[Jai is a student at Maharashtra National Law University, Mumbai.]
The time bound resolution of distressed corporate entities is perhaps the most important objective of the Insolvency and Bankruptcy Code 2016 (IBC). The corporate insolvency resolution process (CIRP) introduced by the IBC was supposed to lead the charge in achieving this end. Unfortunately, the average time taken for the 190 CIRPs that yielded resolution is 394 days. This far exceeds the statutory timeline of 330 days provided in the IBC. Keeping in mind the need to expedite this process, it is argued that extending the green channel approval process of the Competition Commission of India (CCI) to IBC-driven acquisitions could help in realizing the timely completion of CIRPs.
Interface between Insolvency Law and Competition Law
Often, as part of the CIRP, competitor firms propose to acquire an insolvent competitor. This is where CCI comes into the picture. Acquisitions that meet a certain threshold must be notified to the CCI under Section 5 of the Competition Act 2002 (Competition Act). IBC-driven acquisitions are no different. Accordingly, resolution plans that contain a provision for a combination (specifically, acquisition) as defined in Section 5 must receive an approval that states the combination will not cause an appreciable adverse effect on competition (AAEC).
When to Notify CCI - Why it Matters
When the IBC came into force it did not specify when a resolution applicant would have to seek the CCI’s approval. It was simply implicit that the resolution plan would have to be approved by the CCI and the Committee of Creditors (CoC) within the timeline of the erstwhile 270-day limit. This changed with the 2018 Amendment, which inserted Section 31(4) into the IBC. The section’s proviso clarified that CCI approval should be obtained prior to CoC approval.
Then came the ruling of the National Company Law Appellate Tribunal (NCLAT) in ArcelorMittal last December. The NCLAT held that the proviso of Section 31(4) is directory and not mandatory, going on to observe that the CoC may approve the resolution plan before the CCI’s approval. While the judgment is unlikely to impact the legal advice resolution applicants receive with respect to timely filing, it merits an examination into the appropriate time one should notify a resolution plan to the CCI.
Admittedly, the decision to secure CCI approval prior to CoC approval appears to be prudent insofar as the statutory timelines are concerned. It would certainly be troubling if the CCI’s approval were sought after CoC’s approval (like in Electrosteel) and the time taken by the CCI pushed the CIRP beyond its prescribed time-limit. On the other hand, requiring prior CCI approval may lead to a situation where multiple filings could be made for the same transaction. This is precisely what happened when both Patanjali and Adani Willmar sought to acquire Ruchi Soya, and when both Ultratech and Dalmia sought to acquire Binani Cement. While this method could save time, CCI ends up pronouncing several orders that serve purely an academic end.
Of course, one may contend that this additional burden that the CCI is forced to bear is a necessary sacrifice for the expedited clearance of CIRPs. However, as this post argues, it may indeed be possible to reconcile these seemingly mutually exclusive inefficiencies that are risked in both the aforesaid scenarios.
Affording IBC-driven Combinations the Green Channel Benefit
The green channel refers to an automatic system of approval for combinations (which breach the threshold) wherein the combination is deemed to have been approved upon filing the notice in the prescribed format. Under Regulation 5A of the CCI (Procedure in regard to the Transaction of Businesses relating to Combinations) Regulations 2011, parties may avail the benefit of the green channel if they satisfy the conditions prescribed in Schedule III of the regulations. Essentially, there may not be horizontal or vertical overlaps, nor should the parties be engaged in activities that would cause complementary overlaps.
So while there is no express bar that prevents IBC-driven acquisitions from availing the benefit, it is often a competitor that seeks to acquire a failing firm. Therefore, a situation where none of the aforesaid overlaps exist is unlikely to occur. This is also precisely why none of the 17 IBC-driven acquisitions thus far have been able to avail the benefit of the green channel.
However, the need for expedited clearance should not be ignored. This was recognised by the Competition Law Review Committee when it recommended that IBC-driven combinations could be notified under the green channel. While the recommendation was not incorporated by the legislature, allowing this could achieve two efficiencies. First, since approval is deemed to be granted on filing, it would nullify the concern that the CCI’s decision-making process could extend past the statutory time limit. Second, in the event multiple filings are received for the same transaction, the CCI would not be required to expend its time over decisions that would eventually be redundant. Instead, the multiple filings would be granted deemed approval and the CoC would choose only the one they find most appropriate.
The Failing Firm Defence - Why and How to Afford IBC-driven Acquisitions the Green Channel
Arguably this could be an efficient process, but on its own, it is not enough to merit extending the green channel benefit to IBC-driven combinations. It must be noted that the mandate of the CCI is to protect competition in the Indian markets and not to save failing firms. So really, it comes down to two questions. First, why should this benefit be afforded in the first place? Second, how does one bring IBC-driven combinations under the ambit of the green channel?
The ‘failing firm defence’ comes to one’s aid when answering the first. First explored in the case of Kali und Salz (now reflected in the European Union’s Merger Guidelines). This proposition lays down a 3-point test. First, the failing firm must be on the verge of exiting the market. Second, that there is no less anti-competitive alternative. Third, that absent the merger, the failing firm would inevitably exit the market. If these points are satisfied, it could be stated that there would be no significant reduction in competition, and the impugned combination should be allowed.
Indian competition law is no stranger to this concept either. Section 20(4)(k) of the Competition Act requires the CCI to look into the possibility of a failing business when determining whether a combination would result in an AAEC. The Raghavan Committee Report also recorded a comment inquiring what welfare loss could be caused if a firm was about to exit the market anyway. Moreover, the CCI has also considered a target’s inevitable failure in some of its IBC-driven notifications – notably in Reliance’s acquisition of Alok Industries. In fact, CCI has allowed each of the 17 notifications it has received pursuant to a resolution plan, many of them involving several overlaps.
However, none of this is to suggest that the CCI does not let failing firms exit the market. What is argued, however, is that oftentimes the competition in a market may be better protected by permitting a transaction that allows for the failing firm’s assets to stay in the market, in the absence of which, the failing firm’s market share would be taken up by existing competitors and competitive constraints would be impacted in any case. Basis this argument, it would follow that there is no good reason to delay the approval of a combination that involves the acquisition of a failing target once the resolution plan has been approved by the CoC (even if the resolution applicant in question is a competitor).
It is now important to examine how IBC-driven combinations could be afforded the green channel benefit. For starters, since, in its current form, the green channel is unlikely to accommodate IBC-driven combinations, the Combination Regulations would need to be amended so as to afford these combinations the green channel benefit. While doing so, the legislature may mandate practices highlighted in the decision of the European Commission (EC) in Aegean/Olympic II. The EC observed that a merger that raises competition concerns may be permitted if it can be shown that without the merger the competition would deteriorate to the same extent. In permitting this merger, the EC relied on forecasts that indicated that Olympic would leave the market in the absence of the impugned combination. Similarly, the amended green channel could require resolution applicants to submit financial forecasts while notifying proposed transactions.
Of course, one may contend that this additional burden that the CCI is forced to bear is a necessary sacrifice for the expedited clearance of CIRPs. However, as this post argues, it may indeed be possible to reconcile these seemingly mutually exclusive inefficiencies that are risked in both the aforesaid scenarios.
Conclusion
Finally, it is important to note that the delayed completion of CIRPs can hardly be attributed to CCI. Notable, CCI has passed orders on 17 IBC acquisitions and the longest it has ever taken is 60 days, averaging approximately 31 days. So really, the problem that needs resolution has little to do with CCI. However, it is indeed possible for an already efficient approval process to improve on itself by using the tools lying in its own backyard. After all, even a 30-day acceleration could be a difference.