Supreme Court rules on the constitutional validity of the IBC vis-à-vis Government Companies

-Gunjan, Partner

Recently, the Supreme Court of India had the opportunity to deal with a batch of Writ Petitions challenging the validity of certain provisions of the Arbitration and Conciliation (Amendment) Act, 2019 as well as certain aspects of the Insolvency and Bankruptcy code, 2016 (IBC). A bench of Justices Nariman, Surya Kant and Ramasubramanian delivered its verdict on these issues on 27th November, 2019 by the judgment of Hindustan Construction Company Ltd. and anr vs. Union of India (“Hindustan Construction”). 

This article deals solely with the Insolvency related aspects of the judgment. Incase you’re interested in the Arbitration related aspects of the matter, please read here.

It was a contention of the Petitioner in the matter, that owing to various provisions of the Arbitration and Conciliation (Amendment) Act, 2019, there was an automatic stay of the award, which was in favour of the Petitioner. Owing to the said stay, on the one hand, the Petitioner could not obtain those monies under the Award to pay its creditors debts, and on the other hand, any debt of over INR one lakh owed to a financial or operational creditor which remains unpaid, would attract the provisions of the Insolvency Code against the Petitioner No.1 – making these provisions arbitrary, discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution of India.

In view of the above contentions, to enable the make the provisions more reasonable, the following assertions were made:

1. Either the Petitioner should be enabled to recover monies from Government Companies and NHAI, by reading the definition of ‘corporate person’ under Section 3(7) of the IBC, without the words “with limited liability” contained in the third part, so as to include Government companies including NHAI in the said definition; or
2. The definition of ‘person’ under Section 3(23)(g) of IBC, should be read into the provision of Section 3(7) of the IBC, thereby implying inclusion of Government Companies under the scope of IBC.

In order to ascertain whether the above submissions could be accepted, the Court considered the following issues:

1. From a reading of a conspectus of clauses of the National Highway Authority of India Act, 1956 (NHAI Act), it was evident that the maintenance of national highways which is performed by NHAI is a government function falling under Entry 23 of List I of 7^th Schedule to the Constitution of India. 
2. Clearly these government functions could be performed only by an extended limb of the Central Government, which was NHAI, and the said functions could not be taken over by a Resolution Professional under the IBC or for that matter by any other corporate body. 
3. Owing to the said reasons, the NHAI could obviously not be able to be wound up under the IBC.
4. Furthermore, the Supreme Court, relying on  K. Kishan v. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 662, reiterated, that arbitral awards which are pending adjudication under Section 34 would show that a pre-existing dispute exists in such cases. Looking at it from that view also, allowing the Petitioner to proceed against NHAI, where a Section 34 Petition is already pending would also not be permissible.
5. Further, the Supreme Court also observed that merely because –  on one hand the Petitioner could not obtain those monies under the Award to pay its creditors debts, and on the other hand, any debt of over INR one lakh owed to a financial or operational creditor which remains unpaid, would attract the provisions of the Insolvency Code against it –  it would not render the provisions of IBC arbitrary, owing to the fact that IBC is not meant to be a debt recovery legislation.

Owing to all the above reasons, it was held by the Hon’ble Supreme Court of India, that the challenge to the provisions of the Insolvency Code was devoid of any merit.

The conclusion, therefore, is that Government Companies can still not be proceeded under the IBC, and the law and legislation as it is holds good.