India : Prior competition clearance in Insolvency Resolution Process now mandatory – step towards “ease of doing business”

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India : Prior competition clearance in Insolvency Resolution Process now mandatory – step towards “ease of doing business” 

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) has been often cited as one of the key economic reform of the present government . Undoubtedly the new enactment resulted in large corporate entities queuing up to acquire distressed companies and their assets, put on block following initiation of IBC proceedings, thereby infusing efficiencies in the economy due to likely revivals of such companies . Acquisition of a corporate debtor under the IBC begins with the submission of a resolution plan to the Resolution Professional (RP) by the resolution applicant (acquirer/bidder), followed by the approval of such resolution plan by the Committee of Creditors (CoC) and finally by the National Company Law Tribunal (NCLT).

But whether the competition regulator, the Competition Commission of India (CCI) should have  a role in such corporate insolvency resolution process (CIRP) , which is primarily justified under the “failing firm”  defence and whether it has created another regulatory hurdle for the foreign investors who may be interested in purchasing the assets or otherwise robust Indian companies in crucial sectors with a well established marketing network with goodwill and well – known brand of products or services ? Let us examine .

Depending upon the turnover or assets of the resolution applicant (bidder) and the corporate debtor (target), as prescribed under the Competition Act, 2002 (‘the Act”) and the Combination Regulations framed thereunder, such resolution plans (bids) require mandatory approval from the Competition Commission of India (CCI) in terms of section 6 of the Act , which empowers the CCI to examine ex ante , all acquisitions , mergers or amalgamations , where the  parties collectively meet the prescribed thresholds ( referred as “combinations’)  . The CCI, till date, has been notified 13 large transactions involving the acquisition of a corporate debtor under the IBC , which amounted  to “combination” under the Act and CCI has granted approval to all of them in shortest possible time. The recent acquisition of a sick co., Ruchi Soya Industries Ltd. by a consortium led by home grown Patanjali Ayurved Ltd. pursuant to its resolution application for reviving Ruch Soya , a leading company in edible oils and soya products , which was approved by CCI in a record time of 13 working days , is a case in point which justifies the CCI as a contributor to the proverbial “ease of doing business” , a key parameter for India’s economic growth highlighted by the government of Narendra Modi in his first tenure (2014-19)  and not as a hurdle.

The elusive ‘binding’ document and “trigger” event for notifying CCI under IBC

Under the Act, an acquirer’s obligation to the notify the CCI is triggered upon execution of a binding document conveying an agreement or even a decision taken by the acquirer to acquire control, shares, voting rights or assets.

In this context, one of the earliest uncertainties surrounded as to what would constitute a binding document for a prospective buyer to notify the CCI i.e. whether the submission of the resolution plan or the approval of such resolution plan by the COC?

The CCI’s decisions so far appear to have indicated some clarity on what constitutes a binding document for obtaining CCI approvals in IBC proceedings.  For instance, out of the five transactions initially notified to the CCI, only one (acquisition of Electrosteel Steel Limited by Vedanta Ltd.) was filed pursuant to the approval of the resolution plan by the CoC.

In the face of multiple resolution plans (acquirers) gunning for the same corporate debtor, the question arose  whether notifying the CCI, prior to the approval of a resolution plan by the COC would constitute a ‘pre-mature’ filing since, ultimately only one resolution plan would succeed?

From the CCI’s decisional practice , it was known till then  that the CCI considers a resolution plan filed by a resolution applicant as a ‘binding document’ for the purposes of filing notice. Had the CCI not considered the resolution plan as a binding document, instead of approving Dalmia’s and Ultratech’s notices (in their proposed acquisition of Binani Cements Ltd.), the CCI would have held the notices as pre-mature and thus invalid.  Thus, there was an ambiguity prevailing at the time as to the time when a resolution applicant should approach CCI . This resulted in unnecessary delays.

Amendments in IBC

To remove the above ambiguity in CIRP, the Indian Parliament passed the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (The Amendment Act). The Amendment Act, passed on 17 August 2018, inter alia, introduced a new sub section (4) in Section 31with a proviso. By way of this  proviso to the new sub section (4) of Section 31 , it has been provided that  where a resolution plan or any part thereof constitutes a ‘combination” under section 5 of the Competition Act,2002 (the Act) , that is, in case where the combined values of the assets or turnovers of the resolution applicant and the corporate debtor proposed to be acquired cross the thresholds prescribed under section 5 of the Act, it will be mandatory for the resolution applicant to obtain prior approval of the proposed acquisition from the  Competition Commission of India (‘CCI’) and in such cases the CoC shall have to wait for the CCI approval before approving the resolution plan .

The said proviso to sub section (4) of Section 31 of the Amendment Act reads as follows:

“Provided that 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”.

This, in effect, means that the prospective buyers of the distressed assets or Insolvent companies, while making their bids/resolution applications for such companies should file the Notice before CCI simultaneously with the filing of the resolution plan to avoid delay in obtaining CCI approval. The above proviso brings the much-needed clarity in the CIRP and reduces unnecessary litigation and delays and is a step towards ‘ease of doing business”.