NCLT Bengaluru Says Govt. Companies Subject To IBC, Admits CIRP Against Karnataka Food Corporation

The Bengaluru Bench of the National Company Law Tribunal (NCLT) on 12 October held that a government company incorporated under the Companies Act cannot claim exemption from insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), merely because it performs public welfare functions.

A Bench comprising Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada admitted a Section 9 petition filed by Daksh Jute LLP against Karnataka Food and Civil Supplies Corporation Limited, initiating the Corporate Insolvency Resolution Process (CIRP) over an operational debt of approximately Rs. 19.25 crore. The Tribunal observed:

“While statutory bodies may be immune from insolvency proceedings, the government-owned Corporate Persons, viz. NHPC, NTPC and IRCON are not ipso-facto protected and remain amenable to the Code by virtue of being covered under the first part of 'corporate person' as provided in section 3(7) thereof.”

Daksh Jute LLP filed the petition seeking recovery of approximately Rs. 19.25 crore for supplying 12 lakh jute gunny bags weighing 580 grams each to Karnataka Food and Civil Supplies Corporation.

The Corporation opposed the petition, contending that it was owned and controlled by the State Government and performed public welfare functions connected with food security and the public distribution system. It argued that it functioned as an extended limb of the State and performed sovereign functions, making it immune from CIRP in light of the Supreme Court's judgment in Hindustan Construction Company v. Union of India (2019).

Daksh Jute LLP countered that the Corporation was incorporated under the Companies Act and therefore fell within the definition of a “corporate person” under the IBC. It argued that government ownership and the public nature of an entity's activities did not exempt it from insolvency proceedings.

The operational creditor further submitted that the Supreme Court's ruling in Hindustan Construction Company v. Union of India was distinguishable because it concerned the National Highways Authority of India (NHAI), which was established under the National Highways Authority of India Act, 1988.

Examining the Corporation's Memorandum of Association, the Tribunal observed that it undertook various activities relating to foodgrains, foodstuffs and other essential commodities and did not function exclusively as an arm or agent of the Government. It therefore neither performed an inalienable sovereign function nor exercised eminent domain in discharging its activities.

Further, it held that the Corporation, being a State Government company incorporated under the Companies Act, 2013, fell within the definition of “corporate person” under Section 3(7) of the IBC and could not claim immunity from the Code merely on account of its government ownership or public welfare functions.

Finding that the operational debt and default were established and exceeded the statutory threshold under Section 4 of the IBC, the Bench admitted the Section 9 petition and initiated CIRP against Karnataka Food and Civil Supplies Corporation Limited.

However, it kept the operation of the admission order in abeyance until 31 October 2026 to allow the parties to negotiate a settlement before the moratorium and the Interim Resolution Professional's takeover take effect.

Accordingly, the NCLT admitted Daaksh Jute LLP's petition but kept the admission order in abeyance until 31 October 2026.