Judicial Shift: CCI Approval First In Distressed M&A Deals

INTRODUCTION

In the realm of failing business acquisition, the process of obtaining approvals from relevant regulatory bodies play a crucial role in maintaining fair competition, ensuring compliance with the legal framework and safeguarding the interests of various stakeholders. One of the most important aspects of such regulatory procedures is the approval of mergers and acquisitions ("M&A"), which involves the scrutiny by the Competition Commission of India ("CCI") and the Committee of Creditors ("CoC"). In a recent judicial development, it has been established that CCI approval is mandatory before CoC approval for specific corporate transactions, particularly those involving distressed companies under the Insolvency and Bankruptcy Code, 2016 ("IBC").

INTERSECTION BETWEEN IBC LAWS AND COMPETITION ACT, 2002

The IBC was enacted inter-alia with the objective of ensuring efficient and time-bound resolution of corporate insolvencies. It aims to provide a streamlined framework that maximizes the value of assets, promotes creditor's confidence and facilitates the revival of financially distressed companies while minimizing losses for stakeholders. By setting strict timelines for the Corporate Insolvency Resolution Process ("CIRP"), the IBC prevents undue delays that could erode asset value and hinder economic recovery. The legislation is creditor-driven, empowering the CoC to assess and approve resolution plans, ensuring that financially viable entities have the opportunity to restructure while economically unfeasible businesses face liquidation.

Parallelly, competition law, as embodied in the Competition Act, 2002 ("Act"), serves a distinct but equally important role in regulating market dynamics. It seeks to prevent the emergence of dominant entities that may exploit their market power to the detriment of fair competition. The CCI acts as the regulatory authority overseeing mergers and acquisitions, ensuring that such transactions do not result in anti-competitive or abusive practices. While IBC prioritizes the revival of companies and the protection of creditors' interests, competition law safeguards the market from undue concentration of power, thereby ensuring a level playing field for all businesses horizontally as well as vertically.

Given these contrasting priorities, the intersection of insolvency resolution and competition regulation often leads to legal complexities. One such issue arises in cases where an entity seeks to acquire a financially distressed company under IBC. While IBC mandates the approval of the CoC as a critical determinant of the viability of a resolution plan, the Competition Act mandates CCI clearance to prevent any potential adverse effect on market competition. This leads to a conflict regarding the sequence and necessity of regulatory approvals, particularly whether CCI approval must be obtained before CoC votes and accords approval or whether it can be secured afterward before National Company Law Tribunal's ("NCLT") sanctions the resolution plan.

Recognizing this interplay, the 2018 amendment to the IBC introduced a proviso to Section 31(4), of the IBC¹, explicitly requiring CCI approval for acquisitions under the insolvency framework. However, this provision became contentious, with Courts having been compelled to interpret whether such prior approval was "mandatory" before CoC vote or merely a "directory" requirement that could be obtained subsequently.

JURISPRUDENCE BEFORE SCI ORDER

The interpretation of Section 31(4) of the IBC has been a contentious issue, with several judgments diluting the mandatory nature of the provision. In Arcelormittal India Pvt. Ltd. v. Abhijit Guhathakurta², the National Company Law Appellate Tribunal ("NCLAT") held that obtaining CCI approval before CoC approval was directory, not mandatory. The NCLAT reasoned that since the CoC primarily assesses the commercial viability of a resolution plan, it could approve a plan subject to later CCI approval, provided such approval was secured before the NCLT sanctioned the resolution plan under Section 31 of the IBC.

SCI CLARIFIES CCI'S APPROVAL TO BE MANDATORY BEFORE CoC's APPROVAL

InIndependent Sugar Corporation Limited v. Girish Sriram Juneja and Ors³, the Supreme Court of India ("SCI") vide its order of 29.01.2025 held that in relation to the Corporate Insolvency Proceedings under the IBC, there is a mandate on the parties to obtain prior approval from the CCI before the approval of a resolution plan by the CoC in terms of the proviso to Section 31(4) of IBC.

The appeals before the SCI arose from the orders of the NCLAT upholding the approval of the resolution plan proposed by the AGI Greenpac Limited ("AGI Greenpac") and the approval of the combination, advanced by proposed resolution plan, between the Hindustan National Glass and Industries Limited (Corporate Debtor) and AGI Greenpac.

The corporate insolvency resolution process ("CIRP") was initiated against the Corporate Debtor on admission of Section 7 petition, followed by the establishment of CoC. AGI Greenpac and Independent Sugar Corporation Limited ("INSCO") submitted resolution plans for consideration by the CoC. Although AGI Greenpac's resolution plan proposing a combination lacked CCI's approval as mandated under Section 31(4) of the IBC, the same was approved by the CoC. Subsequently, approval from the CCI was obtained.

INSCO challenged this approval before the NCLT, Kolkata, and later before the NCLAT. However, both the forums upheld the CoC's decision, and opined that obtaining CCI's approval, while mandatory, need not precede CoC approval. Aggrieved by the NCLAT's decision, INSCO appealed to the SCI.

It was argued by the INSCO that proviso to Section 31(4) of the IBC mandates that a party must take prior approval from the CCI before obtaining an approval from CoC for a resolution plan containing a combination. AGI Greenpac's plan was approved by CoC without obtaining prior approval from the CCI, thereby violating the proviso to Section 31(4) of the IBC.

It was further argued that the proviso should be construed as mandatory, not directory in nature. The proviso creates an exception, differentiating combination cases from other statutory approvals (which can be obtained post-CoC approval) Furthermore, it was argued that the legislative intent demands strict adherence and that allowing post-CoC approval would render the proviso redundant and meaningless. It was also further argued that the NCLAT erred in holding that prior approval is directory, as the absence of statutory consequences does not imply flexibility.

After considering the arguments made by INSCO, the SCI held that the legislative intent behind Section 31(4) of the IBC is clear and unambiguous and thus the CCI prior approval must be obtained before the CoC approves the resolution plan. The SCI further held that this provision was purposely introduced to prevent anti-competitive combinations from being approved without due regulatory scrutiny.

Furthermore, the SCI rejected the argument that requiring CCI approval before CoC approval would cause procedural delays in CIRP. Instead, it emphasized that ensuring regulatory compliance at an early stage is essential to prevent later legal conflicts.

The SCI held that allowing the CoC to approve a resolution plan before CCI clearance would be illogical, as it could lead to situations where CoC-approved plans are later rejected by CCI. If such plans were ultimately found to violate competition laws, they would be unenforceable, resulting in significant delays, potential legal challenges, and unnecessary complexities in insolvency resolution. The proviso to Section 31(4) of the IBC explicitly requires prior CCI approval before CoC approval for a resolution plan involving a combination. The use of "shall obtain" and "prior to approval" signifies a clear legislative intent to make the requirement mandatory. Literal interpretation should apply as the proviso is plain, unambiguous, and self-explanatory and thus there is no need for purposive construction. It was also held that the NCLAT erred in holding that prior approval is "directory" as statutory language cannot be overridden by commercial exigencies and insolvency timelines must align with competition law requirements, and not vice versa.

The said decision is subject to dissent wherein it was held that while strict adherence to statutory language is an essential rule of interpretation, it should not be considered as an infringement of law. Literal interpretation must not lead to hardships, inconsistencies, or consequences that defeat the purpose of the statute. Instead, statutes must be interpreted in a manner that ensures their practical applicability, keeping in mind their intent and objectives. It was further held that previous rulings established that "purposive interpretation—an approach where courts interpret legal provisions based on their purpose rather than just their literal text—should be preferred in situations where strict textual reading leads to impractical or counterproductive results."

REVIEW PETITION FILED BY AGI GREENPAC OF SCI ORDER⁴

AGI Greenpac has sought a review of the SCI's judgment which quashed the approval of AGI's resolution plan for the bankrupt Hindustan National Glass & Industries Ltd "(HNGIL"), citing failure to obtain prior permission from the CCI. In addition to the review petition, AGI Greenpac has also reportedly filed an application with the NCLT Kolkata Bench, seeking to restrain the CoC and the resolution professional of HNGIL from taking any further action until the SCI decides the review petition.

CONCLUSION

The requirement for CCI approval before CoC approval is a significant development in India's corporate regulatory framework, bringing greater scrutiny to mergers and acquisitions that arise from insolvency proceedings. Time is the essence in both IBC Law and the Competition Act, while CIRP proceedings are mandated to be concluded in a time bound manner, similar is the case in relation to the proposed acquisitions under the Act. Recently, the Competition Act has been amended and the timelines of M&A regulations, have been further squeezed which mandates the CCI to act with more speed while scrutinizing M&A deals including those which arise in the wake of Corporate Insolvency Resolution Plan under the IBC laws.

Footnotes

1 31(4) "The resolution applicant shall, pursuant to the resolution plan approved under sub-section (1), obtain the necessary approval required under any law for the time being in force within a period of one year from the date of approval of the resolution plan by the Adjudicating Authority under sub-section (1) or within such period as provided for in such law, whichever is later:

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 that Act prior to the approval of such resolution plan by the committee of creditors."

2 Company Appeal (AT) (Insolvency) No. 524 of 2019

3 Civil Appeal No. 6071 of 2023

4 Available at:https://www.livemint.com/companies/news/agi-greenpac-seeks-review-of-sc-order-quashing-acquisition-of-bankrupt-hngil-11739346979860.html

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Mr G R Bhatia
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