How power ministry's view on discoms could expose them to insolvency suits

The ministry has said these entities do not fall under the category of govt companies, a view based on the argument that discoms do not perform sovereign functions

In what could open the doors for litigation against state government-owned power distribution companies (discoms), the Union power ministry has said these entities do not fall under the category of government companies as defined under section 2(45) of the Companies Act. The ministry’s view is based on the argument that discoms do not perform sovereign functions under a statute.

Section 2(45) defines a government company in which not less than 51 per cent of the paid-up share capital is held by the Central or state government or governments, or partly by the Centre and one or more state governments, or it is a subsidiary of a government company. Though state discoms by virtue of being fully owned by the state governments fulfill this criterion, the ministry of power’s reading of the law is intended to treat them on par with privately run discoms. In an office memorandum issued by the ministry of power, it has also noted that state-owned discoms perform business similar to private companies that also retail power.

Discoms could now be dragged to the insolvency court for non-payment of dues by operational creditors. The first to bear this fate could be the Tamil Nadu Generation and Distribution Company (TANGEDCO) that has filed a writ petition in the High Court of Madras following a corporate insolvency resolution process initiated by the South Asian Corporation.

The memorandum addressed to the secretary in the department of legal affairs takes away from the discoms the immunity against the Insolvency & Bankruptcy Code (IBC) by saying that there is no conflict between the Electricity Act and the code.  

TANGEDCO had contended that CIRP could not be initiated against a company owned by the state government or the central government and that it was an extended arm of the state government and is exempt from the applicability of IBC. The power ministry, however, held that discoms come under section 3(7) of the IBC that defines a corporate person as a company in accordance with the Companies Act and the Limited Liability Partnership Act and would not include any financial service provider.

The ministry also cited the Supreme Court order in a case involving Hindustan Construction Company Limited and Union of India and others where it was held that a statutory body which functions as an “extended limb” of the government, the IBC cannot be used because no resolution can take over the management of such body as it performs sovereign function. The court has, therefore, made exceptions only for “statutory bodies” like the National Highways Authority of India.

The power ministry further said the Electricity Act allowed freedom in the matter of the ownership of all utilities and licensees which could be private or state-owned and does not anywhere mandate that generation, transmission or distribution of electricity is to be carried out only by the government or any corporate owned and controlled by the government.

Besides, the Act through section 158 provides for dispute resolution mechanism within the power sector players while the IBC is not to settle a dispute “to merely affect a possible resolution to an already settled and undisputed claims through initiation of CIRP” and, therefore, both the Acts do not overlap, said the power ministry memorandum.