Can A Government Entity Initiate Insolvency Proceedings?

Under the Insolvency and Bankruptcy Code (IBC), any creditor can initiate insolvency proceedings against a debtor company if the debtor defaults on its debt obligations. This includes both private and public entities. A government entity, such as a public sector bank or government department, can initiate insolvency proceedings against a company if it meets the criteria set under the IBC.

Can a Government Entity Initiate Insolvency Proceedings?

Role of Government Entities as Creditors: Government entities can act as creditors under the IBC if they are owed money by the company. They can either be financial creditors (for example, if the government entity has lent money to the company) or operational creditors (if the company owes the government for goods or services received).

Initiation by Financial Creditors: If the government entity is a financial creditor and the company defaults on a debt of ₹1 crore or more, the government entity can initiate the Corporate Insolvency Resolution Process (CIRP). The IBC allows any financial creditor, including a government entity, to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings.

Initiation by Operational Creditors: A government entity can also be an operational creditor if the company owes it for goods, services, or statutory dues like taxes or other government fees. Operational creditors can file a petition for insolvency if the debt exceeds ₹1 crore and the company defaults on payment.

Debt Related to Public Dues: In some cases, government entities may initiate insolvency proceedings due to unpaid public dues, such as taxes, statutory dues, or other obligations that the company has failed to fulfill. Such debts must meet the financial threshold (₹1 crore) to trigger insolvency proceedings under the IBC.

Public Interest Considerations: A government entity may initiate insolvency proceedings to protect public interest or to ensure that funds owed to the public, such as taxes, are recovered. However, the decision to initiate insolvency will also depend on whether the entity’s claim meets the IBC's eligibility requirements.

Impact of Government Debt on Insolvency Process: The initiation of insolvency by a government entity will lead to the company being placed under a moratorium, preventing any further legal action against the company. The government entity's claim will then be considered by the Committee of Creditors (CoC), and any resolution plan will need to address these claims.

Legal Actions and Protections:

Insolvency and Bankruptcy Code (IBC): The IBC allows both private and government entities to initiate insolvency proceedings. The minimum debt threshold of ₹1 crore must be met for any creditor, including government entities, to file an insolvency petition. The moratorium under the IBC prevents the company from making payments to creditors during the insolvency resolution process.

Role of the National Company Law Tribunal (NCLT): Once a government entity initiates insolvency proceedings, the NCLT will review the petition to determine if the default has occurred and if the government entity has the standing to file. If the NCLT admits the petition, the Corporate Insolvency Resolution Process (CIRP) will begin, and a Resolution Professional will be appointed.

Government Dues in Insolvency: Government entities are treated as operational creditors for the purposes of insolvency, but they do not have a higher priority over other unsecured creditors unless the debt is secured or falls under the special category of preferential claims (e.g., certain tax dues may have priority in liquidation).

Example:

If a government department is owed ₹2 crore by a private company for unpaid taxes, and the company fails to settle the debt, the government entity can initiate insolvency proceedings under the IBC:

• The government department will file an application with the NCLT as an operational creditor.
• The NCLT will evaluate whether the claim meets the requirements and if the company has defaulted on the debt.
• If the NCLT admits the application, the company will be placed under a moratorium, and the insolvency process will begin.
• The government department’s claim will be evaluated by the Committee of Creditors (CoC), along with other creditors, and a resolution plan will be prepared.