Tribunal rules sovereign functions do not exempt State Government Company from Insolvency and Bankruptcy Code; procurement irregularities under KTPP Act do not constitute pre-existing dispute to deny payment
In a landmark decision dated October 12, 2026, the National Company Law Tribunal (NCLT), Bengaluru Bench, admitted a Corporate Insolvency Resolution Process (CIRP) petition filed by Daaksh Jute LLP against Karnataka Food and Civil Supplies Corporation Limited (KFCSCL), a State Government Company. The petition, filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeks recovery of an operational debt amounting to over Rs. 19 crore for unpaid supplies of jute gunny bags.
The crux of the dispute involved the question of whether insolvency proceedings could be initiated against a government-owned corporation performing public welfare functions related to food security and distribution. The Corporate Debtor contended that it was effectively an extension of the State Government performing sovereign functions, thereby exempting it from CIRP under the precedent set by the Supreme Court in Hindustan Construction Company Ltd v. Union of India (2020) 17 SCC 324. It also raised objections on grounds of alleged violation of the Karnataka Transparency in Public Procurements Act, 1999 (KTPP Act), asserting that part of the procurement lacked valid government approval and tender procedure compliance.
Rejecting these contentions, the Bench distinguished the Corporate Debtor from statutory bodies like the National Highways Authority of India (NHAI) that perform primary inalienable sovereign functions and are immune from CIRP. The Tribunal held that KFCSCL, incorporated under the Companies Act, 2013, is a "corporate person" under Section 3(7) of the IBC and does not enjoy immunity merely because it is government-owned or engaged in public welfare. The functions of procurement, storage, and distribution of food grains and implementation of welfare schemes, while important, are not exclusive sovereign functions and can be undertaken by private entities.
Further, the Tribunal found that the Corporate Debtor admitted receipt, acceptance, and utilisation of the goods supplied and acknowledged a substantial outstanding principal amount. The alleged irregularities under the KTPP Act were held to be an internal dispute between the Corporate Debtor and the State Government and did not constitute a bona fide pre-existing dispute vis-a-vis the Operational Creditor. The Tribunal applied the Supreme Court's ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., emphasizing that mere feeble legal arguments or assertions unsupported by contemporaneous evidence cannot defeat a claim for admission of a Section 9 petition.
Consequently, the Tribunal admitted the petition, initiated CIRP against the Corporate Debtor, and declared a moratorium under Section 14 of the IBC. An Interim Resolution Professional (IRP) was appointed to oversee the resolution process, with directions to maintain the Corporate Debtor as a going concern and comply with all statutory provisions.
This decision reinforces the principle that government companies incorporated under the Companies Act are subject to insolvency proceedings under the IBC unless specifically exempted by law. It also clarifies that procurement irregularities under public procurement laws, unless raising a genuine dispute with the creditor, cannot be used to withhold payment and stall insolvency processes.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 Section 9 Maintainability of CIRP against State Government Company - Government company incorporated under Companies Act is a "corporate person" under Section 3(7) and is not immune from CIRP merely because it performs public welfare/public distribution functions - Procurement/storage/distribution of foodgrains and implementation of welfare schemes are not sovereign functions in the strict sense - Alleged violation of Karnataka Transparency in Public Procurements Act, 1999, being an internal issue between Corporate Debtor and State Government, cannot constitute a pre-existing dispute when supply, receipt, consumption of goods and principal liability are admitted - Petition admitted.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 3(7), 4, 8, 9, 14; Companies Act, 2013 Sections 2(20), 2(45); Karnataka Transparency in Public Procurements Act, 1999 Sections 4, 5; Micro, Small and Medium Enterprises Development Act, 2006 Section 16; Contract Act, 1872 Section 23
