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The authors are Aditya Maheshwari and Vedman Lokesh, fourth year students at Gujarat National Law University, Gandhinagar.
Introduction
The inception of the Insolvency and Bankruptcy Code 2016 (Code), has frequently been heralded as one of India’s biggest success stories in terms of resolving insolvencies either through resolution or liquidation. However, as with any other law, it has faced its own share of hurdles that have hampered its effectiveness from time to time. The Corporate Insolvency Resolution Process (CIRP) begins with an application to the National Company Law Tribunal (Adjudicating Authority). Thereafter, the resolution plan is given the go-ahead by the Committee of Creditors (CoC) and eventually is put forward in front of the Adjudicating Authority for their approval. This was the basic process that was to be adhered with respect to the resolution process. However, this process has been slightly tweaked with the insertion of the Proviso to Section 31(4) of the Code (hereinafter, “proviso”) through the 2018 Amendment. In certain cases, involving combinations, additional approval from the Competition Commission of India (CCI) is also required. Now, whether this approval is mandatory or only directory is the matter of contention here.
In this article, we intend to expound the proviso and its interplay with Section 5 of the Competition Act 2002 (Act). With the recent Bank of Maharashtra v. Videocon Industries Judgement, the discussion around mandatory CCI approval under Section 31(4) of the Code is in vogue again.
The Proviso to Section 31(4) of the Code vis-à-vis Section 5 of the Act
On a plain reading of the Proviso, it is clear that in instances where the aggregate values of the assets or turnovers of the resolution applicant and the corporate debtor to be acquired exceeds the threshold amount mentioned in Section 5 of the Act, then for the resolution plan to move forward, prior approval from CCI will be required. The CoC will have to wait for the CCI Approval before going ahead with the resolution plan. The purported objective of requiring approval from the CCI is to avoid any “appreciable adverse effect on competition” in India. Therefore, the CCI scrutinizes these combinations once these jurisdictional thresholds are crossed.
At the same time, though, it can be argued that this approval requirement interferes with a time-bound resolution of the CIRP, which is the basic fulcrum of the IBC Code. Section 12 of the Code, mandates that a CIRP Process should get concluded within 270 days (including a 90-day extension). Now, a mandatory CCI Approval may cause delays in the process, thereby completely derailing the objective of the IBC.
The Proviso was brought in with the aim of ensuring that a resolution applicant does not gain an undue advantage through the resolution plan by taking over the company during this process. The CoC, going by its “commercial wisdom”, may only emphasize the “maximization of the value of the corporate debtor” and consequently adversely affect the competition.
Therefore, abiding by the suspensory merger control regime of India, the Proviso made it mandatory to get the CCI approval before the approval from the CoC. The crux of the debate here is whether the approval is mandatory as per the wording of the legislation or simply “directory” based on recent jurisprudence.
Two contradictory Judgements – ArcelorMittal vs Videocon
Since the amendment in 2018, there have been judgements that have diluted the mandatory requirement of CCI approval. Apropos to this, in ArcelorMittal Pvt. Ltd. V. Abhijeet Guhathakurta, NCLAT observed, stating that, “It is always open to the ‘Committee of Creditors’, which looks into viability, feasibility and commercial aspect of a Resolution Plan to approve the ‘Resolution Plan’ subject to such approval by Commission”.
The decision of Vishal Vijay Kalantri v. Shailen Shah, which concluded that the resolution plan would be compatible with Section 31(4) even if permission was obtained after the CoC approval, provided additional support for this dictum. Although NCLAT acknowledged the mandatory character of 31(4), they believed that considering such a requirement mandatory is fraught with dangerous repercussions. This was also supported in the Makalu Trading v. Rajiv Chakraborty case, where the NCLAT ruled that a resolution plan won't violate section 31(4) as long as the CCI permission is sought before the Adjudicating Authority approves the resolution plan.
It seemed like the NCLT was amenable to making 31(4) a directory-natured Proviso, however, with the recent Videocon Industries Judgement, things have taken a fresh turn. In this case, the tribunal has observed that “Statutory compliances do not fall under the commercial wisdom of the CoC” (Para. 49). They stated that since the CCI approval was not obtained before the approval of the plan by the CoC, the approval was not valid and hence required further review and reconsideration.
Analysis – scope of commercial wisdom under IBC
It is always a precarious situation with regards to taking approvals from tribunals and regulators in India, considering the amount of intricacies involved. It is emphasized that the soul of the Code is to maximize the value of the assets of the corporate debtor, which comes under the commercial wisdom of the CoC. However, the same is being restricted by the legislature with the insertion of the Proviso, by bringing one more regulatory body into the picture. While the insertion has its own utility by ensuring fair competition in the market, the commercial wisdom of the CoC cannot be overlooked.
The Apex Court, on various occasions, has observed the eminence of commercial wisdom of the CoC over the interference being made by the NCLAT. However, in the Swiss Ribbons Pvt. Ltd. v. Union of India, the Court, while elucidating on the preamble of the IBC, observed that the commercial wisdom of the CoC must work within the wall of the aims and restrictions provided in the preamble. Prior to the Videocon Industries judgment, the tribunal considered approval of the CCI as merely directory in nature. However, the same has been ameliorated by the NCLT by making distinction between the commercial wisdom and statutory wisdom. While one of the objectives of the principle of commercial wisdom is to maximize the value of the assets of the corporate debtor, the same must be exercised to protect the interest of all the stakeholders and to comply with statutory approval. By considering approval of the CCI merely directory in nature, the tribunal opens the door for anti-competitive activities and underwhelms the intention of the legislature which made it a mandatory provision under the Code.
Recently, in AGI Greenpac’s proposed acquisition of Hindustan National Glass & Industries, the rival resolution applicant contended the divergence from the mandatory requirement of taking approval from the CCI as well as violating the terms of the Request for Resolution Plan (RFRP) by AGI Greenpac. Here, the approval of the CCI was considered merely directory by the Resolution Professional and the CoC. This case has reignited the grey area under the Code wherein the tribunal must provide lucidity along with superiority of RFRP vis-à-vis statutory compliance.
Conclusion
The conundrum over the nature of the Proviso, either directory or mandatory, has been unsettling. To conclude, the tussle is between the commercial wisdom of the CoC and compliance with the statutory approval, which is the legislature’s intention. While, in many cases, the significance of commercial wisdom has been emphasized, the same shall underwhelm the intention of the legislature and proliferate the chance of anti-competitive practices in the market economy.
While, taking approval from the CCI is somewhat paradoxical in nature as this statutory compliance is akin to throwing a wet blanket on the timely completion of the CIRP. The whole process would seem counterintuitive if a resolution plan is approved by the CoC and thereafter, rejected by the CCI. However, the “Green Channel Approval” being suggested as an alternative to permission under the Proviso seems a feasible option at the face of it. But this route does not cover mergers that involve horizontal or vertical overlaps. Moreover, down the line if companies begin to voluntarily decide that they meet the criteria for the green channel route, only to be found later that it is not so, then the costs incurred for untangling the assets will be monumental. Such issues were discussed in a 2020 IBBI Research Paper as well.
At this point, the feasible action would be to provide legislative recognition to the Expediate Approval Route wherein the CCI would deal with the matters pertaining to the approval of restructuring entities on a pre-eminence basis within a period of 30 days as suggested by the Insolvency Law Committee Report 2018.
In conclusion, it is stressed that with respect to a plan that is rejected by the CCI after the approval by the adjudicating authority, the costs will be huge. However, in a situation where the plan is rejected by the CCI before the adjudicating authority comes into the picture, the consequences will be much more bearable. We suggest that reading down the mandatory nature of the proviso to Section 31(4) of the IBC will be counter-intuitive in the long run, the legislature’s original intentions should be adhered to. The AGI Greenpac case, will hopefully shed light on the above-mentioned issues and flesh out the grey areas in a comprehensive manner.