A corporate debtor’s journey from admission to resolution comprises various compliances and procedures in India, as prescribed in the Insolvency and Bankruptcy Code, 2016 (IBC), and regulations. One of the key steps is implementation of a resolution plan, which requires approvals from relevant regulators under applicable law.
An amendment in 2018 (sub-section (4) under section 31) mandated a resolution applicant to obtain necessary approvals within one year from the date of approval of the resolution plan, or within the timeline prescribed, whichever is later.
Approval by the Competition Commission of India (CCI) under section 5 of the Competition Act, 2002 (CCI Act), was treated on a different footing; in a proviso directing that approval “shall” be obtained prior to approval of the resolution plan by the committee of creditors (COC).
The interpretation of this proviso and its implication on timely resolution and value maximisation of the corporate debtor has been controversial and was recently put to the test before the National Company Law Appellant Tribunal (NCLAT) in the case of Independent Sugar Corporation Ltd v Girish Sriram Juneja & Anr, otherwise known as the INSCO case.
The proviso to section 31(4) comprises two parts: (1) requirement of CCI approval for proposed combination by the resolution applicant, which undoubtedly is a mandatory requirement to examine any appreciable adverse effect on competition; and (2) the nature of the timeline of obtaining such approval, which is the main bone of contention, namely, whether to be interpreted as mandatory or directory, considering the entire scheme of the IBC.
The meaning and intent of the legislature are keys to determining the directory or mandatory nature of a provision, to be ascertained not only from the phraseology of the provision, but also by considering its object, design, and the consequences that would follow from construing it one way or another.
If strict interpretation is accorded to the timeline provided in the proviso, then it will have an adverse effect on the time-bound completion of the corporate insolvency resolution process (CIRP), as the timeline contemplated under the IBC (180 days, subject to further extension) is not in consonance with the timeline provided under the CCI Act (deemed approval of combination within 210 days, although approvals may come earlier).
It will also undermine the purpose of the IBC, as the COC will not be able to vote on and approve the resolution plans that require CCI approval if such resolution plans do not receive CCI approval before being put to a vote. This leads to freezing the CIRP process, or disqualifying otherwise robust proposals.
However, if the timeline in the proviso is interpreted as directory – in that approval of the CCI can be obtained after COC approval but prior to approval by an adjudicating authority – then it enables the COC to evaluate all resolution plans on an equal footing and approve them subject to CCI approval obtained prior to approval of resolution plans by the adjudicating authority.
This interpretation is aligned in principle with the Insolvency and Bankruptcy Board of India’s discussions on the requirement to obtain an indication on the stance of the concerned regulators on the resolution plan prior to the resolution plan being approved by the adjudicating authority, which has been upheld by the NCLAT in previous judgments.
Considering the implications of the proviso on the objective of the IBC – and that no consequences are provided in the IBC for non-compliance of the proviso – the NCLAT in the INSCO case held that although CCI approval was “mandatory”, the timeline for such approval prior to COC approval was “directory”. The NCLAT judgment in the INSCO case is currently being challenged before the Supreme Court.
In the authors’ view, while the proviso has caused hardships, the watered down and purposive interpretation accorded by the NCLAT is a step in the right direction. It balances the objective of the IBC without compromising or undermining compliance with regulatory requirements.
However, approvals cannot be treated with a “tick-box” approach. What happens when such approvals get rejected also needs due evaluation. After all, a single approval should not have the power of unravelling the entire resolution plan.
Concessions accorded by an approving authority ought not to have the unintended effect of other rejected resolution applicants claiming that such concession can also make them eligible. Like everything else under the IBC this, too, shall evolve and hope remains that the pillars and principles continue to be respected.
Veena Sivaramakrishnan and Soummo Biswas are partners, Yugal Jain is a senior associate, and Aditi Tomar is an associate at Shardul Amarchand Mangaldas & Co