[Purava Rathi and Disha Kothawade are 4th year B.A.LL.B. (Hons.) students at National Law Institute University, Bhopal (NLIU)]
The recent Supreme Court ruling in Independent Sugar Corporation Ltd. v. Girish Sriram Juneja and Others (29 January 2025) has settled the legal position that approval from the Competition Commission of India (CCI) must be obtained prior to the approval from the Committee of Creditors (CoC) in a case involving the insolvency of a company. This case highlights the interplay between two distinct regulatory frameworks. The Insolvency and Bankruptcy Code, 2016 (IBC) prioritizes the revival of financially distressed companies through a structured resolution process. In contrast, the Competition Act, 2002 seeks to prevent market distortions and ensure fair competition.
The key issue in this case was whether the proviso to section 31(4) of the IBC is to be interpreted as mandatory or merely directory. This question is crucial because if a combination results in an appreciable adverse effect on competition (AAEC) in the relevant market, the plan must comply with the Competition Act. Failure to do so could render the resolution plan void. Additionally, once the CoC approves a resolution plan, the adjudicating authority under the IBC cannot modify it. This strengthens the argument for obtaining CCI approval before submitting the plan to the CoC to ensure regulatory compliance from the outset. However, this raises practical concerns, as the corporate insolvency resolution process (CIRP) cannot be indefinitely stalled due to a pending CCI application.
This post begins with an analysis of the judgment, particularly the interpretation of section 31(4) of the IBC and its implications for securing prior CCI approval. In this context, the authors undertake a study of international regimes, including those of the United States (US), the United Kingdom (UK), and the European Union (EU). Finally, the post evaluates the feasibility of green-channelling for insolvency resolution plans (IRPs) and proposes a harmonized approach to ensure regulatory compliance without compromising insolvency timelines.
Interpreting Section 31(4) as a Mandatory Compliance Requirement
In its order dated 18 September 2023, the National Company Law Appellate Tribunal (NCLAT) ruled that obtaining approval from the CCI under the proviso to section 31(4) of the IBC is mandatory. However, it held that securing this approval before the CoC approves the resolution plan is only “directory” and not “mandatory.” The tribunal reasoned that the timing of the CCI’s approval is beyond the resolution applicant’s control. Treating prior approval as an absolute requirement could stall the CIRP indefinitely due to delays at the CCI, defeating the very purpose of the IBC. Guided by the Bankruptcy Law Reforms Committee Report, the IBC aims to preserve distressed companies as going concerns and facilitate timely debt resolution. The interpretation of section 31(4) must align with these objectives and the broader statutory framework of the IBC. Therefore, the NCLAT interpreted section 31(4) to mean that while approval is necessary, its timing before CoC approval is flexible.
However, the Supreme Court disagreed with the NCLAT’s order. Applying the statutory principles of interpretation, the Court examined whether a literal or purposive construction should be adopted in this context. Additionally, it considered whether the mere use of the term “shall” in a provision automatically renders it mandatory, irrespective of the broader legislative intent.
Literal vs. Purposive Interpretation of Section 31(4)
To determine the legislative intent behind the proviso to section 31(4) of the IBC, the rule of literal interpretation must take precedence over purposive interpretation. It may be argued that the determination of whether the requirement is mandatory or directory depends on the legislative intent rather than the language of the statute. Courts have often interpreted “shall” as a “directory” to uphold the broader purpose of the statute and prevent procedural rigidity. However, it is also a well-established legal principle that when a statutory provision is clear and unambiguous, its literal meaning best reflects legislative intent. The court cannot consider the consequences of applying such a provision, even if they appear unreasonable, unjust, or inconvenient.
The Supreme Court emphasized that the use of the word “prior” in the proviso of section 31(4) is clear, precise, and unequivocal, without leading to any absurdity. The provision explicitly mandates that CCI’s approval must be obtained before the CoC grants its approval to a resolution plan. Interpreting this requirement to permit approval after the CoC’s decision would amount to altering the statutory language, which is impermissible. The Court further held that the proviso, specifically addressing resolution plans involving combinations, along with the deliberate use of the term “prior,” establishes a distinct exception to safeguard against anti-competitive practices. Additionally, the Court found no conflicting provision within the IBC that would warrant a different interpretation or create any inconsistency with the broader scheme and purpose of the Code.
Lastly, the counterarguments highlight the overlapping nature of the timelines. However, the Court rejected this contention, deeming it completely misplaced.
Legislative and Judicial Perspectives on Regulatory Timelines for CCI Approval in CIRP
The Supreme Court referred to the Report of the Insolvency Law Committee, which had recommended incorporating specific timelines in the IBC for obtaining approvals from government authorities, including the CCI. In consultation with the CCI, the Committee agreed on a timeline of 30 working days for the CCI’s decision on combinations arising out of the IBC. In exceptional cases, this timeline could be extended by another 30 days and, if no approval or rejection was issued within this period, the combination would be deemed approved. The proposed introduction of this timeline was a deliberate effort to ensure a structured process for obtaining necessary approvals while upholding the IBC’s objective of timely resolution.
In the present case, the Court clarified that notice to the CCI need not be delayed until the resolution plan is submitted to the resolution professional. The combination proposal can be submitted at any stage, ensuring that the resolution process aligns with the IBC’s 330-day timeline. This alignment would create consistency between the timelines of both statutes.
The dissenting opinion found that a careful reading of sections 31(1), (2), and the proviso to 31(4) shows that the adjudicating authority stage is the appropriate point for ensuring statutory compliance under the Competition Act. Securing combination approval after CoC approval does not reduce the value of stressed assets because the competitive bidding process remains intact. One of their primary concerns was that a company undergoing CIRP could not afford to halt the entire process while awaiting CCI’s approval, as this would undermine the very purpose of the resolution process. However, it is crucial to recognize that if CCI approval were to be sought after the CoC’s approval, the resolution plan would still be subject to CCI’s review, resulting in a similar delay, and reduction of asset value.
Impact of Prior CCI Approval on CoC’s Commercial Wisdom
Pertinently, the requirement of CCI approval under section 31(4) of the IBC must be interpreted in light of its impact on the commercial wisdom of the CoC. Insisting on compliance with sections 5 and 6 of the Competition Act at the CoC voting stage could significantly narrow the CoC’s ability to evaluate proposals based on “feasibility and viability.” This rigid approach may deprive creditors of potentially better recovery options simply due to procedural hurdles.
While the commercial wisdom of the CoC is crucial in the insolvency process, the legislature recognized the risk posed by anti-competitive combinations and, therefore, mandated prior CCI approval for such plans. The CCI has the power to approve, reject, or modify proposed combinations. If the CoC approves a plan before CCI’s review, any subsequent modifications would escape CoC scrutiny, leaving the CoC to exercise its judgment without complete information. Such an approach would be inconsistent and undermine the legislative intent, resulting in flawed decision-making.
Moreover, if a resolution plan containing a combination with an AAEC is approved by the CoC without securing prior CCI approval, it becomes unenforceable. Such an omission is incurable at a later stage, rendering the CoC’s approval legally ineffective. Consequently, a plan that violates sections 30(2)(e), 30(3), 30(4), and 34(4)(a) of the IBC is deemed to contravene the law and cannot be upheld by the court.
In light of this discussion, the authors argue for a balanced approach inspired by global best practices, proposing a different approval mechanism for bankrupt entities to enhance India’s insolvency framework.
Global Frameworks and Best Practices for Competition Approval
In the, the Hart-Scott-Rodino (HSR) Act established the pre-merger notification regime for antitrust review to safeguard consumer interests. The Federal Trade Commission (FTC) oversees this process, which generally involves a 30-day waiting period. However, acquisitions of bankrupt companies under section 363(b) of the Bankruptcy Code follow a specialized expedited process, reducing the waiting period to 15 days, which starts when both the “acquiring person” and the trustee or debtor-in-possession (DIP) file, ensuring a faster resolution while addressing competitive concerns. In bankruptcy cases, this waiting period after compliance is shortened to 10 days instead of the standard 30 days. This expedited process ensures faster reviews, reduced regulatory hurdles, and swift handling of distressed assets while safeguarding competition.
In the UK, the merger control regime under the Enterprise Act, 2002 is “voluntary”, meaning companies are not required to notify the Competition and Markets Authority (CMA) before implementing a merger. While this offers flexibility and reduces delays, it poses risks, especially for insolvency-related mergers, where post-merger intervention could lead to asset detangling or capital restructuring, complicating operations and destabilizing the merged entity. Such complications could jeopardize the restructuring process, as creditors often extend additional financing based on the approved resolution plan. Creditors also tend to favour larger bidders, increasing the risk of market concentration, and highlighting the need for careful competition scrutiny to balance insolvency and competition law objectives.
In this context, the concept of green-channelling IRPs in India, which allows certain mergers to bypass CCI’s pre-merger review, could streamline the insolvency process. Since green-channelling prevents pre-implementation scrutiny, it closely resembles the voluntary regime in the UK, where companies are not required to notify the CMA before implementation. Unlike the UK’s regime, India’s 2019 amendment to the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 limits green-channelling to specific transactions. Hence, expanding this mechanism to IRPs requires an understanding of how the UK model operates.
The suitability of voluntary merger regimes for IRPs is questionable due to the significant risks they pose. Post-merger scrutiny occurs after implementation, leaving creditors unable to explore alternative proposals or renegotiate terms. Further, if a merger is later found to violate competition laws, it could lead to disruption of the entire process. The 2019 Amendment addresses this issue through regulation 5A, which declares non-compliant mergers void ab initio, unlike section 6 of the Competition Act, which voids them without retroactive effect.
Way Forward & Concluding Remarks
A practical way forward for India is to adopt a balanced approach that draws lessons from global practices while accounting for the unique features of the country’s IBC framework. Expedited timelines, as seen in the US model, could significantly improve the efficiency of merger reviews in the context of IRPs. The Competition (Amendment) Act, 2023 has already reduced the timeline for approving combination proposals from 210 days to 150 days while shortening the CCI’s timeframe for providing a prima facie opinion from 30 to 15 days. The authors suggest that similar to the separate timeline model for bankrupt entities in the US, India could consider adopting and implementing a similar framework to expedite the process as a whole.
Another potential approach could be adopting elements of the UK’s voluntary merger regime, where companies are not required to notify the CMA before implementing a merger. In India, presently, the merger control regime is suspensory, meaning transactions cannot proceed until CCI approval or the expiration of the standstill period. However, a green-channelling model could be introduced for bankrupt entities.
While green-channelling, similar to the voluntary regime, could help minimize delays, it also carries significant risks. A key concern, as previously mentioned, is the potential need for asset detangling if a merger is later deemed anti-competitive. This could disrupt IRPs, create uncertainty for creditors, and ultimately deter them from investing further in the restructuring process. Thus, modifications to an IRP by the CCI are best done at the negotiation and bidding stage, giving the CoC an opportunity to vote on alternative plans if the CCI rejects their preferred one.
Therefore, while green-channelling can streamline insolvency proceedings, enhanced coordination between the NCLAT and the CCI remains a more effective alternative, ensuring that broader market interests are protected. The IBC contains provisions mandating resolution applicants to seek CCI approval before CoC’s approval, allowing competition concerns to be addressed at an early stage.
If India does move towards green-channelling IRPs, safeguards like the failing firm defence used in the European Union should be introduced. This defence, codified in the Horizontal Merger Guidelines, requires meeting three key tests: (1) the acquired firm must be likely to fail, (2) no less anticompetitive alternative acquirer must exist, and (3) the firm’s assets would exit the market without the merger. Furthermore, the European Commission ensures internal group dealings are at arm’s length to prevent artificial defaults, a practice India must adopt.
Such safeguards would prevent subjectivity and misuse. Without them, businesses might manipulate accounts to trigger insolvency and exploit green-channelling. However, it is to be noted that self-certifying mechanisms like green-channelling may lack the detailed scrutiny necessary for this level of analysis.
Thus, a nuanced approach is essential to prevent anti-competitive outcomes without compromising the efficiency of insolvency proceedings. Drawing inspiration from international models, India could introduce a separate expedited timeline for distressed entities to ensure a swifter, yet robust, approval process. While the current case-by-case CCI analysis has worked without any IRP combination causing an AAEC, the evolving nature of India’s insolvency framework necessitates a more structured, future-ready mechanism that balances competition law compliance with the need for timely resolutions.
– Purava Rathi & Disha Kothawade
