[Rajat Sethi is a Partner and Akanksha Agrahari an Associate at S&R Associates]
The recent judgement of the Supreme Court in Independent Sugar Corporation Ltd. v. Girish Sriram Juneja has reignited the debate in respect of the timing for approval of the Competition Commission of India (“CCI”) for resolution plans under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
The factual matrix of this case arose from the corporate insolvency resolution process (“CIRP”) of Hindustan National Glass and Industries Ltd. (“HNGIL”). The core issue before the Supreme Court was whether CCI approval of a combination is mandatory before approval by the committee of creditors (“CoC”) of a resolution plan that provides for such combination. This post discusses the Supreme Court judgement and argues for a legislative amendment.
Background
The proceedings before the Supreme Court arose out of an order of the National Company Law Appellate Tribunal (“NCLAT”) dated September 19, 2023 (2023 SCC OnLine NCLAT 632). AGI Greenpac Ltd. (“AGI”), the successful resolution applicant, sought to acquire HNGIL through its resolution plan. AGI’s resolution plan envisaged the formation of a combination in terms of section 15 of the Competition Act, 2002 between HNGIL and AGI, which required CCI approval. Independent Sugar Corporation Limited (“INSCO”), another resolution applicant, challenged the approval of AGI’s plan, arguing that it lacked the necessary prior CCI approval for the proposed combination. The NCLAT concluded that CCI approval is not mandatorily required prior to the approval of the resolution plan by the CoC. The unsuccessful resolution applicant, INSCO, filed an appeal in the Supreme Court.
The Prevailing View Before this Judgement
Before the Independent Sugar Corporation judgement, the prevailing view as reflected in several NCLAT decisions leaned towards a liberal interpretation of the proviso to section 31(4) of the IBC. The NCLAT decisions in Arcelor Mittal India Pvt. Ltd. v. Abhijit Guhathakurta (2019 SCC OnLine NCLAT 920), Vishal Vijay Kalantri v. Shailen Shah (2020 SCC OnLine NCLAT 1013) and Makalu Trading v. Rajiv Chakraborty (2020 SCC OnLine NCLAT 643) supported the view that while CCI approval was mandatory, obtaining it prior to CoC approval was not. In those cases, the NCLAT reasoned that rigidly enforcing a prior approval requirement could unduly delay the CIRP, potentially undermining the IBC’s objectives.
In two of these cases, Vishal Vijay Kalantri and Makalu Trading, the Supreme Court also dismissed appeals against the NCLAT decisions, lending credence to the NCLAT’s interpretation. However, the recent judgment in Independent Sugar Corporation has now established a different precedent.
The Majority Judgement
By a majority opinion, the Supreme Court overturned the NCLAT’s judgement. It held that the proviso to section 31(4) of the IBC mandates prior CCI approval for resolution plans involving combinations, and that CCI approval is required to be obtained prior to the resolution plan being considered by the CoC. The Court based its reasoning on the plain meaning of the statute. It held that when the language of the provision is clear and unambiguous, literal interpretation is the best way to understand the legislative intention behind enacting the particular provision. Therefore, if the statute requires that the act of obtaining approval of the CCI for the resolution plan must be done in a particular manner, i.e., prior to the resolution plan being approved by the CoC, then it should be interpreted in a straightforward manner as a mandatory requirement.
Commenting on the relevance of the CCI and its scrutiny of the resolution plans containing proposals of a combination, the majority judgement noted that only those resolution plans that meet the requisite lawful criteria can be placed for the scrutiny and approval before the CoC by the resolution professional. In this case, lawful criteria would mean that the resolution plan is fully compliant with the Competition Act, and that the proposed combination does not lead to any appreciable adverse effect on competition in the relevant market. If the prior approval of CCI is not obtained, it may lead to the situation where the CoC approves a resolution plan which does not pass muster under the Competition Act. This would render the whole CIRP exercise futile. To avoid such situations, a prior approval of the CCI is mandatory.
The Dissenting Judgement
The dissenting judgement emphasized the directory nature of the proviso to section 31(4). It held that the prior approval of the CoC is not mandatory. The literal rule of interpretation is not an inviolable rule. Interpreting the proviso in a literal manner should not frustrate the objects of the statute. Such interpretation, apart from causing difficulties in the CIRP, defeats the object of IBC which is maximization of recovery. The use of the word “shall” in the proviso may appear to make the requirement mandatory; however, it is offset by other considerations such as the object, scope of the enactment, and the consequences flowing from such interpretation.
Moreover, the CoC uses its commercial wisdom to judge the feasibility or viability of the resolution plan, and the combination approval is not very relevant from that perspective. The compliance of the resolution plan with the Competition Act, as approved by the CoC, is examined by the adjudicating authority. The minority judgement opined that an insistence on CCI approval before the resolution plan is considered by the CoC would limit the number of resolution applicants. Given that the core object of the CIRP is to maximize recovery, such an insistence would be harmful to the CIRP exercise. Further, only the adjudicating authority can reject a non-compliant resolution plan; the CoC is principally concerned with the feasibility and viability of the plan from a commercial perspective. The dissenting judgement, thus, upheld the impugned NCLAT order, and relied on a purposive interpretation of the proviso.
A Case for a Purposive Interpretation
While the Supreme Court’s commitment to upholding statutory provisions is laudable, the mandatory nature of prior CCI approval, as emphasized in the majority opinion, may inadvertently hinder the IBC process. The minority judgement, in our view, presents a more pragmatic approach. It correctly emphasizes the importance of adhering to the IBC’s timelines. The CIRP is intended to be a swift and efficient process, aimed at maximizing asset value and ensuring timely resolution. Mandating prior CCI approval introduces a potentially lengthy step that could disrupt these timelines. The CCI’s approval process can take a considerable amount of time, potentially freezing or halting the CIRP due to a pending application.
Moreover, a rigid interpretation of the proviso to section 31(4) could stifle the CoC’s commercial wisdom. The CoC, comprising experienced financial creditors, is best positioned to assess the feasibility and viability of resolution plans. Requiring prior CCI approval might prematurely exclude potentially viable plans simply because the CCI process is not completed.
An Interesting Twist
In considering the legislative intent behind the proviso to section 31(4) of the IBC, the memorandum explaining modifications which introduced this proviso in 2018 was placed before the Court. The memorandum states as follows:
“(d) in clause 24 of the Bill, in sub-section (4) of section 31 of the Code, a new proviso is inserted “provided where the resolution plan contains a provision for combination as referred to in Section 5 of the Competition Act, 2002, the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors” so as to clarify that the approval for the combinations from Competition Commission of India has to be obtained prior to the approval of resolution plan by the Adjudicating Authority.”
Do the underlined words in the memorandum reflect the true legislative intent and did the proviso to section 31(4) inadvertently refer to approval of the CoC instead of the approval of the adjudicating authority? This was argued before the Court but rejected by the majority on the basis that the language of the proviso to section 31(4) is clear and unambiguous and there is no need for any external aid for interpretation.
The Way Forward
To strike a better balance between competition concerns and the objectives of the IBC, the proviso to section 31(4) warrants reconsideration. In line with the memorandum explaining the introduction of the proviso to section 31(4) in 2018, the authors propose a legislative amendment in the proviso to section 31(4) to replace the words “Committee of Creditors” with “Adjudicating Authority”.
Accordingly, the authors propose that the amended proviso to section 31(4) should read as follows (change shown in strikethrough format):
“PROVIDED that where the resolution plan contains a provision for combination as referred to in section 5 of the Competition Act, 2002 (12 of 2003), the resolution applicant shall obtain the approval of the Competition Commission of India under the Act prior to the approval of such resolution plan by the Committee of CreditorsAdjudicating Authority”.
Such legislative amendment would ensure that CCI approval is obtained before the final approval of the resolution plan by the relevant adjudicating authority, while still allowing the CoC to exercise its commercial wisdom in a timely manner.
Conclusion
The Supreme Court’s judgement in Independent Sugar Corporation has brought the debate around prior CCI approval in IBC resolutions back into focus. The practical implications of this judgement warrant careful consideration. A more flexible approach, as put forward by the minority opinion, would have better served the objectives of the IBC and ensure a more efficient and effective resolution process. Legislative action to amend the proviso to section 31(4) now appears necessary to achieve a balanced approach.
– Rajat Sethi & Akanksha Agrahari
