Divey Pratap Singh Rana
Introduction
In the case of Independent Sugar Corporation Ltd v. Girish Sriram Juneja, three judge bench of supreme court pronounced a judgement in ratio 2:1 which ruled that the approval of a Resolution Plan (RP) from the Competition Commission of India (CCI) must be taken prior to the approval of the Committee of Creditors (CoC). The decision depicts convergence between the Insolvency and Bankruptcy Code, 2016 and the Competition Act, 2002. The central issue before the court was whether section 31(4) of competition act, 2002 is mandatory or directory provision. It is important to note “combinations” that have an appreciable adverse effect on competition (AAEC) can thwart a resolution plan from being approved. Thus, the CCI must provide clearance prior to the CoC voting in terms of the resolution plan so the adjudicating authority can rely upon the CCI clearance order and will not be gate kept from flipping the outcome of the resolution plan down the road by changes in its decision . However, this raises the issue of timing in the relevant CCI processes in terms of the Corporate Insolvency Resolution Process (CIRP) and whether a multi-layer clearance process adds to timing issues.
The manuscript aims to analyse the decision and draw reference from the statues of US and UK and also highlight a green-channel approval for regulation to see if regulation can be balanced with regulatory approvals and timely resolution in insolvency.
Factual Matrix Of Case
The crux of case relates to Corporate Insolvency Resolution Process (CIRP) of Hindustan National Glass and Industries Ltd. (HNGIL), which commanded a 60% share of Indian glass packaging sector. In relation to the insolvency proceedings, AGI, the second largest entity in the same sector by share, submitted its resolution plan which was approved by the CoC. The resolution plan consisted of AGI merging with HNGIL. This would provide AGI with a combined 80-85% and approximately 40-45% share of the food and beverage and alcohol sector, respectively. The Resolution Professional (RP) approved the plan submitted by AGI and allowed the plan to advance before approval of CCI. Independent Sugar Resolution Corporation, an unsuccessful applicant contested the approval of plan by CCI.
Previous Judicial Precedent
Before this ruling, Courts have taken a liberal interpretation of Section 31(4) of the Insolvency and Bankruptcy Code, 2016. In Arcelor Mittal India Pvt. Ltd. v. Abhijit Guhakurta, Vishal Vijay Kalantri v. Shailen Shah and Makalu Trading v. Rajiv Chakraborty, the NCLAT had ruled that whilst CCI’s approval was mandatory, obtaining such approval prior to CoC approval would only inhibit the completion of the CIRP period and in turn negate the IBC’s non-adjudicatory nature requiring timeliness. The ruling before the NCLAT, also illustrated a strong departure from precedent by ruling that CCI’s approval has to be obtained prior to CoC approval.
Analysis of the Court Judgment
Majority Opinion
Understanding of section 31(4) of IBC, 2016
In the judgement of NCLAT dated 18th September 2023, it was stated that obtaining approval from CCI under section 31(4) of IBC, 2016 is obligatory. However, securing approval for the resolution plan prior to the approval of CoC is a procedural guideline rather than an obligatory requirement. The ruling was founded on the premise that the approval timing of the CCI is beyond the control of the resolution applicant. If the prior approval has been made mandatory then it will cause delays in the completion of CIRP which will defeat the underlying objective of IBC, 2016. IBC, 2016 which is based on the recommendations of report of Bankruptcy Law Reforms Committee,2015 explicitly states that the main objective of IBC is to maintain troublesome business as ongoing entities and enables a prompt and quick dispute resolution process. The court should ensure that the interpretation of section 31(4) of IBC is consistent with the legislative intent of IBC. To sum-up NCLAT determined that although the approval of CCI is essential the timing of such approval lies within the discretion of the resolution applicant. However, Supreme Court rejected the NCLAT’s perspective.
Interpretation of Section 31(4) of IBC, 2016
The Supreme Court emphasized a strict, liberal interpretation of the rule of law rather than adopting a purposive approach to legal interpretation. Though many scholars have argued that ascertainment of whether the obligation is mandatory or not is derived from legislative intent rather than the language of the provision. Courts have often inferred ‘shall’ as a directive obligation to facilitate the aim of legislation and avoid rigidity of statue. However, when language of the statue is unambiguous, the literal rule most accurately defines legislative intent. The court while applying literal rule will not take any repercussions into considerations.
Supreme Court in its judgement paid heavy emphasis on the word ‘prior ‘mentioned under section 31(4) of IBC stating that it is clear, unambiguous and devoid of any interpretations. The provision explicitly states that prior to the approval of the resolution by CoC the approval of the CCI must be obtained. If the approval of CCI over the resolution plan is taken after the approval of CoC then the language of provision will be modified. The court also stated that statue specifically emphasizes on merger and acquisitions or any other resolution plan, the deliberate use of word ‘prior’ constitute a distinct exception for prevention of anti-competitive contracts. Furthermore, the court observed that there is no contradicting provision within the IBC, 2016 that would result in different interpretation which would override or defeat the underlying objectives of the legislation.
Legislative and Judicial Perspective for regulatory timelines for CCI approval in CIRP
The Supreme Court referenced the Insolvency Law Committee’s report, which recommended establishing specific timeframes within the IBC for securing approval from government authorities, including CCI. In consultation with CCI, the committee designated a thirty day timeframe for CCI to evaluate and approve the resolution plan under the framework under IBC. In extraordinary cases, the deadline can be extended for another 30 days. If after the completion of 60 days, no communication of acceptance or rejection is issued by CCI, then the plan is deemed to be approved. The introduction of a timeline aimed to create a structured process for obtaining assent of CCI, thereby aligning with the goals of IBC. The court clarified that notice to CCI need not be postponed until the submission of resolution plan to RP. The submission of a combined proposal is permissible at any point during the process, provided that the resolution timeline aligns with 330 day maximum period mandated by IBC, 2016. This alignment promotes coherence between both the statues.
In light of foregoing arguments, the Hon’ble Supreme Court declared the resolution plan submitted by AGI null and void due to the fact that approval from CoC was taken prior to approval from CCI which is in direct contravention of section 31(4) of IBC, 2016.
Dissenting Opinion
The dissenting opinion is authored by Justice SVN Bhatti. The following are findings from his judgment:
Provision is directory not mandatory
The proviso should be regarded as directory rather than mandatory; a literal reading of this provision indicates that it conflicts with other provision of section 31 of IBC. Moreover, pursuant to section 30(4) of IBC, 2016, the CoC, while exercising its commercial judgement must evaluate whether the proposed plan is feasible, valuable or viable or whether the interests of shareholders are appropriately prioritized. Consequently, CoC does not possess the authority to determine the legal enforceability of the resolution plan; such jurisdiction is exclusively vested in NCLT. Hence, if a resolution applicant secures approval from CCI subsequent to CoC approval but prior to NCLT’s endorsement of resolution plan, the plan aligns with the provisions stipulated by the IBC.
The discrepancy between the provisions of IBC and The Competition Act, 2002
The CoC utilizes its commercial judgement to evaluate the feasibility and practicality of the proposed resolution plan. It is the responsibility of the adjudicating Authority to ensure that the resolution plan aligns with the requirements stipulated by The Competition Act, 2002, as sanctioned by CoC The minority opinion argued that, requiring prior approval from CCI before the CoC approves the resolution plan would restrict the number of potential resolution applicants. Since the fundamental objective of CIRP is to maximise recovery, such a requirement could undermine the effectiveness of CIRP. Additionally, only the Adjudicating Authority possesses the authority to reject a resolution plan that does not meet compliance standards. The CoC’s primary concern lies in evaluating the plan’s commercial feasibility and viability. As a result, the dissenting opinion affirmed the decision of NCLAT, interpreting the proviso in a purposive manner.
Effect of Judgment on Commercial Wisdom of CCI
The requirement of acquiring prior approval from the CCI (CCI) as per Section 31(4) of the Insolvency and Bankruptcy Code, 2016 (IBC), requires special interpretation, primarily vis-à-vis the commercial wisdom of the Committee of Creditors (CoC). The strict application of Sections 5 and 6 of the Competition Act, 2002 at the CoC voting stage may limit the creditors’ ability to evaluate resolution plans by the standard of ‘feasibility and viability’, thereby preventing them from examining possibly better recovery options due to procedural restriction on their vote.
Although the precedence of the commercial wisdom of the CoC is a fundamental aspect of the insolvency process, the legislature has recognized the systemic risks of anti-competitive combinations. The CCI has a statutory mandate to approve, reject or suggest modifications to the anti-competitive combination therefore due attention to the statutory mandate is considered important. Any resolution plan can be approved and only later revised post-approval, which means the CoC was not informed of changes being made after their voting and before the sanction by the CCI, preventing them from making an informed decision. This would be inconsistent with the legislative intention and expose the creditors to poor decision making.
Moreover, if the CoC approves a resolution plan that includes a combination which is likely to cause an appreciable adverse effect on competition (AAEC) without prior CCI clearance, it will be (and will remain) legally unenforceable. This defect is not capable of being cured at a later stage, and therefore the CoC approval will be null and void and violate Sections 30(2)(e), 30(3), 30(4), and 34(4)(a) of the IBC. As such, there needs to be a measured approach which reposes on global best practices. The authors argue for a bespoke approval regime for bankrupt entities which reconciles competition law compliance with the efficiency aims of the IBC, and furthers India’s stronger insolvency regime.
Harmonising Insolvency And Antitrust: Lessons From Global Merger Control Models
The Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), the pre-merger notification system that is part of a federal antitrust law in the United States, was enacted to establish a framework for antitrust review, and consequently to protect the interests of consumers in the marketplace. The HSR Act is administered by the Federal Trade Commission (FTC) and typically imposes a waiting period of 30 days prior to consummating a transaction. With respect to distressed asset acquisitions that are conducted subject to Section 363(b) of the U.S. Bankruptcy Code, a fast-track procedure applies and shortens the waiting period to 15 days from the date that the “acquiring person” and the trustee or debtor-in-possession (DIP) make their filings. In certain limited bankruptcy circumstances, the waiting period can be as short as 10 days. The special procedure allows the competitive and market review to be completed in a prompt manner while not sacrificing any competitive protections. The process ultimately allows transactions to close sooner with fewer delays and allows a more effective and efficient process for managing the bankruptcy process.
In contrast, the merger control regime in the United Kingdom, as set out in the Enterprise Act 2002, utilizes a “voluntary” notification system whereby the parties do not have to notify the Competition and Markets Authority (CMA) until after the merger occurs. While this removes procedural delays, it also produces risks for those arrangements that involve insolvency. To intervene after the merger may entail requirements for asset divestment, or restructuring that disrupts the ongoing business and creates instability in the merged entity. These issues can create uncertainty for restructuring plans, especially in cases where creditors are extending financing based on the approved resolution plan. Further, creditors will often prefer the higher bids of larger purchasers whose concentrations create competition issues, where it is most acutely needed.
In India, the concept of “green channel” approval through the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (the 2011 Regulations) can enable certain transactions to avoid scrutiny for approval from a pre-merger notification process, which has a mechanism, in part, similar to the voluntary system in the UK. The approval can only be conducted for certain kinds of combinations. The extension of this mechanism to insolvency resolution processes (IRP) may offer the benefit of efficient processes, with caution. The absence of a prior competition assessment with voluntary regimes does mean creditors lose the opportunity to use an alternate restructuring mechanism. In other words, when a transaction is implemented, the creditors of the company may not weigh the options available to them during the IRP process if the transaction ultimately is in breach of competition law. The disruption to the IRP could be immense if a transaction is found to be contrary to competition law. Fortunately, the elements of Regulation 5A from the 2019 amendment to the 2011 Regulation, avoids this potential for exposure since a non-compliant merger would be void ab initio, compared to Section 6 of the Competition Act, which only operates with retrospective incapacity to nullify.
Conclusion
A possible pragmatic way forward for India’s reform is to adopt a graduated approach that integrates global best practices while preserving the key aspects of the Insolvency and Bankruptcy Code (IBC). The fast timelines in the U.S. model serve as a strong impetus to improve merger reviews in insolvency resolution processes (IRPs). The Competition (Amendment) Act, 2023, has already reduced the total timeline for combination approvals from 210 days to 150 days and has reduced the timelines for the CCI to form a prima facie opinion of a combination from 30 days to 15 days. Building on that legislative framework, India could introduce a tailored, expedited review regime for bankrupt companies like the U.S. regime to expedite the resolution process while protecting competition.
An alternate or supplementary reform can be inspired by the UK voluntary merger notification regime. In the UK, no party is required to notify the CMA prior to completing a transaction. Whereas India operates a suspensory merger control regime that bans consummation until CCI clearance or the standstill period expires. A custom “green channel” process for bankrupt entities could potentially provide a sensible balance between the need for transaction speed and ex post competition scrutiny, aligning the efficiency of resolutions in insolvency with the need to comply with antitrust.
Though the introduction of a green-channel process comparable to the UK’s voluntary notification process may help reduce procedural delays, there will be significant risk elements involved. The most significant risk is assets could be divested after part of the process was implemented if that transaction was later found to violate competition law. This kind of adjustment could cause disruption to the IRP, uncertainty for creditors, and result in creditors being less willing to commit more resources related to efforts for restructuring. This viewing of any alteration to an IRP because of the CCI position is best considered at the time of negotiation and bidding. This would allow the CoC to consider and vote on alternative resolution plans if the CCI rejected or materially altered their preferred proposal.
Although the green-channelling route may have efficacious procedural advantages, better outcomes could arise from seeking better institutional coordination between the National Company Law Appellate Tribunal (NCLAT) and the CCI. Such coordination will acknowledge competition issues at the same time as maintaining the stability of the insolvency regime. Indeed, the IBC accounts for such coordination by requiring resolution applicants to receive CCI approval before CoC voting commences, and this will allow anti-competitive effects to be considered at an earlier stage and protects both markets and creditors.
A calibrated approach is necessary to prevent anti-competitive effects while also achieving the time-sensitive goal of an insolvency resolution. Based on comparative international experiences, India may wish to consider implementing a separate expedited timeline for reviewing transactions that involve distressed entities, while ensuring an informally speedy process where due diligence is maintained, with rigour. While on each occasion to date, the CCI (CCI) has found that an insolvency resolution plan (IRP) combination did not cause an appreciable adverse effect on competition (AAEC), the evolving nature of the IBC (Insolvency and Bankruptcy Code) framework indicates the need to move towards a more structured and anticipatory system – one that integrates compliance with competition law, while maintaining timely and meaningful resolutions.
Divey Pratap Singh Rana is a third-year undergraduate student pursuing a Bachelor of Laws degree at Symbiosis Law School, Noida, Uttar Pradesh, India
NUALS Law Journal 