Introduction:
With the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC/Code) corporate entities are actively taking this route to resolve or revive themselves from the financial distress. The process starts with an application to the Adjudicating Authority (NCLT for corporate entities) for initiation of the corporate insolvency resolution process when the debtor is unable to repay the minimum specified default. After such approval, a resolution plan is approved by the Committee of Creditors (CoC) and is finally taken up with the NCLT for approval. However, this is not the case with every resolution process under IBC. With the introduction of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (2018 Amendment Act), proviso to Section 31(4) was specifically introduced to obtain approval of the resolution plan from the Competition Commission of India (CCI) in certain cases involving combinations.
What are Combinations under Competition Act, 2002?
India opened avenues for foreign direct investment by relaxing its existing policies of trade and investment in the year 1991. Actual globalization in the Indian market took place after such a major haul in the policies. Such reforms were aimed at protecting the country from defaulting and improving the condition of the balance of payment. The free trade in the country attracted countless foreign enterprises to invest and set up their industry in the country, ultimately resulting in the strategy of corporate restructuring adopted by the companies. Such a strategy allows the companies to eliminate competition in the market and foster more profitability as a result of a decrease in competition and increase in the area of practice.
This also created a burden on the Indian companies to match up with the multinational companies and in order to control the monopolistic practices and fair trade and pricing models, the Competition Commission of India as per the provisions of section 5 of the Competition Act, 2002 is tasked with providing approval for such combinations which breaches a particular threshold as notified.
As per the definition provided under section 5 of the Competition Act, 2002 a combination is an “acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises”. To put it simply combination as per the Competition Act, 2002 means any acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has direct or indirect control over another enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act.
A combination that is in the form of an acquisition, merger, or amalgamation must be notified to and approved by the regulatory authority, Competition Commission of India (CCI), if it breaches the prescribed asset and turnover thresholds and does not qualify for any exemptions. The requirement to notify CCI is mandatory and combinations are subject to a 'standstill' or suspensory obligations.
The present threshold limit for any combination to seek approval of CCI is provided in the table.
Why do resolution plans need to be approved by the CCI?
Under the scheme of the Code, a resolution plan submitted by the prospective resolution applicant is required to be approved by the Committee of Creditors by not less than sixty-six percent of the voting share of the financial creditors. Further, such a resolution plan is submitted to the Adjudicating Authority for their approval and implementation. However, when it comes to certain resolution plans which are above the threshold limit as defined under Section 5 of the Competition Act, 2002 they are required to be approved by the CCI as well.
Initially when the Code was enacted there was ambiguity regarding the timeline and stage at which such approval is sought from the CCI during the CIRP period. Regulation 37(1)(l) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, provides for necessary statutory approvals to be taken from the concerned authority but the timeline for such approval from CCI was not mentioned.
Later, with the enactment of the 2018 Amendment, such ambiguity is cleared. Presently, such approval from the CCI must be sought before the approval of the resolution plan by the Committee of Creditors. Such approval is to ensure that the resolution plan does not provide undue advantage to the resolution applicant with such takeover of the company through the resolution process.
However, the NCLAT in the matter of ArcelorMittal India Pvt. Ltd. v. Abhijeet Guhathakurta watered down the mandatory provisions as inserted by the 2018 Amendment Act. In this case, the CoC had approved the resolution plan before seeking approval from the CCI.
The Appellate Tribunal stated, “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”.
Therefore the requirement is now directory in nature. This was further affirmed in the matter of Makalu Trading v. Rajiv Chakraborty, the NCLAT held that a resolution plan will not fall foul of section 31(4) as long as the CCI approval is sought before the approval of the resolution plan by the Adjudicating Authority.
Differential treatment for IBC: Necessity or not?
One of the key objectives of the Insolvency and Bankruptcy Code, 2016 is the time-bound resolution and adherence to the timeline provided for completion of the CIRP process. Such a timeline ensures the value maximization of the assets of the corporate debtor which is already in distress. As per Section 12 of the Code, a CIRP process shall be finished under 180 days with a one-time extension of 90 days. Therefore, such a process shall be completed within 270 days.
Now the approval from the CCI is mandatory in nature as per the provisions provided under Section 31(4) of the Code. There are other statutory approvals also required to be taken while submitting the resolution plan for the approval of the NCLT. Such statutory approvals can be taken up within one year from the date of the approval of the plan by the Adjudicating Authorities. This is the departure from the mandate provided for the approval of the resolution plan involving CCI. This can cause several issues as follows:
Such approval may delay the CIRP process as the CCI can take time for approval of such a resolution plan. As per the provisions of Section 2(A) of the Competition Act, 2002 no combination can come into effect till the lapse of 210 days of such notice or CCI orders on the combination, whichever is earlier. Though it is understood that the approval of the resolution plan has been taken on priority by the CCI considering the strict timeline under IBC. But there may be instances that approval from the CCI will get delayed and would defeat the whole objective of the Code.
Further, if the CCI orders for rejection of the resolution plan or orders for modification of the resolution plan then in such a scenario the whole process would get frustrated and the CoC has to go through the entire process. Interestingly, the Code does not comprehend the situation where the CCI asks for the modification of the resolution plan.
Thirdly, if the resolution plan is approved by the NCLT itself and the approval from the CCI is still pending then whose primacy shall be binding is another issue. However, this precarious situation is now settled vide the 2018 Amendment Act, which specifically mentions that approval from the CCI shall be taken before the approval of the plan from CoC.
The above-mentioned situations carve out certain scenarios which justify the differential treatment of resolution plans to be approved by the CCI. Since the requirement of the Code is to complete the whole insolvency resolution process within the timeline mentioned.
Conclusion:
The Corporate Insolvency Resolution Process is largely dependent on the commercial wisdom of the committee of the creditor. Even the Supreme Court in catena cases of judgments [i] highlighted the importance of the role of CoC in the resolution process. The approval of CCI before the approval of CoC would ensure that the whole CIRP process is not futile and also ensures that the resolution plan submitted to the CCI complies with the fair competition practices and does not lead to any monopoly or undue advantage in the competitive market to any specific resolution applicant.
AUTHOR: AVM Resolution Professionals LLP
Website: www.avmresolution.com
