[Srishti Multani and Aryan Birewar are final year students at Symbiosis Law School, Pune]
Introduction
A leading common law principle in construing legislation has been Generalia Specialibus Non Derogant, which translates as “general provisions do not derogate from special ones.” Whenever there is a conflicting position between a general and a special provision, the latter shall prevail. However, in recent times, there have been numerous cases where two or more special statutes have been in conflict.
One such statutory tussle involves the Competition Act 2002 (“Act”) and the Insolvency and Bankruptcy Code 2016 (“IBC/Code”). The proviso to Section 31(4) of the IBC (“CCI Proviso/proviso”) requires resolution applicants to obtain approval from the Competition Commission of India (“CCI”) prior to the approval of the resolution plan (“plan”) by the Committee of Creditors (“CoC”) when the resolution plan contains a provision for a combination under Section 5 of the Act. The legal question at hand is whether the stipulated prior CCI approval is directory or mandatory.
A 3-judge bench of the Supreme Court (“SC”), with a majority of 2:1, recently addressed this issue in Independent Sugar Corporation Ltd. (“INSCO”) v. Girish Sriram Juneja & Ors. The majority held that CCI approval must precede a CoC scrutiny and approval of plans involving combinations. While the majority emphasized respecting the provision’s clear legislative intent, the dissenting opinion prioritized the IBC’s time-sensitive nature over mandatory pre-approval. Purposive v. Literal Interpretation
The moot point is whether the use of “shall” mandates a prior CCI approval? The answer depends upon the tool of interpretation employed: purposive or literal? The majority opinion chose literal interpretation, thereby reading the proviso as is. Their position is that the clear, distinct and unambiguous language warrants a literal interpretation only. Reading it otherwise not only defeats the legislative intent but also contradicts the natural meaning. Thus, permitting CCI to step-in post CoC approval results in reconstruction of the proviso, which is bad-in law. On the other hand, the dissenting opinion chose purposive interpretation, thereby not sticking to the strictures of the proviso. The dissenting judge argues that CCI approval can be taken at the stage of examination by the Adjudicating Authority (“AA”). This way the Corporate Insolvency Resolution Process (“CIRP”) timelines remain unaffected by the delays in soliciting CCI approval. Thus, pro-directory reading of the proviso is viable and legally compliant.
In the authors’ opinion, literal interpretation is the correct way forward. There are three arguments to make this case:
(i) ‘Shall’ carries a mandatory effect: Courts have previously ruled that “shall” must be interpreted to carry the force of a mandate. In the case of Vidarbha Industries Power Limited v. Axis Bank Limited, the SC observed that the use of “shall” makes it clear that the legislative intent was to give the provision a mandatory import.
(ii) CCI Approval is an exception: As rightly punctuated by the majority opinion, in the present case, insertion of a proviso for CCI approval evidences creation of an exception, which is fair because finding of an Appreciable Adverse Effect on Competition (“AAEC”) renders the combination, under Section 6(1) of the Act, and thereby the resolution plan, under Section 30(2)(e) of the Code, void.
(iii) Reconstruction of proviso amounts to judicial overreach: If the concerned proviso is worded clearly and unambiguously, employment of literal interpretation is justified to respect the legislative intent, ordinary meaning, and thereby not read it for what is not.
Mandatory v. Directory Nature of the CCI Proviso
Reading the CCI Proviso as directory leads to a fundamental question: What will happen to the resolution plan if it’s rejected by the CCI post-CoC approval? The SC has sufficiently addressed this question in Ebix Singapore Pvt. Ltd. v. CoC of Educomp Solutions Ltd. and SREI Multiple Asset Investment Trust Vision India Fund v. Deccan Chronicle Markeeters & Ors., wherein it observed that once the resolution plan is approved by the CoC, the AA cannot unilaterally modify it without the re-approval of the CoC. This question was further examined in MK Rajagopalan v. Dr. Periasamy Palani Gounder & Anr., wherein the SC observed that even procedural or technical changes in revised resolution plans require re-approval by the CoC prior to being placed before the AA. This directly implies that if the CCI rejects the resolution plan post-CoC approval, a fresh plan containing the modifications must be re-approved by the CoC before the AA’s approval.
Therefore, even if the CCI Proviso is read to be directory, compliance with the strict IBC timelines in cases of resolution plan modifications post-CoC approval is difficult. Furthermore, interpreting the CCI Proviso as directory violates the letter and spirit of the IBC (Second Amendment) Act, 2018 in two specific ways: First, the legislative intent was to treat the CCI approval as a “class apart”; and second, the AA is devoid of “jurisdiction” to vote on a plan without prior CCI approval in accordance with the CCI Proviso. With respect to the first point, watering down the “prior CCI approval’s mandatory effect” is treating it akin to other statutory approvals. With respect to the second point, as observed by the SC in the case of Arun Kumar v. Union of India, the presence of a jurisdictional fact is a sine qua non for the exercise of power, in the absence of which, no authority can proceed with the case or adjudicate in accordance with the law. Thus, in the present case, the AA does not have the jurisdiction to rule on a resolution plan without receiving prior CCI approval.
Reading the CCI Proviso as mandatory has been frowned upon by the AA, primarily owing to the serious consequences on the time-bound nature of a CIRP, yet it also acknowledges the class-apart nature of CCI’s approval, as observed in Vishal Vijay Kalantri v. Shailen Shah. This means that if the conflicting statutory timelines of the Code and the Act are reconciled, the AA will be amenable to accepting the mandatory nature of the CCI Proviso. Plus, now the CoC will be able to vet the most financially viable plan, considering all have received CCI approvals.
There are two approaches to shorten the CCI review period so that the approval is expedited and the CIRP is completed within the stipulated time:
(i) Green Channel Route: The Report of the Law Review Committee (CLRC), 2019, suggested that combinations arising out of resolution plans can be notified through the green channel route. Under Regulation 5A of the CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011, a combination via the green channel route is deemed approved as soon as the CCI acknowledges the request for approval. However, there are two primary issues with respect to this approach: First, the green channel route mandates no horizontal or vertical overlaps inter-se the parties; and second, if it is later found that the conditions for the green channel route are not met, the combination will be deemed void-ab initio. With respect to the first point, majority of the combinations arising out of resolution plans are between overlapping entities. One of the recent examples would be AGI-Greenpac acquiring HNG, creating a behemoth in the Indian container glass manufacturing market. With respect to the second point, if a combination is held to have never existed, it will not only nullify the CIRP but also raise the risks connected to investment in distressed assets subject to insolvency proceedings. These lingering issues barricade the idea of expediting CCI approval in IBC-driven combinations.
There are two major solutions to address these legal issues. First, a legislative amendment to exclude the IBC-driven combinations from the standard criteria of availing the green channel route. Second, leveraging the “failing firm defence” acknowledged by the European Commission (“EC”) and CCI, both. The crux of this defence is that the exit of failing firms, even in the absence of its acquisition, would reduce competition levels to a higher extent than its potential acquisition. Such a defence stands to reason because the failing firm would leave the market anyway, and thus its acquisition will not really lessen competition in the market. The CCI has recognised this defence under Section 20(4)(k) of the Act.
(ii) Expedited Approval Route: As mooted by the Report of the Insolvency Law Committee, 2018, CCI would have a window of 30 working days from the date of filing combination notices to approve IBC-driven combinations. If no approval or rejection is received in the stipulated period, the combination will be deemed approved. The pressing need of the hour is to grant legislative recognition to this astute recommendation of the committee. Over and above this, the statutory timelines for the prima facie opinion and aggregate review period of the CCI, with the introduction of the Competition (Amendment) Act, 2023, have been wisely revised to 30 “calendar days” from the erstwhile “working days” and 150 days from the earlier 210 days, respectively. At this point, it is important to note that even in the absence of the proposed legislative amendment, the CCI has been approving combinations under the IBC swiftly. This directly implies that the current situation is not grim, but with legislative changes, it can certainly improve.
Concluding Remarks
In conclusion, CCI’s approval is key to ensuring fair market competition in IBC-driven combinations. While compliance with stringent IBC timelines is imperative, the post-combination market health and consumer interests should not be compromised. Thus, the legislative intent of the IBC (Second Amendment), 2018, must be respected by not reading down the CCI Proviso. As for the reservations pertaining to the mandatory effect, they can be assuaged through a legislative amendment to facilitate green-channelling of the IBC-driven combinations. The INSCO decision is perfectly in-line with the legislative intent of the CCI Proviso, thereby striking a balance between the need for expeditious relief and adherence to statutory frameworks.
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