankruptcy Code, 2016 - Government companies to be equated with State or not - Applicability of provisions of the Insolvency Code as not applicable for Government Companies - HELD THAT - Not only was there a challenge to the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 but a challenge was also there to various provisions of the Insolvency Code. Therefore, the contention of the learned senior counsel for the petitioners that the matter relating to the Insolvency Code was not before the Court, is not correct. The petitioners then argued that Government Bodies other than Government Companies are exempted from the Insolvency Code as they are statutory authorities of the Government Department and, therefore, they cannot be taken before the adjudicating body under the Insolvency Code. On the other hand, the petitioners, who also owes large amount of dues to its Operational Creditors can be taken to the adjudicating authority under the Insolvency Code. Therefore, apart from a challenge to Section 87 of the Arbitration and Conciliation Act, 1996, there was also constitutional challenge to the Insolvency Code. It is not an arm of the State. It is usually performing a commercial or/and business functions. A Government Company cannot be equated with a State authority, like National Highway Authority of India (NHAI), which is performing statutory functions or like other Departments, like Postal, Telegraph or the Railways or Public Works Department. This distinction has been clearly made by the Hon ble Apex Court in the case of Hindustan Construction Company Limited, 2019 (12) TMI 5 - SUPREME COURT which is binding upon this Court. Petition dismissed.

Summary

Issues Involved:
1. Constitutional validity of certain provisions of the Insolvency and Bankruptcy Code, 2016.
2. Applicability of the Insolvency and Bankruptcy Code to Government Companies.
3. Legal distinction between Government Companies and Government Authorities performing sovereign functions.

Detailed Analysis:

1. Constitutional Validity of Certain Provisions of the Insolvency and Bankruptcy Code, 2016:
The petitioners initially challenged the constitutional validity of some provisions of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code). However, during the arguments, the petitioners limited their challenge to the applicability of the Insolvency Code to Government Companies. The court referenced the Supreme Court's decision in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, which upheld the Insolvency Code as a path-breaking legislation aimed at reorganization and insolvency resolution in a time-bound manner.

2. Applicability of the Insolvency and Bankruptcy Code to Government Companies:
The petitioners argued that a Government Company should not be considered a "Corporate Person" or "Corporate Debtor" under Sections 3(7) and 3(8) of the Insolvency Code. They contended that the definition of "Corporate Person" in Section 3(7) does not explicitly include Government Companies, which are separately defined under Section 2(45) of the Companies Act, 2013. The petitioners relied on various judgments to argue that Government Companies perform state functions and should not be subject to the Insolvency Code.

The respondents countered by citing the Supreme Court's decision in Hindustan Construction Company Limited vs. Union of India, which held that Government Companies are included under the Insolvency Code. The court noted that the Supreme Court had clearly stated that Government Companies, defined under Section 2(20) of the Companies Act, 2013, are "Corporate Persons" under the Insolvency Code. The court emphasized that this was not an obiter dictum but a ratio decidendi, binding on all courts.

3. Legal Distinction Between Government Companies and Government Authorities Performing Sovereign Functions:
The petitioners argued that Government Companies should be treated differently from private companies, similar to how statutory authorities performing sovereign functions, like the National Highway Authority of India (NHAI), are treated. The court referred to the Supreme Court's decision in Hindustan Construction Company Limited, which distinguished between Government Companies and statutory bodies like NHAI. The Supreme Court held that while Government Companies are subject to the Insolvency Code, statutory bodies performing sovereign functions are not, as they cannot be wound up under the Insolvency Code.

The court further elaborated that a Government Company, despite being wholly owned by the government, has a distinct legal identity and is not an agent of the government. The court cited precedents like Heavy Engineering Mazdoor Union vs. State of Bihar and A.K. Bindal vs. Union of India to support this view. The court concluded that the Insolvency Code applies to Government Companies, and their inclusion as "Corporate Persons" under the Code is consistent with legislative intent and judicial interpretation.

Conclusion:
The writ petition was dismissed, and the court upheld the applicability of the Insolvency Code to Government Companies. The court vacated interim orders and made no order as to costs. The judgment reaffirmed that Government Companies are distinct legal entities and subject to the Insolvency Code, unlike statutory bodies performing sovereign functions.