Competition Approval in Insolvency Resolutions

Timing of Competition Approval in Insolvency Resolutions: A Need for Greater Clarity in the IBC

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The Insolvency and Bankruptcy Code 2016, (“IBC”) lays down the mechanism (through a corporate insolvency resolution process (“CIRP”)) for insolvency and bankruptcy proceedings for companies. As a corporate debtor enters into a CIRP under the IBC, the committee of creditors (“CoC”) of such corporate debtor appoints a resolution professional, who: (a) invites interested applicants to submit resolution plans; and (b) examines whether such resolution plans are in conformity with the IBC.

Upon completion of the examination of the resolution plans received, the resolution professional sends the shortlisted resolution plan to the CoC for approval. Thereafter the CoC will vote to approve the shortlisted resolution plan. The CoC is required to approve a resolution plan by a vote of at least 66% of the voting share of the financial creditors, after considering feasibility and viability, the manner of proposed distribution and such other requirements as may be specified. Once the plan has been approved by the CoC, the resolution professional will submit such plan to the National Company Law Tribunal (“NCLT”) for approval. If the NCLT is satisfied that the resolution plan approved by the CoC meets the requirements of the IBC, it will approve the resolution plan. A CIRP is required to be mandatorily completed within a period of 330 days from the date of admission of the application for initiation of the CIRP (“CIRP Timeline”).

REGULATORY APPROVALS FOR A RESOLUTION PLAN

A successful resolution applicant is required to obtain requisite regulatory approvals with respect to implementation of the resolution plan. The exact stage at which such regulatory approvals are required was not clear until a new Section 31(4) was introduced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (“2018 Amendment”). Section 31(4) of the IBC requires the resolution applicant to obtain the necessary approvals required under any applicable law within a period of one year from the date of approval of the resolution plan by the NCLT or within such period as provided for in such law, whichever is later. A proviso to Section 31(4) lays down that where the resolution plan contains a provision for combination under the Competition Act, 2002 (“Competition Act”), the resolution applicant is required to obtain the approval of the CCI prior to the approval of such resolution plan by the CoC (“CCI Proviso”).

Section 31(4) is based on a report issued by a committee constituted by the Ministry of Corporate Affairs, Government of India, in 2018 (“2018 Insolvency Law Committee Report”). While the objective of the requirement to obtain a CCI approval prior to the approval of the resolution plan by the CoC could be to prevent the entire CIRP from being negated in the event the CCI disapproves an application pursuant to the selected resolution plan, the same logic would apply for any other regulatory approval as well. The 2018 Insolvency Law Committee Report did not provide a rationale for differential treatment in respect of timing of the CCI Approval as compared to the timing of other regulatory approvals.

The requirement under the CCI Proviso for an approval from the CCI prior to the approval from the CoC for a resolution plan is framed in mandatory terms. However, certain judgements of the NCLT/National Company Law Appellate Tribunal (“NCLAT”) have diluted the mandatory effect of the CCI Proviso by treating the CCI Proviso as ‘directory’. A key decision in this regard has been the decision of the NCLAT in Arcelormittal India Pvt. Ltd v. Abhijit Guhathakurta (“Arcelormittal Case”).[1] In the Arcelormittal case, CCI approval was obtained after CoC approval but prior to the NCLT approval for the resolution plan. The NCLAT held that the CCI Proviso is directory and not mandatory and that it is always open to the CoC, which looks into the viability, feasibility and commercial aspect of a resolution plan to approve the resolution plan subject to such approval by the CCI, which may be obtained prior to the approval of the NCLT under Section 31 of the IBC. The decision in the Arcelormittal Case was reiterated in Vishal Vijay Kalantri v. Shailen Shah.[2]

In Makalu Trading Ltd. v. Rajiv Chakraborty (“Makalu Case”)[3] , an online application to the CCI was made prior to the approval of the resolution plan by the CoC and the CoC approval for the resolution plan was given prior to receipt of the CCI approval. Following earlier judgements, the NCLT held that since the approval from the CCI was obtained prior to the approval of the resolution plan by the NCLT, the requirement under the CCI Proviso had been addressed.

However, the NCLAT in the Bank of Maharashtra v. Videocon Industries Limited (“Videocon Case”),[4] rejected the resolution plan for non-compliance as the resolution applicant did not obtain CCI approval prior to CoC approval. The NCLAT ordered the resolution plan to be remitted back to CoC for completion of the process relating to CIRP in accordance with the provisions of the IBC.

Accordingly, the Videocon Case exemplified a risk that the NCLT or NCLAT could, in a particular case, hold that the resolution plan was not validly approved if the requirement under the CCI Proviso (CCI approval prior to CoC approval) was not complied with.

Subsequently, in DBS Bank Limited v. Hindustan National Glass and Industries Limited (“DBS Case”),[5] the NCLT held that the Videocon case was a judgement passed by a bench consisting of two members, whereas the Arcelormittal Case was a judgement passed by a bench comprising of three members and on that basis the judgement in the Arcelormittal Case was upheld.

REQUIREMENT OF A BINDING DOCUMENT PRIOR TO NOTIFICATION UNDER THE COMPETITION ACT

Any combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India, is prohibited under the Competition Act. The Competition Act requires for a notice of a combination to be given to the CCI within 30 days of: (a) approval of the proposal relating to merger or amalgamation by the board of directors of the enterprises concerned with such merger or amalgamation; (b) execution of any agreement or other document for acquisition or acquiring of control. In this regard, competition law requires the existence of a binding document prior to the notifying the CCI in relation to a combination.

IS THE CCI PROVISO NEEDED?

While the courts have, as a general matter, correctly read down the mandatory terms of the CCI Proviso, the more fundamental question is whether the CCI Proviso is needed at all.

Leaving aside the uncertainty it creates for resolution applicants (as exemplified by the Videocon Case where the NCLAT read the CCI Proviso as creating a mandatory requirement), it is hard to ascertain the purpose the CCI Proviso is intended to achieve. Given the timeline for a matter proceeding from CoC approval to NCLT approval (one year would be a good outcome), it is difficult to understand the benefit, if any, that the CCI Proviso can bring to compressing insolvency resolution timelines.

In fact, by effectively requiring multiple bidders to approach the CCI for approval before CoC approval, the CCI Proviso runs counter to the general competition law principle that there should be a binding document in existence prior to notifying the CCI. It creates an additional burden for an already over-burdened CCI infrastructure. In addition, even though courts have generally read down the mandatory terms of the CCI Proviso, it in fact provides an additional ground of challenge to unsuccessful resolution applicants, thereby extending insolvency resolution timelines instead of compressing them.

The authors’ submit that the CCI Proviso does not appear to serve any useful purpose and recommend its deletion. The relevant time period for obtaining all regulatory approvals in connection with an insolvency resolution process should be the time period between CoC approval and NCLT approval with an additional time period of one year after NCLT approval to complete any regulatory process that remains incomplete at the stage of NCLT approval.


[1] National Company Law Appellate Tribunal, New Delhi, Company Appeal (AT) (Insolvency) No. 524 of 2019

[2] National Company Law Appellate Tribunal, New Delhi, Company Appeal (AT) (Insolvency) No. 466 of 2020

[3] National Company Law Appellate Tribunal, New Delhi, Company Appeal (AT) (Insolvency) No. 533 of 2020

[4] National Company Law Appellate Tribunal, Principal Bench, New Delhi, Company Appeal (AT) (Ins.) No. 503 of 2021

[5] National Company Law Tribunal, Kolkata Bench, IVN. P. (IB) No. 19/KB/2022 in C.P.(IB) No. 369/KB/2020


This insight has been authored by Rajat Sethi (Partner) and Vyoma Mehta (Associate). They can be reached at rsethi@snrlaw.in and vyomamehta@snrlaw.in, respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.