Supreme Court ruling on Insolvency and Competition Approvals in India
Introduction
In 2016, the Insolvency and Bankruptcy Code (IBC) was introduced, fundamentally changing how distressed businesses in India are restructured and how debt recovery is managed. The IBC has paved the way for significant corporate restructurings, including the high-profile acquisition of Essar Steel by ArcelorMittal and the impending acquisition and revival of Videocon Industries by the Vedanta Group.
A recent Supreme Court ruling in Independent Sugar Corporation Ltd. v Girish Sriram Juneja & Ors
The Supreme Court judgment alters the settled regulatory practices both in the context of insolvency processes and the CCI merger control. This piece discusses the key outcomes and its commercial implications.
Overview of the case and key outcomes
The case involved a dispute regarding the proposed acquisition of Hindustan National Glass (HNG) (one of India’s largest glass manufacturers) by AGI Greenpac Ltd (AGI Greenpac) as part of a resolution plan under the IBC. HNG, an important glass manufacturer, was insolvent. AGI Greenpac and Independent Sugar Corporation (INSCO) submitted bids to acquire HNG. Both acquisitions required approvals from the CCI.
AGI Greenpac’s resolution plan received the approval of the committee of creditors (CoC) with 98% of the votes, before CCI approval. INSCO’s plan for resolution received 88% of votes. Notably, the INSCO resolution plan had obtained the prior CCI approval.
INSCO challenged the CoC approval before the National Company Law Appellate Tribunal (NCLAT), stating that the CoC could not approve AGI Greenpac’s plan pending CCI approval. The NCLAT ruled that the proviso in Section 31(4) of IBC, which requires CCI approval before the approval of CoC, was discretionary. The requirement could be relaxed so long as the CCI approval was obtained subsequently.
INSCO also challenged the CCI’s conditional approval of AGI Greenpac’s proposed acquisition of HNG on various grounds including the absence of stakeholder consultation, and the approval being premised on incorrect market facts submitted by AGI Greenpac. The NCLAT upheld the CCI approval order
The Supreme Court overturned the NCLAT’s decision.
The Supreme Court set the order of play for approvals from the CCI and CoC
The Supreme Court held that the approval from the CCI must be mandatorily obtained prior to the CoC approval. This ruling affects the current practice whereby the CoC approves a resolution plan before receiving CCI approval. The Supreme Court stated that, while the CoC must exercise its commercial judgment and play a vital role in insolvency proceedings, the law also recognizes anti-competitive transaction risks. CCI can approve, reject or modify terms of transactions to address any competition concerns that may arise from the transaction. A conditional approval, or rejection, may change the terms of the CoC’s approval of the resolution plan. This would be contrary to the intent of the law and could lead poor decision-making. The Supreme Court invalidated AGI Greenpac’s Resolution Plan. The Supreme Court ordered the CoC review the INSCO Resolution Plan.[1]
Stakeholder consultation is mandatory in CCI phase 2 review.
The Supreme Court objected also to the CCI approval process, noting that the CCI did not follow the procedure mandated under the Competition Act. According to the Competition Act, any merger in India that meets certain thresholds requires approval by the CCI. The CCI can review a transaction in two stages.
Phase 1
is an initial 30-day review, where the CCI assesses if the deal could harm the competition. The deal is cleared if no major concerns are raised. If there are any concerns, the parties may propose remedies (e.g. asset sales, capacity commitments, etc.). If the review continues to raise concerns about competition, it will move to Phase II. The review will move to Phase II if the CCI continues to have concerns about the deal. The process begins with a Show Cause Notice (
SCN) as to why the deal should not be investigated further. The CCI will ask the parties to respond to the SCN by providing reasons, evidence and any modifications that they propose to reduce the CCI’s concerns. If the CCI deems the modifications to be sufficient, it can approve the deal with the modifications. The CCI can block the transaction or impose additional conditions to approve the deal based on these inputs. Based on these inputs, the CCI may block the transaction or impose further conditions to approve the deal to protect competition.
As a matter of practice, post issuance of the SCN, the CCI has usually accepted proposed modifications and cleared transactions without initiating a public consultations process even though it is required under the Competition Act.In this case, the CCI’s Phase I review of the AGI Greenpac-HNG resolution plan raised concerns about increased concentration in the glass manufacturing market. It formed a preliminary opinion that the AGI Greenpac-HNG acquisition could cause appreciable adverse effects to competition (
AAEC).The CCI issued a SCN to AGI Greenpac, but not the target. The CCI approved this transaction based on AGI Greenpac’s response to the SCN, and the voluntary modifications made to the deal by AGI Greenpac (including the separation of HNG’s Rishikesh facility). The deal was not open to public consultations. This was in line with the CCI’s prior practices.
The Supreme Court held that the scheme of Section 29 of the Competition Act is such that once the CCI issues a SCN indicating a prima facie opinion that the transaction can cause AAEC, the entire procedure including (i) sending the SCN to both parties (and not just the acquirer) and (ii) opening up the transaction to public for comments must be followed. The Supreme Court also observed that any deviation from this process can open CCI approvals up for legal challenge.The Court observed that the active involvement of the target (HNG) in the CCI engagement process was particularly necessary in this case. AGI Greenpac offered HNG to divest its Rishikesh facility to address competition concerns. The Supreme Court noted that conditional approvals granted by the CCI are based on future compliance by AGI Greenpac in divesting HNG’s Rishikesh facility. It noted that the such conditional approvals run contrary to the IBC’s stated objectives of finality and decisiveness.
Commercial Implications
The Supreme Court’s observations on how conditional approvals from the CCI are contrary to the IBC’s stated objectives of finality would have the following implications for stakeholders.
CoC
Going forward, it is likely that the CoC may hesitate from granting approvals to resolution plans that have been conditionally approved by the CCI subject to fulfilling certain conditions. The Supreme Court noted that such conditional approvals run counter to the IBC’s stated objectives of finality and decisiveness. This would have the following implications for stakeholders. In the event that the proposed acquirer fails to comply with regulatory and legal requirements, such approvals could also be challenged. The CoC will also have to take this into consideration, in addition to the commercial merits of the resolution plans. Bidders/acquirers may have to consider the likelihood of conditional approval by the CCI, and how this may reduce their chances of success before CoC. They would also need to consider the compliance burdens, and any delays in implementing the transaction. As a result, we may see fewer resolution applications where the acquirer and distressed target create high market concentration, as the chances of success in such cases are lower.
CCI
Considering how conditional approvals do not align with the IBC’s objectives, the CCI may have to be circumspect about ordering conditional approvals to transactions arising from the insolvency process. The CCI could rely on the failing-firm defence
to unconditionally approve these transactions. However, the CCI will have to weigh the potentially anti-competitive effects of the proposed transaction against the economic efficiencies / benefits of reviving the distressed target company.
Procedural Implications
Involvement of the target in acquisitions under Phase I Review
While the decision was rendered in the context of Phase II investigations, the Supreme Court’s position on actively involving the target while reviewing an acquisition would also apply to the Phase I investigation process as the CCI merger control regulations, especially Regulation 14 uses similar terminology “parties to combination” throughout. The CCI will now be required to engage actively with the target company. Active engagement with the target would also add to the regulatory timeline and could push back the review timelines for CCI, specifically in hostile takeovers (like Larsen & Toubro Group’s hostile takeover of Mindtree Limited (now LTI Mindtree)). Furthermore, active engagement with the target would add to the regulatory timeline and could push back the review timelines for the CCI, specifically in hostile takeovers (like Larsen & Toubro Group’s hostile takeover of Mindtree Limited (now LTI Mindtree)).
Approvals granted without public consultation post a SCN can be challenged
The CCI will now have to follow the entire process including putting out all deals undergoing Phase II review for third party consultations. As noted by the Supreme Court of India, approvals given without following a similar process can be challenged. This will have two major implications.
First, the CCI has cleared many transactions in the recent past where the acquirer / parties offered modifications after the issuance of the SCN, but without proceeding for public comments. Third parties can challenge all such prior approvals. These include some significant landmark transactions that have impacted major sectors of the Indian economy.
Second, given the time consuming nature of a Phase II review, it is likely that we will see a lesser number of deals going into Phase II with more deals getting cleared at the Phase I stage itself based on any preemptive commitments / modifications offered by parties at that stage.[2]
Conclusion
The regulatory burden on companies appears to have increased both in the context of the insolvency process and the CCI merger control process.
In IBC cases, the CCI will have to balance its objectives of ensuring fair competition in the market with the IBC’s mandate of finality and quick revival of distressed target companies.
Further, in the context of the CCI merger control process, it would be interesting to see if disgruntled third parties / competitors of the parties that have obtained CCI approval for their deals without following the entire Phase II review process file legal challenges to such approvals.
Interestingly, AGI Greenpac has filed a review petition in the Supreme Court against the court’s judgment. Review petitions are rarely successful as they require a clear error on the record, and this is a well-reasoned judgment. v. Rajiv Chakraborty, 2020 SCC OnLine NCLAT 643, Vishal Vijay Kalantri v. Shailen Shah, 2020 SCC OnLine NCLAT 1013. In competition law, the defense is used to balance the harm caused by a merger against the harm caused by a failing firm.
