[Mayank Udhwani and Ragini Agarwal have recently graduated from National Law University, Jodhpur]
The introduction of section 31(4) through the Insolvency and Bankruptcy (Second Amendment) Act, 2018 was intended to fine tune the workings of the Insolvency and Bankruptcy Code, 2016 [‘IBC’]. The clause provides that the resolution applicant is required to obtain necessary statutory approvals required for the effective functioning of the resolution plan. While this requirement was already provided under regulation 37 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a timeline within which such approvals were to be obtained was missing. Accordingly, section 31(4) clarified that the necessary approvals should be obtained within a year from the date of approval of the resolution plan by the adjudicating authority. However, an exception has been created vis-à-vis the Competition Commission of India [‘CCI’]. The proviso to section 34 states that if the resolution plan contains a provision for combination, approval from the CCI has to be obtained prior to the approval of the resolution plan by the committee of creditors [‘CoC’].
This gives the impression that the legislature has treated the requirement of approval from the CCI as a class apart from other statutory approvals. Although the requirement under the proviso to section 31(4) appears to be mandatory in nature, the recent judicial trend leans heavily in favour of treating it as directory in nature. In this two-part series, the authors argue that the provision under section 31(4) of the IBC must not be watered down and that approval from the CCI must be obtained prior to the approval of the resolution plan by the adjudicating authority.
In part-I, the authors delineate the raison d’etre for the differential treatment of CCI approval in comparison to other statutory approvals. This is followed by a discussion of the judicial precedents which led to eventual the watering down of section 31(4) of the IBC.
In part-II, the authors counter the argument that requirement of approval from the CCI cannot be reconciled with the timelines prescribed under the IBC. This argument has ostensibly been used by courts to water down the effect of section 31(4) of the IBC. The authors, with the help of empirical data, endeavour to establish that such an argument falls foul of the ground reality.
Objective Behind Treating CCI Approvals Distinctly
The Insolvency Law Committee Report, 2018 had advocated the introduction of timelines for obtaining statutory approvals so as to ensure that the timeline prescribed for the completion of the corporate insolvency resolution process [‘CIRP’] is not compromised. In this regard, it was noted that a fast track procedure should be introduced for obtaining the approval from the CCI prior to approval of the resolution plan by the adjudicating authority (at para 16.4).
Interestingly, the report does not delineate the rationale for differential treatment of CCI approval with respect to other statutory approvals. However, the rationale for the same could be that if a resolution plan approved by the adjudicating authority is later rejected by the CCI, then it would render the entire CIRP nugatory. This logic does not extend to other approvals since if a plan falls foul of the standards required for other approvals, the same would be curable by making requisite changes in the plan. If a plan, however, fails to fulfil the standards required by CCI, remedial measures could include actions such as the requirement of a different resolution applicant altogether, which will not be possible to follow through after the completion of the CIRP. This argument could be the underlying basis of provisions of the IBC permitting obtaining statutory approvals within one year from the approval of the resolution plan, while mandating that the approval of the CCI must precede the approval by the Adjudicating Authority. Therefore, it stands to reason that the legislature must provide that the approval from the CCI is sought before the approval of the resolution plan by the adjudicating authority.
Further, India follows a suspensory merger control regime, i.e. a regime where the implementation of a plan likely to have an appreciable adverse effect on competition is suspended until the CCI approves the same. Parties need to remain independent competitors until a transaction is closed. They need to maintain their standstill obligation, i.e. forbearing from engaging in activities which lead to integration of operations. Such conduct not only leads to gun-jumping and attracts penalties under section 43A of the Competition Act, 2002 [‘Competition Act’] but also potentially requires “unscrambling” of the combination. Hence, in the opinion of the authors, the proviso to section 31(4) is a protective measure intended to preserve the sanctity of the CIRP.
The Reading Down of Mandatory Provisions Can Be Counterintuitive
In Arcelormittal India Pvt. Ltd. v. Abhijeet Guhathakurta (2019), the National Company Law Appellate Tribunal [‘NCLAT’], without specifying any reasons, held that the special provision with respect to CCI approval was not mandatory but directory in nature (at para 15). This was a case where the CoC had approved the resolution plan before the applicant had sought an approval from the CCI. To justify its decision, the NCLAT held 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”. By this observation, the NCLAT paved the way for watering down of the mandatory import of the proviso to section 31(4).
This dictate found further support in the case of Vishal Vijay Kalantri v. Shailen Shah (2020), wherein it was held that the resolution plan would be compliant with section 31(4) even if the approval was obtained subsequent to the CoC approval (at paras 14 and 15). In this case, the NCLAT recognized the mandatory nature of section 31(4) of the IBC. Despite this, the NCLAT observed that “treating such requirement as mandatory is fraught with serious consequences”. However, instead of elucidating what such ‘serious’ consequences may be, the NCLAT proceeded to rely upon the decision in Arcelormittal to substantiate its claim of the directory nature of section 31(4) of the IBC. Recently, on 9th September 2020, in 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 (at para 11).
Clearly, the judicial verdict leans towards watering down the effect of proviso to section 31(4). This dilution should, however, not be done to such an extent that the mandatory effect of obtaining approval from the CCI prior to the approval by the adjudicating authority is also diluted. This is because the legislative intent was to make CCI approval mandatory at least with respect to obtaining the said approval prior to the plan being approved by the adjudicating authority. In Sharif-Ud-Din v. Abdul Gani Lone, it was held that although the use of nomenclature “shall” or “may” is not a decisive factor, if the object of the law would be defeated by non-compliance of it, the provision would be treated as being mandatory in nature. It is true that the defect in the present case can be cured by a subsequent approval of the CCI; however, in case an approval is not granted, the entire CIRP will be derailed. If the approval from the CCI is sought after the confirmation of the resolution plan by the adjudicating authority and the CCI subsequently rejects that plan by finding that the proposed combination will have an appreciable adverse impact on the competition, then the entire CIRP will be rendered nugatory.
In case the CCI does not grant approval to the resolution plan approved by the CoC, the CoC can consider other viable resolution plans. However, such a step may not be possible if the CCI rejects the resolution plan after the adjudicating authority has granted its approval. In such a situation, the corporate debtor not only risks going under liquidation (under section 33 of the Code), but also risks attracting the penalty of gun-jumping.
Additionally, it must be pointed out that there is a difference in the approach adopted by the CoC and the CCI while considering a resolution plan. The CoC, in its commercial wisdom, only looks at the maximisation of the value of the corporate debtor; whereas, the CCI gives prime importance to ensuring that the resolution plan does not cause an appreciable adverse impact on competition, which the CoC may choose to overlook. Therefore, an attempt to bypass the mandatory requirement of the section 31(4) must not be made.
In the next part, the authors discuss the reconciliation of timelines under the CIRP with the requirement under section 31(4) of the IBC.
– Mayank Udhwani & Ragini Agarwal