[Priyadarsini T P is a 3rd year B.A LL.B (Hons) student at National University of Advanced Legal Studies, Kochi]
Recently, Vedanta and JSW Steel received approval from the Competition Commission of India (“CCI”) for acquiring the insolvent entities Electrosteel Steels Ltd. and Monnet Ispat and Energy respectively. Although section 238 of Insolvency and Bankruptcy Code, 2016 contains a non-obstante clause, it will be imprudent to interpret it so as to conclude that corporate insolvency resolution plans (“CIRPs”) are immune from review by the CCI. Therefore, acquirers have played it safe as there is no express exemption from CCI review for insolvency acquisitions.
But what happens if the CCI concludes that the resolution plan, if effected, will have an appreciable adverse effect on competition (“AAEC”)? Section 30(2)(e) of the Code provides an indication by stating that the resolution plan submitted to the resolution professional should not contravene any of the provisions of the law for the time being in force. Non-conformity of the plan with this condition is a ground for rejection of the plan by the adjudicating authority under section 31. This means that a resolution plan approved by the committee of creditors (“CoC”) found to have AAEC shall be rejected by the National Company Law Tribunal (“NCLT”) and liquidation shall commence straight away, which may actually harm competition in concentrated markets.
In this scenario, one may wonder whether the majority of the creditors’ interests should be allowed to be subverted by anti-competitive concerns at all times, irrespective of particular circumstances. One may even wonder why insolvency acquisitions are made reviewable by the CCI because, irrespective of the combination taking effect or not, the insolvent entity will exit the market and thus the combination cannot possibly harm competition. However, this may not hold true in all cases as there is a possibility that the acquired assets may be deployed by the acquirer to lessen competition significantly thereafter. Further, there is a chance that the acquisition took place through concerted action by the buyer and the insolvent entity which otherwise would not have taken effect due to anti-trust concerns. Hence, it is not a good idea to do away with CCI review.
The above posed question reflects a scenario in which the goals of bankruptcy law and anti-trust law conflict. One of the major goals of bankruptcy, i.e., realization of maximum value of the assets, is most likely to be achieved when the assets to be acquired have the potential to confer significant market power to the acquirer, something that is frowned upon by competition law. This post attempts to resolve this conflict in the light of section 20(4)(k) of the Competition Act, 2002 (“Act”) which provides that the CCI shall consider the ‘possibility of a failing business’ while determining whether a combination is likely to have AAEC in the relevant market. This is akin to the ‘failing firm’ defense prevalent in the United States by which a combination, otherwise unpardonable, is allowed to proceed because the acquired entity faces the grave probability of a business failure and there is no other less anti-competitive alternative other than the acquisition by the competitor to keep it in the market with a less significant reduction in competition [International Shoe v. FTC (1930)]. The social factors such as shareholder losses, elimination of jobs, and other public harms threatened by the shutdown have been cited as the rationale for permitting such combinations [United States v. Philadelphia Nat’l Bank (1963)]. As per the 2010 Horizontal Merger Guidelines, all of the following criteria have to be met to successfully establish the defense:
[i] the allegedly failing firm would be unable to meet its financial obligations in the near future
[ii] it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act
[iii] it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger.
Similar provisions are incorporated in the European Union merger laws in which whether or not the competitive structure in the market will deteriorate in the absence of the merger is an important point of consideration. The three criteria the Commission may consider are:
[i] the allegedly failing firm would in the near future be forced out of the market if not taken over by another undertaking
[ii] there is no less anti-competitive alternative purchase than the notified merger and
[iii] In the absence of a merger, the assets of the failing firm would inevitably exit the market.
The ‘failing business’ factor must be mandatorily considered and assessed by the CCI in case of evaluating a combination that involves a failing business and these principles provide some guidance in that respect. Such combinations call for a higher standard of meticulousness in the review. The competition regulator should examine the merits of a proposed resolution plan from the purview of how desirable it is in the interests of corporate rescue, whether the proposed plan is the only possible mode of reorganization without liquidation, whether there are other reorganization plans which are less anti-competitive, etc. The evidentiary standard to establish that the firm is actually failing should also be high in order to ensure that relaxations, if any, are sparingly granted.
One possible way of avoiding the scenario in which the CoC approved resolution plan is tossed out for being anti-competitive is to seek the CCI review at a stage as early as when the bid the submitted. Under section 6(2) of the Act, any person or enterprise proposing to enter into a combination has to give notice to the CCI within 7 days of execution of any agreement or other document for acquisition or for acquiring control. The puzzling question is which agreement has the said effect. The conundrum is better explained by certain events that transpired during the Binani Cements Insolvency Resolution Process. In this case, CCI approved the resolution plans submitted by Rajputana Properties Private Limited and UltraTech Cement, two prospective purchasers of the insolvent company’s assets, even before they were submitted to NCLT and in the case of the former, before it was approved by the CoC. If this is allowed to happen in the future, there is a possibility that the CCI will have to review multiple proposals at the bidding stage out of which only one may succeed in the end. However, this may actually be instrumental in resolving the anti-trust/bankruptcy conundrum. If multiple bidders get their resolution plans reviewed by the CCI, before it is approved by the CoC, those plans which are found to have AAEC can be excluded from being even considered by the CoC so that the plan that is finally approved will definitely be compliant with Competition norms.
The ambiguity with respect to whether the bid upon being proposed itself triggers the notification process or it is triggered only when it has obtained the CoC approval can be resolved by either construing the bid as an agreement within the meaning of section 6 of the Act, or by making signing of a letter of intent mandatory once the bid is accepted.
Another area that needs reconciliation between the Act and the Code is the timelines given therein. The CCI can take up to 210 days under the Act to approve or disapprove a transaction. That being said, there is a need to prescribe an expedited review process in case of review of insolvency resolution plan so that the process may be completed within the limit of 270 days as prescribed in the Code for completion of CIRP. This is not an impossible task as the CCI was able to clear the proposal to acquire 80% of Binani Cements proposed by Rajputana Properties within 24 days. Similar abbreviated pre-merger notification process (15 days for the period of initial government review instead of 30 days and subsequent waiting period is reduced to 10 days) in case of bankruptcy sales is provided for in the US. Worst case scenario, if the time limit for submitting the resolution plan to NCLT expires before the CCI review is completed, the latter time period must be excluded from the calculation of 270 days to avoid the entity from going into liquidation.
These are only few of the anti-trust concerns in relation to insolvency resolution plans. Any more such conflicts which may arise need to be resolved in such a manner that the spirit of both the laws is preserved.
– Priyadarsini T P